First Lien vs Second Lien Land Notes in Texas: What Buyers Pay

Lien position is one of the most critical factors determining the value of a Texas land note, yet many note holders do not fully understand what it means or how it affects what a buyer will pay. The distinction between first lien vs second lien land notes in Texas can translate into a difference of tens of thousands of dollars when you decide to sell your note. A first lien note — one that holds the senior position on the property's title — carries significantly less risk and commands a substantially higher price than a second lien note, which is subordinate to the first lien and faces the real possibility of being wiped out entirely in certain scenarios. Understanding this distinction, why it matters, and how it affects your options is essential knowledge for every Texas land note holder.

The concept of lien priority is rooted in a simple but powerful principle: when a property is sold at foreclosure, the proceeds are distributed to lienholders in order of priority. The first lienholder gets paid first, the second lienholder gets paid from whatever is left, and any additional lienholders follow in sequence. If the foreclosure sale price is not enough to pay all lienholders in full, the junior lienholders absorb the shortfall. This means that holding a second lien position is inherently riskier than holding a first lien position, because your recovery depends not just on the property's value but on the amount owed to the senior lienholder. This cascading risk structure is the fundamental reason for the value difference between first lien vs second lien land notes in Texas.

Whether you hold a first lien note, a second lien note, or are not sure which position your note occupies, this guide will give you a thorough understanding of how lien priority works in Texas, how it affects note pricing, and what your options are for maximizing the value of your note regardless of its position.

Understanding Lien Priority in Texas

How Lien Priority Is Established

In Texas, lien priority is generally determined by the order in which liens are recorded in the county deed records — the "first in time, first in right" principle. The first deed of trust recorded on a property holds the senior (first) lien position, and any subsequently recorded deed of trust holds a junior position. There are important exceptions to this general rule: property tax liens always take priority over all other liens regardless of recording date, and certain statutory liens (such as mechanic's liens in some circumstances) may also have special priority rules. But for the purposes of owner-financed land notes, the recording date of the deed of trust is the primary determinant of lien position.

When you sold your land with owner financing and recorded a deed of trust, the position of your lien was determined by whether any other liens were already recorded on the property. If you sold the property free and clear of any other liens, your deed of trust is a first lien — there is nothing ahead of you in priority except property tax liens. If there was an existing mortgage or deed of trust on the property and you recorded your deed of trust behind it, your note is a second lien. This second scenario can arise in several ways: you may have sold only a portion of the equity in the property, the buyer may have obtained financing from another source for part of the purchase price, or the property may have had an existing lien that was not paid off at closing.

Why Lien Position Matters for Note Holders

Lien position matters because it determines your recovery priority if the borrower defaults and the property is sold at foreclosure. As a first lienholder, you are paid before all other lienholders (except tax authorities). If the property sells for 80,000 dollars at foreclosure and you are owed 50,000 dollars, you receive your full 50,000, and the remaining 30,000 goes to junior lienholders. As a second lienholder in the same scenario, your recovery depends entirely on what is left after the first lienholder is satisfied. If the first lien balance is 60,000 dollars and the property sells for 80,000, you receive only 20,000 of your 50,000-dollar balance — a 60 percent loss. If the property sells for only 55,000, you receive just 5,000. And if the property sells for less than the first lien balance, you receive nothing. This exposure to total loss is the defining risk of holding a second lien note.

What Note Buyers Pay for First Lien Texas Land Notes

First Lien Pricing Dynamics

First lien Texas land notes are the bread and butter of the secondary note market. They represent the standard product that most note buyers are set up to evaluate, purchase, and service. The pricing for first lien performing notes typically reflects a discount of 10 to 30 percent from the remaining balance, depending on the note's specific characteristics — interest rate, borrower payment history, loan-to-value ratio, property type, documentation quality, and remaining term. A strong first lien note with a competitive interest rate, a long payment history, a low loan-to-value ratio, and complete documentation can command premium pricing, with the seller receiving 80 to 90 percent or more of the remaining balance.

The key factor that supports first lien pricing is the security of the position. The note buyer knows that in the worst case — a borrower default and foreclosure — their recovery is protected by the senior lien position. As long as the property is worth more than the note balance (a positive equity position), the buyer can recover their investment through foreclosure and resale. This security translates into confidence, which translates into better pricing for the note seller. Longhorn Note Buyers, with over $46 million in Texas notes purchased since 2007, focuses primarily on first lien Texas land notes and can provide accurate, fair pricing based on their deep knowledge of the Texas market and decades of experience evaluating first lien notes.

Factors That Maximize First Lien Note Value

Within the first lien category, several factors distinguish premium notes from standard notes. A low loan-to-value ratio — meaning the note balance is significantly less than the property's current value — provides a substantial equity cushion that protects the buyer and supports higher pricing. A high interest rate (9 percent and above in the current market) generates strong income and reduces the discount needed for the buyer to achieve their target yield. A long, clean payment history demonstrates borrower reliability and reduces perceived default risk. Complete, well-organized documentation — including the original note, recorded deed of trust, payment history from a professional servicer, and title search — makes the buyer's due diligence faster and cheaper, which can improve the offer. Each of these factors contributes to the note's overall risk profile and affects the price buyers are willing to pay. Our detailed guide on what determines note value in Texas examines each of these factors in depth.

What Note Buyers Pay for Second Lien Texas Land Notes

The Steep Discount Reality

Second lien Texas land notes trade at significantly steeper discounts than first lien notes — typically 40 to 70 percent or more of the remaining balance for performing second liens, and even deeper discounts for non-performing second liens. This means a second lienholder with a 50,000-dollar note balance might receive an offer of 15,000 to 30,000 dollars, compared to 35,000 to 45,000 dollars for a comparable first lien note. The discount reflects the substantially higher risk of the junior position: the buyer must pay off or navigate around the senior lien to protect their investment, and in a foreclosure scenario, the second lienholder may receive little or nothing after the first lienholder is satisfied.

Some note buyers will not purchase second lien notes at all, regardless of the price. The risk profile of junior liens — particularly on rural Texas land where property values can be volatile and the resale market is thin — is outside the risk tolerance of many buyers. This limited buyer pool further depresses pricing for second lien notes, as the few buyers willing to participate can set prices with less competitive pressure. For second lien note holders, the limited market and steep discounts can be frustrating, but they reflect genuine economic realities rather than arbitrary pricing decisions.

Factors That Affect Second Lien Pricing

The most critical factor in second lien pricing is the combined loan-to-value ratio — the total of the first lien balance plus the second lien balance relative to the property value. If the combined balance is well below the property value, the second lienholder has meaningful equity protection even in a foreclosure scenario, which supports better pricing. If the combined balance approaches or exceeds the property value, the second lienholder faces the real risk of total loss in a foreclosure, which drives the price down dramatically. The status of the first lien — whether it is current, whether it has an approaching maturity, and who holds it — also affects second lien pricing, because problems with the first lien can cascade to the second lienholder.

The borrower's payment history on both the first and second liens is another important factor. A borrower who is current on both liens demonstrates financial capacity and commitment, which reduces the perceived risk of default on the second lien. A borrower who is current on the first lien but delinquent on the second is following a rational economic pattern — they prioritize the senior obligation because default on the first lien leads to foreclosure — but it is a concerning signal for the second lienholder. Understanding these dynamics helps you set realistic expectations about your second lien note's market value.

How Lien Position Affects Your Options as a Texas Note Holder

First Lien Holders: A Full Range of Options

If you hold a first lien Texas land note, you have the full range of options available to you: continue holding and collecting payments, sell the full note, sell a partial interest, or foreclose if the borrower defaults. Your senior position protects your investment in virtually all scenarios, and the active buyer market for first lien notes means you can convert your note to cash quickly and at competitive prices whenever you choose. First lien holders are in the strongest position in the note ecosystem, and their primary decision is simply whether the timing is right to sell.

Second Lien Holders: More Limited but Still Viable

If you hold a second lien Texas land note, your options are more limited but still viable. You can continue holding and collecting payments, which makes sense as long as the borrower is paying both liens and the combined loan-to-value is reasonable. You can sell the note, although the pricing will reflect the junior position and the limited buyer pool. You can attempt to negotiate with the first lienholder to combine or restructure the liens. Or you can foreclose if the borrower defaults on your second lien — although this requires you to either pay off the first lien or sell the property subject to the first lien, both of which add cost and complexity.

One option worth considering for second lien holders is selling the note sooner rather than later. The risk of a second lien note increases over time — the longer you hold, the more opportunity there is for the first lien to develop problems, the property value to decline, or the borrower to default on one or both liens. By selling now, you lock in a known value and eliminate the junior-position risk entirely. While the price will be lower than for a comparable first lien note, the certainty of cash in hand may be more valuable than the uncertain prospect of collecting all remaining payments. Longhorn Note Buyers evaluates both first and second lien notes and can provide a fair assessment of your note's value regardless of its position. For more context on working with a direct buyer in Texas, our guide explains the benefits of selling directly.

Common Scenarios Involving Lien Position in Texas

When the First Lienholder Forecloses

One of the most damaging scenarios for a second lien holder occurs when the first lienholder initiates foreclosure. In Texas, the foreclosure of a senior lien generally extinguishes all junior liens on the property. This means that if the first lienholder forecloses, your second lien is wiped out — you receive nothing from the foreclosure sale unless the proceeds exceed the first lien balance and sale costs. Your only protection is to pay off the first lien and take over the senior position, which requires having the capital to do so, or to bid at the foreclosure sale to acquire the property and protect your investment. Both options are costly and may not be feasible, which is why second lien holders should monitor the first lien's status carefully and act quickly if there are signs of trouble.

When Both Liens Are Performing

If both the first and second liens are performing and the combined loan-to-value is reasonable, the situation is stable and both note holders are receiving their expected returns. This is the scenario where holding a second lien note is most comfortable, and it may continue for the entire life of both notes. However, the stability of this scenario depends entirely on the borrower's continued ability and willingness to service both obligations, which can change due to job loss, health issues, market conditions, or other factors. Second lien holders in this position should enjoy the stability while it lasts but remain aware that their position is inherently more fragile than a first lienholder's.

Confirming Your Lien Position

If you are not certain whether your note holds a first or second lien position, a title search on the property will reveal the current state of the title, including all recorded liens and their priority. This information is available through the county clerk's office or through a title company. Confirming your lien position before attempting to sell your note is essential because it directly affects the pricing and the buyer pool for your note. If you discover that your note is a second lien when you believed it was a first lien, the value implications are significant, and understanding this before engaging with a buyer prevents surprises and allows you to set realistic expectations.

Ready to Sell Your Note?

Whether you hold a first lien or second lien Texas land note, Longhorn Note Buyers can provide a fair, transparent evaluation within 24 hours. With over $46 million in Texas notes purchased since 2007, a 100 percent close rate on every deal quoted, and a BBB A+ rating, Longhorn brings the expertise and certainty that Texas note holders need. Founded by Nick McFadin — buying notes since 1983 — and partnered with Sandy McFadin since 2013, Longhorn Note Buyers is based in San Antonio and works exclusively in Texas. Call (210) 828-3573 or visit longhornnotebuyers.com today for a free, no-obligation quote. Knowing exactly what your note is worth — in its specific lien position, with its specific characteristics — is the essential first step toward making the best financial decision for your situation.

Frequently Asked Questions

How do I find out if my note is a first lien or second lien?

The most reliable way to determine your lien position is to order a title search on the property through a title company or review the deed records in the county where the property is located. The title search will show all recorded liens on the property and their priority order based on recording dates. If your deed of trust was the first one recorded and no senior liens were in place at the time, you hold a first lien position. If another deed of trust or mortgage was recorded before yours, you hold a junior position. Your original closing documents may also indicate your lien position, and your title insurance policy (if you obtained one) will reflect the state of the title at the time of closing.

Can a second lien note become a first lien note?

Yes, a second lien note becomes a first lien note when the senior lien is paid off. If the borrower pays off the first mortgage or deed of trust — whether through refinancing, a lump sum payment, or regular amortization — your previously junior lien moves into the senior position. This advancement in priority significantly increases the value of your note because you now have the protections and recovery priority of a first lienholder. If you know that the first lien is close to being paid off, it may be worth waiting for the advancement before selling your note, as the improvement in pricing can be substantial.

Do note buyers purchase second lien notes at all?

Some note buyers purchase second lien notes, while others do not. The buyer pool for second lien notes is smaller than for first lien notes, reflecting the higher risk of junior positions. Buyers who do purchase second liens typically specialize in distressed or complex notes and have the expertise to evaluate and manage the unique risks involved. Longhorn Note Buyers evaluates both first and second lien Texas land notes and can provide quotes on both, although the pricing for second liens will reflect the additional risk of the junior position. If you hold a second lien note and are considering selling, getting a professional evaluation from an experienced buyer is the best way to understand your note's current market value.

What is the biggest risk of holding a second lien note in Texas?

The biggest risk is that the first lienholder forecloses on the property, which generally extinguishes your second lien and results in a total loss of your investment. This can happen if the borrower defaults on the first lien while remaining current on yours, or if the borrower defaults on both liens simultaneously. Monitoring the status of the first lien — including whether the borrower is current on those payments — is essential for second lien holders. If you learn that the first lien is in default, you face an urgent decision: pay off the first lien to protect your position, bid at the foreclosure sale, sell your note quickly at whatever price the market offers, or accept the potential loss. Each option has its own costs and risks, and the best choice depends on the specific circumstances.

How does lien position affect the discount when selling my note?

Lien position has a dramatic effect on the discount. First lien performing notes typically sell at discounts of 10 to 30 percent from the remaining balance, while second lien performing notes typically sell at discounts of 40 to 70 percent or more. The difference reflects the substantially higher risk of the junior position, the limited buyer pool, and the additional costs and complexities a buyer faces when acquiring a second lien note. If you hold a first lien note, your lien position is a strong selling point that supports competitive pricing. If you hold a second lien note, understanding the pricing reality helps you set realistic expectations and make informed decisions about whether and when to sell.