Legal Question in Real Estate Law in California

The 2nd lienholder has two (at least) possible strategies.

First, he/she/it can try to be the first to file. This is sometimes facilitated by the fact that borrowers in financial trouble often tend to become delinquent on their 2nd loan before the 1st. The problem then becomes that whomever buys at the foreclosure sale buys subject to the senior lien and thus becomes responsible for paying it off or assuming it (if possible).

Alternatively, the holder of the 2nd can wait for the 1st to foreclose, accept whatever is left of the proceeds (if anything), and then become an unsecured creditor. Such lenders are known in the trade as "sold-out junior" lenders. As an unsecured creditor, a sold-out junior can go to court and sue the borrower for any deficiency. This MAY be a better route in cases where the borrower has assets and can pay the 2nd lender's judgment. It's a business decision.

If the 1st forecloses, the 2nd lien is wiped out. So there would be nothing to foreclose on in a judicial foreclosure at that point. If there is equity in the property to pay part of the 2nd, the holder of the 2nd needs to evaluate whether there is any real chance of the borrower being able to satisfy a deficiency judgment, and compare it to the costs of a year-long lawsuit. The better course may be to non-judicially foreclose, then turn around and sell to pay off the 1st. The last thing the 2nd wants to do, however, is non-judicially foreclose and then have the 1st foreclose. Foreclosure by the 2nd, leaves the first in place AND cancels the 2nd's deficiency rights due to the one form of action rule. There are a lot of other variables as well. The bottom line is that being in second position with a defaulted 1st is a really terrible place to be with many variables that affect the best course of action. There is no one-size fits all answer to what to do in that situation. The real answer to your question, however, is never make a loan if you already doubt the borrower's ability to satisfy the debt, either by payment or out of the collateral, especially if you are going to be in any place but 1st on the collateral. If you do loan based on the collateral, INSIST that the total debt secured by your loan and any senior loans not exceed 75% of the independently appraised value of the property. And at that Loans to Value, you should be getting a VERY high interest rate for your risk (usery doesn't apply to loans secured by real property). Bear in mind that private borrowers are already high-risk for default by definition, or they could get commercial loans at historically low rates. So it is pure folly to loan them money unless you know for SURE that you will be able to satisfy the debt out of the property if need be.

I'm hesitant to answer because you posted this before and you keep using the term "purchase money." You then provide facts that indicate that the loan is not purchase money.

If you were the seller, and financed a portion of the sale by carrying back a note secured by a deed of trust on the property, then the loan is purchase money and you cannot get a deficiency judgment. This is true regardless of the fact that the property is not residential or even unoccupied by the borrower.