Hard Money Collatoral

[Wes Holmes]

I'm just curious whether hard money loans are ever collateralized by anything other than the real estate being purchased. I'm reading an application that sounds as if my personal assets would back the loan. That even though I'm borrowing through an LLC...essentially business to business. Anyone heard of this?

[David Ramirez]

Yes, they sometimes ask for extra types of security if they're worried about the borrower's ability to repay. This might mean asking for personal guarantees or using assets like personal belongings, investments, or other valuable items as collateral, aside from the property being bought. These additional assets give the lender more assurance in case the borrower can't repay the loan.

[Chris Seveney]

@Wes Holmes

Hard money will have you personally guarantee the loan so if you fail they will go after your personal assets if there are not enough assets in the LLC

This is very common and investor need to realize that LLC may provide you some asset protection but most hard money lenders will get the PG

For us it’s a nonstarter if a borrower won’t sign one there is nothing further to discuss

[Erik Estrada]

Quote from @Wes Holmes:

I'm just curious whether hard money loans are ever collateralized by anything other than the real estate being purchased. I'm reading an application that sounds as if my personal assets would back the loan. That even though I'm borrowing through an LLC...essentially business to business. Anyone heard of this?

 Most Hard Money lenders will require a personal guarantee. 

[Wes Holmes]

Thanks for those answers. Feel better knowing it's standard practice.

[Joe Dillamore]

@Wes Holmes Just to add a bit more meat to the bone of what others have said:

It's standard practice for hard money lenders to require a personal guarantee, but once you have significant experience under your belt, lenders are sometimes willing to drop the requirement for a slight decrease in leverage and/or increase in rate.

Regarding extra collateral, lenders sometimes ask for this if the deal is too high risk for them as-is, but you have significant equity in other properties that make it wash. However, it's not standard.

[Mike Klarman]

Your LLC is the borrower, but you the individual are the guarantor. If you should go delinquent, their recourse is to seize the property. The property is in an LLC name so they can not touch personal assets, only assets of the LLC. This is why people only put one property in each LLC. So if something ever happens and the loan goes delinquent the only recourse is the subject property, but if the delinquent property is in an LLC with let's say 4 other properties then those assets are exposed to the LLC debt holder - if that makes sense.

But they will ask to see personal liquidity all the time so they can feel comfortable with the payments being able to be made for 9 months.

[Jacob Sherman]

You can cross collateralize other properties into it 

[Jonathan Killam]

Yes, but you have options. If your property is in a trust they should not be able to attach it. Because the trust owns the property, not you. The other thing to note is that if you are not confident enough in the deal that you would put up your own house, then it may: 

A) not be a good deal at all 

or 

B) you might consider partnering with someone that has more experience 

Nobody likes foreclosing on someone's personal residence. Once you have more assets in your portfolio, you will get more favorable rates and terms. Worst case scenario we'd rather foreclose on another asset to be made whole again.  

[Robert Bell]

We ask to see reserve funds.  We don't use them as collateral, but we like knowing that if something unexpected comes up, our borrower can handle it.  We like to see at least 10% of the loan amount in a checking or savings account.