Non-PG Loans are Overrated for Most Investors

[Michael Manchester]

I think the non-pg desire gets a little backwards sometimes. We all understand the appeal - get the capital you need without having to sign on the loan. On paper, that sounds safer, cleaner and more sophisticated. However most investors miss two critical things.

First, the lender isn't going to waive the guarantee for free. You are going to pay for the non-pg option in reduced leverage, increased fees, higher rates and more strict experience requirements. 

Second, almost every non-PG loan I have seen has extensive "bad-boy" carveouts. Those carveouts start looking a lot like a personal guarantee in practice. 

Fraud, misrepresentation, misuse of funds, unauthorized transfers, bankruptcy filings, waste, failure to maintain insurance, environmental issues, unpaid taxes, title problems, or certain defaults can all bring personal liability back into the picture. That is just to name a few - so your non-pg loan isn't the "walk away clean no matter what" situation so many want to believe that it is. 

It doesn't mean non-pg loans are bad, they make sense in many circumstances. For smaller investors chasing the highest leverage and clean path to quick closing - PG loans typically make a lot more sense. So before you seek a non-pg loan think "What am I giving up to call this non-pg, and what will make me personally liable anyway?"

At the end of the day I believe that a non-PG loan is not automatically safer. Often, it is just a lower-leverage, high-friction loan with better marketing - and enough bab-boy carveouts to still keep the borrower personally exposed. 

Curious how others think about this.