Unique Approach to Mortgage Loans (cross-collateralization)

43 Replies

Hello again BG Bloggers! (I posted this earlier in another forum on accident!)

I am looking for anyone who has experience or a potential POC for someone who may know or has used cross-collateralization to negotiate a mortgage for a new property.

Background/Scenario: I am forming two LLCs, one parent out of state, and one in-state to hold properties. My investment group fully owns one property in the same state that we plan to purchase our second property. We want to purchase a 3-4 unit MF and attempt to have no down payment while still purchasing the property under the in-state LLC.

The Plan: Meet with as many credit union/local lenders as possible and attempt to use cross-collateralization to leverage our first properties equity to have the down payment rolled into the mortgage. The lien would act as insurance against the additional risk the lender would take on. The figures are roughly 120K value first property and looking for a 250-450k MF. I feel like that's enough to entice a lender to allow us to use this method. This is also an attempt to remove the need for a personal guarantee to prevent piercing the corporate veil.

Thoughts, opinions, or strongly worded responses of beer clanking approval?

Originally posted by @Jordan Bowley :

Hello again BG Bloggers! (I posted this earlier in another forum on accident!)

I am looking for anyone who has experience or a potential POC for someone who may know or has used cross-collateralization to negotiate a mortgage for a new property.

Background/Scenario: I am forming two LLCs, one parent out of state, and one in-state to hold properties. My investment group fully owns one property in the same state that we plan to purchase our second property. We want to purchase a 3-4 unit MF and attempt to have no down payment while still purchasing the property under the in-state LLC.

The Plan: Meet with as many credit union/local lenders as possible and attempt to use cross-collateralization to leverage our first properties equity to have the down payment rolled into the mortgage. The lien would act as insurance against the additional risk the lender would take on. The figures are roughly 120K value first property and looking for a 250-450k MF. I feel like that's enough to entice a lender to allow us to use this method. This is also an attempt to remove the need for a personal guarantee to prevent piercing the corporate veil.

Thoughts, opinions, or strongly worded responses of beer clanking approval?

There are 3 Comments

1 .Very Not a good idea. You are putting ALL properties at risk if there is a hick up.

2. There is always a hick up

3. See Comment 1

 

Originally posted by @Account Closed :
Originally posted by @Jordan Bowley:

Hello again BG Bloggers! (I posted this earlier in another forum on accident!)

I am looking for anyone who has experience or a potential POC for someone who may know or has used cross-collateralization to negotiate a mortgage for a new property.

Background/Scenario: I am forming two LLCs, one parent out of state, and one in-state to hold properties. My investment group fully owns one property in the same state that we plan to purchase our second property. We want to purchase a 3-4 unit MF and attempt to have no down payment while still purchasing the property under the in-state LLC.

The Plan: Meet with as many credit union/local lenders as possible and attempt to use cross-collateralization to leverage our first properties equity to have the down payment rolled into the mortgage. The lien would act as insurance against the additional risk the lender would take on. The figures are roughly 120K value first property and looking for a 250-450k MF. I feel like that's enough to entice a lender to allow us to use this method. This is also an attempt to remove the need for a personal guarantee to prevent piercing the corporate veil.

Thoughts, opinions, or strongly worded responses of beer clanking approval?

There are 3 Comments

1 .Very Not a good idea. You are putting ALL properties at risk if there is a hick up.

2. There is always a hick up

3. See Comment 1

 

Mike,

What kind of "hiccup" besides defaulting on the new properties mortgage or being sued could make this a bad idea? If I plan to have them both under the same LLC they're already going to be at equal risk if we are sued, and I don't really plan to default... so please explain what else I'm missing, I'm eager to see the other side.

 

Originally posted by @Jordan Bowley :
Originally posted by @Mike M.:
Originally posted by @Jordan Bowley:

Hello again BG Bloggers! (I posted this earlier in another forum on accident!)

I am looking for anyone who has experience or a potential POC for someone who may know or has used cross-collateralization to negotiate a mortgage for a new property.

Background/Scenario: I am forming two LLCs, one parent out of state, and one in-state to hold properties. My investment group fully owns one property in the same state that we plan to purchase our second property. We want to purchase a 3-4 unit MF and attempt to have no down payment while still purchasing the property under the in-state LLC.

The Plan: Meet with as many credit union/local lenders as possible and attempt to use cross-collateralization to leverage our first properties equity to have the down payment rolled into the mortgage. The lien would act as insurance against the additional risk the lender would take on. The figures are roughly 120K value first property and looking for a 250-450k MF. I feel like that's enough to entice a lender to allow us to use this method. This is also an attempt to remove the need for a personal guarantee to prevent piercing the corporate veil.

Thoughts, opinions, or strongly worded responses of beer clanking approval?

There are 3 Comments

1 .Very Not a good idea. You are putting ALL properties at risk if there is a hick up.

2. There is always a hick up

3. See Comment 1

 

Mike,

What kind of "hiccup" besides defaulting on the new properties mortgage or being sued could make this a bad idea? If I plan to have them both under the same LLC they're already going to be at equal risk if we are sued, and I don't really plan to default... so please explain what else I'm missing, I'm eager to see the other side."


You are Very Funny! "What kind of "hiccup" besides defaulting on the new properties mortgage or being sued could make this a bad idea?" (no offense meant, just having some good clean fun at your expense.)

"and I don't really plan to default..."

No one I know who defaulted planned to default. I have bought a LOT of defaulted properties and made a ton of money at it. None of them planned on it. And if ever you are successful in real estate, you WILL be sued. Attorneys sue those with money, not poor people. The attorney wants to make sure he gets paid, a Lot.

I bought (2) $500,000 houses in August 2001. I obviously had a lot of money on the line. You may be too young to remember and I don't know if they teach this in school, but we got hit by terrorist attacks in Sept 2001. That was just a few weeks after I bought the houses. All lending stopped and real estate froze. Loans were called. If I had been cross-collateralized I would have lost it all. Same when the tech bubble burst. Same when (you name the event . . .I could go on) but it happens fairly regularly.

Markets change, you can easily over guess value, market drops, changing demographics, risk exposure, black swan events, become ill, get into an auto accident, get tangled in a nasty lawsuit, etc.
But, there will never be a down day again will there? ;-)

Keep my number and give me a call if ever you need to get bailed out quickly. Oh, and it won't be for the amount you think it will be. It will be far, far less but then, what other choice will you have?

 

Originally posted by @Account Closed :
Originally posted by @Jordan Bowley:
Originally posted by @Mike M.:
Originally posted by @Jordan Bowley:

Hello again BG Bloggers! (I posted this earlier in another forum on accident!)

I am looking for anyone who has experience or a potential POC for someone who may know or has used cross-collateralization to negotiate a mortgage for a new property.

Background/Scenario: I am forming two LLCs, one parent out of state, and one in-state to hold properties. My investment group fully owns one property in the same state that we plan to purchase our second property. We want to purchase a 3-4 unit MF and attempt to have no down payment while still purchasing the property under the in-state LLC.

The Plan: Meet with as many credit union/local lenders as possible and attempt to use cross-collateralization to leverage our first properties equity to have the down payment rolled into the mortgage. The lien would act as insurance against the additional risk the lender would take on. The figures are roughly 120K value first property and looking for a 250-450k MF. I feel like that's enough to entice a lender to allow us to use this method. This is also an attempt to remove the need for a personal guarantee to prevent piercing the corporate veil.

Thoughts, opinions, or strongly worded responses of beer clanking approval?

There are 3 Comments

1 .Very Not a good idea. You are putting ALL properties at risk if there is a hick up.

2. There is always a hick up

3. See Comment 1

 

Mike,

What kind of "hiccup" besides defaulting on the new properties mortgage or being sued could make this a bad idea? If I plan to have them both under the same LLC they're already going to be at equal risk if we are sued, and I don't really plan to default... so please explain what else I'm missing, I'm eager to see the other side."


You are Very Funny! "What kind of "hiccup" besides defaulting on the new properties mortgage or being sued could make this a bad idea?" (no offense meant, just having some good clean fun at your expense.)

"and I don't really plan to default..."

No one I know who defaulted planned to default. I have bought a LOT of defaulted properties and made a ton of money at it. None of them planned on it. And if ever you are successful in real estate, you WILL be sued. Attorneys sue those with money, not poor people. The attorney wants to make sure he gets paid, a Lot.

I bought (2) $500,000 houses in August 2001. I obviously had a lot of money on the line. You may be too young to remember and I don't know if they teach this in school, but we got hit by terrorist attacks in Sept 2001. That was just a few weeks after I bought the houses. All lending stopped and real estate froze. Loans were called. If I had been cross-collateralized I would have lost it all. Same when the tech bubble burst. Same when (you name the event . . .I could go on) but it happens fairly regularly.

Markets change, you can easily over guess value, market drops, changing demographics, risk exposure, black swan events, become ill, get into an auto accident, get tangled in a nasty lawsuit, etc.
But, there will never be a down day again will there? ;-)

Keep my number and give me a call if ever you need to get bailed out quickly. Oh, and it won't be for the amount you think it will be. It will be far, far less but then, what other choice will you have?

 

Mike,

I understand all your points, and if I lived my life on the what-if then I would be spending my money on gold and guns. So, what else do you propose as an actual solution? I fully own my first rental, so the only option I see beyond waiting and saving for a down payment is to take another loan against the first rental... which in your doomsday examples doesn't increase my likelihood of success by any measure, in fact since it will end up costing me more money it only seems to worsen my situation.

 

We just did that! We used a group of props we bought Apr. 2017 as collateral for the new purcahse. Our lender had a number of requirements, they had to hold the first position on the properties to be used as collateral. We had to have a new appraisal & survey on the old properties as well as the new props. The lender would only consider equity in excess of the 25% for cross collateralization--- it worked out that we had sufficient equity such that we ended up bringing less than 1% of the purhase price of the new props to the table. While there are some significant costs to doing it this way, we were out of pocket very little cash and were super happy with deal.  

Originally posted by @Jill F. :

We just did that! We used a group of props we bought Apr. 2017 as collateral for the new purcahse. Our lender had a number of requirements, they had to hold the first position on the properties to be used as collateral. We had to have a new appraisal & survey on the old properties as well as the new props. The lender would only consider equity in excess of the 25% for cross collateralization--- it worked out that we had sufficient equity such that we ended up bringing less than 1% of the purhase price of the new props to the table. While there are some significant costs to doing it this way, we were out of pocket very little cash and were super happy with deal.  

Jill, 

Thanks for the insights! Do you by chance have a doc that has all of those requirements spelled out? And by significant costs are you referring to all the extra inspections and appraisals or were there more fees I have yet to hear about? There doesn't seem to be a lot on this topic with reputable sources.

 

Account Closed Why do you say you would have lost it all if you had been cross collateralized after attacks in 2001? A loan call? -- While that might have been a possibility, it surely doesn't seem like a certainty. Something else?

Originally posted by @Jordan Bowley :
Originally posted by @Mike M.:
Originally posted by @Jordan Bowley:
Originally posted by @Mike M.:
Originally posted by @Jordan Bowley:

Hello again BG Bloggers! (I posted this earlier in another forum on accident!)

I am looking for anyone who has experience or a potential POC for someone who may know or has used cross-collateralization to negotiate a mortgage for a new property.

Background/Scenario: I am forming two LLCs, one parent out of state, and one in-state to hold properties. My investment group fully owns one property in the same state that we plan to purchase our second property. We want to purchase a 3-4 unit MF and attempt to have no down payment while still purchasing the property under the in-state LLC.

The Plan: Meet with as many credit union/local lenders as possible and attempt to use cross-collateralization to leverage our first properties equity to have the down payment rolled into the mortgage. The lien would act as insurance against the additional risk the lender would take on. The figures are roughly 120K value first property and looking for a 250-450k MF. I feel like that's enough to entice a lender to allow us to use this method. This is also an attempt to remove the need for a personal guarantee to prevent piercing the corporate veil.

Thoughts, opinions, or strongly worded responses of beer clanking approval?

There are 3 Comments

1 .Very Not a good idea. You are putting ALL properties at risk if there is a hick up.

2. There is always a hick up

3. See Comment 1

 

Mike,

What kind of "hiccup" besides defaulting on the new properties mortgage or being sued could make this a bad idea? If I plan to have them both under the same LLC they're already going to be at equal risk if we are sued, and I don't really plan to default... so please explain what else I'm missing, I'm eager to see the other side."


You are Very Funny! "What kind of "hiccup" besides defaulting on the new properties mortgage or being sued could make this a bad idea?" (no offense meant, just having some good clean fun at your expense.)

"and I don't really plan to default..."

No one I know who defaulted planned to default. I have bought a LOT of defaulted properties and made a ton of money at it. None of them planned on it. And if ever you are successful in real estate, you WILL be sued. Attorneys sue those with money, not poor people. The attorney wants to make sure he gets paid, a Lot.

I bought (2) $500,000 houses in August 2001. I obviously had a lot of money on the line. You may be too young to remember and I don't know if they teach this in school, but we got hit by terrorist attacks in Sept 2001. That was just a few weeks after I bought the houses. All lending stopped and real estate froze. Loans were called. If I had been cross-collateralized I would have lost it all. Same when the tech bubble burst. Same when (you name the event . . .I could go on) but it happens fairly regularly.

Markets change, you can easily over guess value, market drops, changing demographics, risk exposure, black swan events, become ill, get into an auto accident, get tangled in a nasty lawsuit, etc.
But, there will never be a down day again will there? ;-)

Keep my number and give me a call if ever you need to get bailed out quickly. Oh, and it won't be for the amount you think it will be. It will be far, far less but then, what other choice will you have?

 

Mike,

I understand all your points, and if I lived my life on the what-if then I would be spending my money on gold and guns. So, what else do you propose as an actual solution? I fully own my first rental, so the only option I see beyond waiting and saving for a down payment is to take another loan against the first rental... which in your doomsday examples doesn't increase my likelihood of success by any measure, in fact since it will end up costing me more money it only seems to worsen my situation. 

If you fully own your rental, just borrow against that rental. Borrow against each rental separately. Don't use multiple properties to guarantee one loan. You may want to talk to a portfolio lender not one of the big banks.

 

Account Closed Thanks for the advice on the portfolio lender. I have planned to do this, but it seemed prudent to not have two loans when i could just have one with a lien. But! i do see your logic behind keeping it all separate.

@Corey Hawkinson That personal guaranty is exactly what i want to avoid! I would rather completely re-mortgage my rental to buy the next one than do that haha. I am doing my best right now to place everything in a nice separate LLC (Except for the first two properties). If a lender requires this then ill just have to find other solutions. Thanks for the comment!

Originally posted by @Jill F. :

@Mike M. Why do you say you would have lost it all if you had been cross collateralized after attacks in 2001? A loan call? -- While that might have been a possibility, it surely doesn't seem like a certainty. Something else?

Years earlier, very early on in my investing, before I knew very much, I used cross-collateralization not really knowing what it meant. I used 2 investment properties and my personal residence cross-collateralized to buy a substantial investment property

It didn't go well.

I nearly lost my house and all of my investment properties because I overbought for my financial ability, spent too much and too long on my rehab and ran out of money. (It was a REALLY nice rehab job though, in a great neighborhood ;-)  I had a ton of "equity" (and bravado, sigh . . .) but no cash to make the payments. I missed a couple of payments and the lender accelerated the interest from 12% to 30% (hey, I was young, I really didn't know what I had gotten into).

I was able to pull out of it at the last minute before foreclosure sale on all cross-collateralized properties but at great pressure and unwanted drama, time lost and legal fees fighting the foreclosure and substantial long term cost that slowed my investing. That's what cross-collateralization means. ALL properties are securing the loan. ALL properties are foreclosed on.

I haven't met an investor yet that can tell the future or who knows enough to avoid all pitfalls. 

I have been a Safe and Sane investor ever Since.

 And right now, I think we are at the top of the market. That doesn't mean the market will correct this year, it just means, if I'm right, that sometime in the next couple of years, the economy will slow and housing will correct. Two very different, but related things. That will put downward pressure on house values and rents. People who are over levered will be hurt and more loans will be in default and called.

@Jordan Bowley Our lender is a portfolio lender I don't think you could do that with a regular non-commercial lender-- We use a regional bank, Wayne Savings. The down sides I can see for these types of deals are exit strategy, all of our properties are tied up together and we have less flexibility to get out a particular property, and having all our assets tied to a single lender means that if one deal goes south every thing tied to it can go south as well.  In addition, we are personally guaranteed. It is a risk and it is not an insignificant risk. Where we are in our business, If we want to grow now rather than later,  and we do, it is for us the best risk alternative; other types of risk, (partners, hard-money (no personal guarantees but higher interest, or more depleted personal cash reserves), are all less attractive to us .  Everyday people take risks that would terrify me: doing things like flipping with hard money, or funding deals using "other people's money." That doesn't mean they're wrong-- They are just willing to tolerate different risks than me. Everyone has to figure out what type and level of risk they can live with.

Also, everyone I talked to wanted a personal guarantee for LLC real estate purchases (except some hard money places with really high rates). Did you find a reputable lender doing LLC loans at reasonable rates without a personal guarantee? what type of assets and history did they require?

Account Closed ah ok. I'm glad you were able to pull it out in time.  I do think however, that there is a pretty big difference between being cross collateralized and over-leveraged (especially at usurious interest rate); The former is a tool and the latter is a mistake regardless of the tool used to accomplish it.

Originally posted by @Jill F. :

@Mike M. ah ok. I'm glad you were able to pull it out in time.  I do think however, that there is a pretty big difference between being cross collateralized and over-leveraged (especially at usurious interest rate); The former is a tool and the latter is a mistake regardless of the tool used to accomplish it.

Ok. Whatever floats your boat.

 

Originally posted by @Jill F. :

@Jordan Bowley Our lender is a portfolio lender I don't think you could do that with a regular non-commercial lender-- We use a regional bank, Wayne Savings. The down sides I can see for these types of deals are exit strategy, all of our properties are tied up together and we have less flexibility to get out a particular property, and having all our assets tied to a single lender means that if one deal goes south every thing tied to it can go south as well.  In addition, we are personally guaranteed. It is a risk and it is not an insignificant risk. Where we are in our business, If we want to grow now rather than later,  and we do, it is for us the best risk alternative; other types of risk, (partners, hard-money (no personal guarantees but higher interest, or more depleted personal cash reserves), are all less attractive to us .  Everyday people take risks that would terrify me: doing things like flipping with hard money, or funding deals using "other people's money." That doesn't mean they're wrong-- They are just willing to tolerate different risks than me. Everyone has to figure out what type and level of risk they can live with.

Also, everyone I talked to wanted a personal guarantee for LLC real estate purchases (except some hard money places with really high rates). Did you find a reputable lender doing LLC loans at reasonable rates without a personal guarantee? what type of assets and history did they require?

 Jill,

If you don't mind me asking, how much equity was in the Cross-C? Or was the personal guaranty just a blanket requirement?

I have yet to speak with a lender just yet, I have started compiling a list to reach out to... I am a few months out before this decision is going to be made so I am just trying to get others opinions or experiences to better prepare myself.

Originally posted by @Jordan Bowley :
Originally posted by @Jill F.:

We just did that! We used a group of props we bought Apr. 2017 as collateral for the new purcahse. Our lender had a number of requirements, they had to hold the first position on the properties to be used as collateral. We had to have a new appraisal & survey on the old properties as well as the new props. The lender would only consider equity in excess of the 25% for cross collateralization--- it worked out that we had sufficient equity such that we ended up bringing less than 1% of the purhase price of the new props to the table. While there are some significant costs to doing it this way, we were out of pocket very little cash and were super happy with deal.  

Jill, 

Thanks for the insights! Do you by chance have a doc that has all of those requirements spelled out? And by significant costs are you referring to all the extra inspections and appraisals or were there more fees I have yet to hear about? There doesn't seem to be a lot on this topic with reputable sources. 

 Just for giggles, let's look at the news and see if there is anything to be concerned with as investors: @Jill F. you may want to cover your eyes and ignore the following, this isn't for you ;-)

@Jordan Bowley

Portfolio loans are pretty typical. Rather than wasting time running all over town for meetings with lenders that spend 95% of their time doing auto loans and heloc’s, pick the right lender for you for the long term and build a plan for future properties at the same time.

Also some non-attorney brainstorming for you. You can still use a single purpose LLC for each property and do the structure you are trying. Just have your regional LLC own each SPE. In the same way that you are personally protected through that structure, so is the regional LLC which can be used to guarantee each loan or a portfolio loan.

The good news is you have equity to work with!

@Jordan Bowley is have done something similar to this. In my scenario, I had already purchased two homes using the same lender, and cross collateralized the second to purchase a third.

The biggest risk in my opinion is if you have a 5 or 7 year balloon, which is common with commercial loans to LLCs.

My lender gave me twenty year amortizations on all three, so I only need to “not default” as you say, and I don’t expect to have my loans called in bad economic times.

I had to have enough equity in the second for the third, which required a new appraisal. It’s more based on relationships with the standard advice of regional or community banks.

Keep looking, and good luck.

Cross collateralization can turn into a house of cards. Another words, if one of them defaults they all default. However getting rid of a personal guarantee is very attractive. I don’t know of any lenders that will do this that are conventional which is not to say they are not out there if you have a relationship.

Hard Money will probably be your best case scenario. Anybody lending money on those types of terms will have in mind that they need to take the property in the event of default. If you’re talking about keeping a very small portion of your portfolio crossed then I don’t think it matters as much.

@Matt Dinofia

The plan is to just use it this one time in order to save all the reserve capital for remodels/rehabs and then instantly start saving for the next purchase.

Like you said, I definitely don’t want to build a house of cards!

Originally posted by @Jill F. :

@Jordan Bowley Our lender is a portfolio lender I don't think you could do that with a regular non-commercial lender-- We use a regional bank, Wayne Savings. The down sides I can see for these types of deals are exit strategy, all of our properties are tied up together and we have less flexibility to get out a particular property, and having all our assets tied to a single lender means that if one deal goes south every thing tied to it can go south as well.  In addition, we are personally guaranteed. It is a risk and it is not an insignificant risk. Where we are in our business, If we want to grow now rather than later,  and we do, it is for us the best risk alternative; other types of risk, (partners, hard-money (no personal guarantees but higher interest, or more depleted personal cash reserves), are all less attractive to us .  Everyday people take risks that would terrify me: doing things like flipping with hard money, or funding deals using "other people's money." That doesn't mean they're wrong-- They are just willing to tolerate different risks than me. Everyone has to figure out what type and level of risk they can live with.

Also, everyone I talked to wanted a personal guarantee for LLC real estate purchases (except some hard money places with really high rates). Did you find a reputable lender doing LLC loans at reasonable rates without a personal guarantee? what type of assets and history did they require?

the risk is if one property defaults they all default..  or let me put it another way.. the lender can call all your loans due and payable if one goes upside down.. so its not like you can just let one go and keep the rest.. Mike above makes good points on this aspect.