Unique Approach to Mortgage Loans (cross-collateralization)
Contractor · Fayetteville, NC · Member since 2020 · 25 posts · 7 votes
Unique Approach to Mortgage Loans (cross-collateralization)
Most Popular Reply
Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
6y@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?
43 Replies
- Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes6y
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 F. You've made my point for me. Your Comment: "all of our properties are tied up together and we have less flexibility to get out a particular property" is why it's such a bad play. If things go south, there isn't any way to cut one property lose to sell if you need to. It's dominoes with no "backstop" as they say on Wall Street. It all goes downhill very fast.
At least if you have separate loans on separate properties you can sell one property if things become urgent and use the proceeds to solve the problem. You can't do that with cross-collateralization. Just stating a fact, not suggesting what you should do.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes6y
I was under contract to buy a house the seller needed to sell. Badly.
Whoops. He had a blanket LOC this house was encumbered by. The bank wouldn't release it so the sale fell through.
I wouldn't touch blanket c-c loans with a 10ft pole. Grow another way.
- Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes6y
@Jill F. You've made my point for me. Your Comment: "all of our properties are tied up together and we have less flexibility to get out a particular property" is why it's such a bad play. If things go south, there isn't any way to cut one property lose to sell if you need to. It's dominoes with no "backstop" as they say on Wall Street. It all goes downhill very fast.
At least if you have separate loans on separate properties you can sell one property if things become urgent and use the proceeds to solve the problem. You can't do that with cross-collateralization. Just stating a fact, not suggesting what you should do.
Mike, I think you must be misunderstanding my position. There are pros and cons for any loan product that you use.
At our lender, Reduced flexibility does NOT mean completely INFLEXIBLE,
it actually is possible to get a property out so long as the bank
maintains it's equity position and you jump through the required hoops-- you might compare it to a cable contract. You might be willing to sign a 3 year contract for a better rate, but perhaps you are thinking of switching to a streaming service or moving so opt for the higher rate now so you can move without penalty but it's not inherently "WRONG" to pick the long contract. Either solution could be right or wrong in different circumstances.The fact that the product did not work out for you in one particular situation doesn't make it a bad product.
- Lender · Los Angeles, CA · Member since 2020 · 11 posts · 1 vote6y
@Jordan Bowley
I’ll shoot you a message with a few perspectives to think about!
- Contractor · Fayetteville, NC · Member since 2020 · 25 posts · 7 votes6y
@Mack Meyer
Looking forward to it, thanks!
- Lender · Salt Lake City, UT · Member since 2019 · 40 posts · 17 votes6y
@Nick Barlow
Why not just do a max cash out loan on the first and roll the equity in cash into the next property? On both of those size properties there are a lot of 30 year fixed products that can combine to do what you are trying to do.
- Lender · Salt Lake City, UT · Member since 2019 · 40 posts · 17 votes6y
@Jordan bowley
- Contractor · Fayetteville, NC · Member since 2020 · 25 posts · 7 votes6y
@Curt Neider
Since we own the first property outright, I’m trying to not have two mortgages when I could live with just the one. This will also provide us the ability to save enough for our next investments DP, avoiding the need to continue doing Cross-C type transactions. Of course if I can’t find favorable terms then I’ll basically do what you’re saying, but it’s my backup plan
- Warsaw, IN · Member since 2017 · 229 posts · 270 votes6y
@Curt Neider great point on the cash out refi. After diligence on the third property in my scenario, When I was in the position to make an offer I approached my lender to do a cash out refi and he suggested cross collateralization-it saved closing costs, and I would have same cash flow-as refi loan would become a higher amount at a New, higher interest rate than I had previously. It worked out the same and I brought no money to purchase third property, so it worked for me this time (likely my only time) in my situation. It’s definitely not my “new strategy”.
I opted for this loan over a 30 yr fixed as this went to my LLC, not me personally. I have not found 30 yr terms for my LLC.
As a fiancier, if you could do 30 yr terms to my LLC in Indiana I will kindly ask you for that confirmation and reach out to you via PM 🙂. - 6yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Jill F. You've made my point for me. Your Comment: "all of our properties are tied up together and we have less flexibility to get out a particular property" is why it's such a bad play. If things go south, there isn't any way to cut one property lose to sell if you need to. It's dominoes with no "backstop" as they say on Wall Street. It all goes downhill very fast.
At least if you have separate loans on separate properties you can sell one property if things become urgent and use the proceeds to solve the problem. You can't do that with cross-collateralization. Just stating a fact, not suggesting what you should do.
If your going to cross collateralize you MUST put release clauses in your loan docs.. common for a lender to want a 120% pay down to release a specific property.. this of course is how we do development / spec loans for the houses we build in one community.. But its germane to those tying up rentals into one large loan.. dont want to get stuck.. I know many who have .. you start missing your loan covenants and it can really spell trouble.
- Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes6yThe question about personal guarantees has mostly been bypassed, but regardless of cross collateralization or not, you're unlikely to find any bank or HML that won't require a personal guarantee from the partners in the LLC. If there are a bunch of partners below a certain threshold, as in a low percentage of ownership, they may not require those partners to guarantee.
Loans without personal guarantees are call non-recourse, and are mostly limited to larger commercial deals where the players are bigger, or loans specifically made to Self directed IRAs, where the borrower can't guarantee without breaking IRS rules. In this latter case, the LTV is low, as in maybe 50%. - Contractor · Fayetteville, NC · Member since 2020 · 25 posts · 7 votes6y
@Ann Bellamy
So you’re basically saying if I want to avoid a personal guarantee I’ll have to take another loan against my first property to provide a substantial enough DP on a new one? I’m willing to do it, just not what I want to do haha.
- Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes6y
No, @Jordan Bowley, I'm saying that any commercial loan, or hard money loan, whether in first or second position, will require a personal guarantee.
If you take a loan on your first property and have enough to pay cash for the second property, you'll still need to personally guarantee the loan you just placed on the first property.
If you take a loan on your first property to provide the down payment against the second property, and get a first position commercial or hard money loan on the second property, you'll have to provide personal guarantees on both loans.
- Contractor · Fayetteville, NC · Member since 2020 · 25 posts · 7 votes6y
@Ann Bellamy
So then what's the point of having an LLC if piercing the corporate veil is so easy if/when there's a mortgage lien against the property?
Do you know of an approach to starting all of this off that will avoid the need for a personal guarantee? I am really trying my best to keep things totally separate! Thanks for the responses btw!
- Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes6y
Originally posted by @Jordan Bowley:
@Ann Bellamy
So then what's the point of having an LLC if piercing the corporate veil is so easy if/when there's a mortgage lien against the property?
See #1 below.
Do you know of an approach to starting all of this off that will avoid the need for a personal guarantee? I am really trying my best to keep things totally separate! Thanks for the responses btw!See #2 below
#1 "Piercing the corporate veil" usually refers to another party holding
the underlying owners personally responsible involuntarily, even when
they have engaged the protection of a corporation or LLC, usually
through legal action. In the case of a mortgage, you will voluntarily
sign personally, or you won't get the funds. The LLC still protects you
against liability from other parties, such as accidents, etc. I am not
an attorney so discuss this with your attorney, this is not legal
advice.#2 Yes, pay cash.
I realize that this is a sarcastic answer, however, this is a case of "he who has the gold makes the rules." You are not entitled to borrow money, it is granted based on certain conditions. And taking responsibiity for your own actions is one of those conditions. When a borrower is intent on not signing a guarantee, it makes the lender wonder why. It makes it clear that if the deal gets in trouble, the borrower is likely to walk leaving the lender holding the bag, rather than make every possible effort to to make the lender whole, even if years later.
This is not an accusation, simply a non-sugar-coated response to your question.
- Contractor · Fayetteville, NC · Member since 2020 · 25 posts · 7 votes6y
@Ann Bellamy
No sugar coating needed here!
I appreciate the perspective from the other side.
To be honest I want it all very separate because I have such a large group of investing members and I would like to say “it’s all separate” without having the disclaimer of saying I’m personally guaranteeing anything. But what you’re saying makes perfect sense too!
Of course the legal action is a concern of mine, but one I continue to be fine with as I will continue placing assets in LLCs and have very little personal equity to sue against. Again, thank you for the advice :)
- Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes6y
if you have a large group of investors then you should make sure that you are in compliance with SEC regulations. That gets very expensive. You can't just find a deal, shop it around to the investors and have them put money into an LLC. That violates SEC regulations and can get you in a world of hurt
- Contractor · Fayetteville, NC · Member since 2020 · 25 posts · 7 votes6y
Originally posted by @Ann Bellamy:
if you have a large group of investors then you should make sure that you are in compliance with SEC regulations. That gets very expensive. You can't just find a deal, shop it around to the investors and have them put money into an LLC. That violates SEC regulations and can get you in a world of hurt
Ann,
Thank your for looking out! We are an Investment Club and are complying with all SEC and IRS regulations, before I got started with anything I did extensive research to ensure we never missed a legal step as we progressed our group portfolio.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.