Non-recourse loan for fix and flip?

Question

How easy is it to get a non-recourse loan for a fix and flip?

I’m just thinking what is the worst case scenario for a fix and flip?

If I get a non recourse loan and don’t have to personally guarantee the loan and put the property in an LLC if worst case scenario happens wouldn’t I just lose my down payment and i wouldn’t have a foreclosure on my record?

Can you get a non recourse loan and not have to personally guarantee for a fix and flip?

Michael Kinsella · Answer

Austin,

I agree with what @Eric Johnson said above.

Coming from the hard money lender space, most fix and flip loan products I've seen entail a personal guarantee.

Once the deal/loan sizes increase, that is when you see more non-recourse options begin to appear.

Best,

Michael

Eric Johnson · Answer

Most small hard money loans require a guarantor, on bigger commercial and multifamily deals, then sure, non recourse.

But generally a guarantor is required for these deals. Consider being a passive investor with an active investor in your market if you are hesitant about doing a deal solo.

Kevin Romines · Answer

Most hard money loans are non-recourse.

Jeff S. · Answer

Exactly what foreclosure protection are you trying to obtain, @Austin Smith?  When you ask about “a foreclosure on my record,” what record are you referring to?

You could record the ownership of your property using a Cayman Islands entity with a trustee in the Isle of Man.  This will not stop a lender from foreclosing if you don’t satisfy your loan obligations.  Single-member/multi-member ownership is irrelevant.

Personal guarantees are used to ensure that the lender has recourse to your personal assets if you borrowed in the name of an LLC, Corporation, or any other entity.  That is, if your lender still comes up short after the foreclosure, they could sue you for the difference because you guaranteed the loan personally.  State law will vary here, but that’s the general idea.

Frankly, nothing would send up a bigger red flag to me than a prospective borrower questioning the personal guarantee we require when we make a loan.    It suggests they want me to take additional risks loaning to them and/or they are not confident in either the deal or their ability to repay.  I don’t know any private/hard money lender that doesn’t require a personal guarantee.  The only exception would be a loan to a retirement plan. PG’s are not allowed in these.

My advice, Austin, is to focus on obtaining competitive money and profitable properties.  If a personal guarantee is a deal killer for you, you might not be ready to accept the risks of leverage.

Darius Ogloza · Answer

Personally, I would not trust any single member entity.  Whether my skepticism is warranted, who knows? I would research credit reporting guidelines to get the best answer.

Austin Smith · Answer

@Darius Ogloza

Would you trust a c/s corporation more than an LLC for the foreclosure protection?

Austin Smith · Answer

@Michael Kinsella how large does the deal have to be to be non-recourse?

how many units? How much does it have to cost (2million? 10 million?) to get a non-recourse loan for commercial?

Darius Ogloza · Answer

Single member LLC's provide much less personal protection than most investors realize due to veil piercing doctrines in many states.  I am not familiar with all the in's and out's of credit reporting but I personally would not count on a single member LLC to protect me from having a foreclosure reported.

Austin Smith · Answer

If I have the property in an LLC or corporation and I get the non-recourse loan and worst case scenario the house explodes/burns down and I can’t pay back the lender and I have to foreclose - I don’t have a foreclosure on my personal record, all I lose is my down payment, and the foreclosure is on the LLC/Corp and I dissolve it and that’s it?

Kevin Romines · Answer

Yes, non-recourse by definition means no personal guarantee. Some hard money is recourse, most are non-recourse.

Non-recourse loan for fix and flip?

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