Non-recourse and Recourse Loan Parameters

12 Replies

BP Members, I've been trying to pinpoint parameters by reading other posts on this subject, but I'm getting conflicting information. I was recently told that I can only get non-recourse loans (residential rentals) for over $1M (generally for portfolio loan). I saw in a post that someone mentioned ability for N/R at as low as $50K. What I'm trying to do with a team of family/friend investors is team up to buy properties cash, but then refinance these rentals within 6 months for 60% cash out. Is that feasible? 2nd question: if placing these properties under LLC that I manage and where 10 people own 10%, if we have to do recourse loan, do ALL 10 people have to give credit, assets, etc.? Can one owner be the "recourse sponsor"? I know there are better financing options if putting properties into S-Corp or C-Corp after buying FNMA rates, but we don't want to be dependent on personal credit for these buys, rather the assets until the overall portfolio is stronger. Thanks for any thoughts/info! Jim

@Jim Froehlich are you talking about multi-family (5+ unit) properties or single family (1-4 unit) properties?  If you are talking about 1-4, then ALL loans are non-recourse.  If you are talking 5+, then the multi-family forum or the commercial forum might be a better place for this type of question.  But do mention the property type and I think that will help you get better responses. And feel free to tag me with any other questions here if you need.  Thanks!

@Andrew Postell , thanks for replying to my post.  Sorry if I wasn't clear, but I am speaking about residential rentals (buried in my post).  I think you mean ALL 1-4 unit loans are recourse, right??  Otherwise, I'm thoroughly confused.  Through discussions with other lenders and professionals, I believe that a blanket loan for multiple residential properties would have to exceed $750K to be non-recourse (with a strong enough team), but I'm open to learning other options.  At this point, I'm considering changing tactics.  The gist of it is that we have a team of non-accredited investors with a mix of credit, assets, income and want to build a buy/hold Residential/Commercial portfolio together without having to pay cash for everything or run everyone's information for each loan.  I heard someone on a podcast recently mention serving as a "key principal" on a deal, which I took to mean, by using their good name, reputation, and financial standing, they agreed to sign on a loan for the group and get 1-2% of the deal for accepting the risk.  So I'm exploring this concept.  Thanks again! Jim

@Jim Froehlich ah, ok, thanks for clarifying.  If you are looking for blanket loans over several homes then yes, they could be a recourse loan...but not always.  If you were looking for individual loans for each home separately, all of those loans are non-recourse loans.  Most blanket loans I know of start at a $500k value...but I have seen a few that have started at $250k but the terms were different.  So depending on how you are acquiring homes, values of the homes, and timing of the acquisitions it will affect the loan terms.  Most blanket loans will not allow changes after you secure them.  Meaning if you buy 4 homes now...and then 5 homes would need 2 different blanket loans.  And if you ever sold a single home from a blanket loan you would have to pay a penalty and likely refinance the other homes into a new loan.  These loans are good loans, especially if you are packaging homes to sell together to hedge funds, etc.  But if you are trying to do something else besides that they can get a little sticky for other purposes.

There are pros and cons to any loan type but I would change up my subject line to "Looking for non-recourse blanket loans in X state".  That might get you a better response rate. I would still suggest to post this in the multi-family forum and here as well.  If you are only looking at properties only in one state then post it in that state forum too.  Hope this helps!

@Jim Froehlich I think @Andrew Postell is confusing some terms. Small loans, especially one loan on one property are almost certainly recourse. Recourse meaning you are personally guaranteeing them. As you mentioned earlier large loan amounts can be non-recourse.

However, why does that matter? Don’t buy junk and have cash reserves. You should be confident enough to put your money where your mouth is. If partners don’t want the liability you guys could always do joint ventures and they wouldn’t get equity. I have several commercial loans with partners. Everyone on title always personally guarantees the paper. My opinion/experience anyway. But if you keep calling banks one might be desperate to offer that, but not the norm.

Good luck!

I guess I should clarify. At least where I am they are all recourse on sub 500k loan amount. Maybe that’s not the case out by you. @Andrew Postell is a lender so maybe they offer that stuff in cattle country.

@Josh C. in the lending world "recourse" does not mean you are personally responsible for it.  A non-recourse loan is where if the borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount.

A recourse loan means that they CAN come after you personally.  So if you default on the loan, the lender will get the money back from the property AND your personal assets...if the property doesn't cover the entire loan.  

It's kind of rare that either loan would not be covered by the full value, because of your down payment, but that is the difference between recourse and non-recourse.

@Andrew Postell so you did mean what you said earlier? “All 1-4 places are non-recourse” meaning the loans you offer the bank can’t come back after the borrower?

@Josh C. yes, exactly. I'm sure there's an exception to this somewhere out there but I have never seen a recourse loan on a 1-4 family unit property. All government loans (Fannie/Freddie/FHA/VA/USDA) are non-recourse. And all portfolio loans I have ever worked with and seen from competitors have been non-recourse on 1-4 family properties. They cannot come after your personal assets if the value of the home does not cover their foreclosure costs.

@Andrew Postell non of what you said made any sense so I looked it up more. And I think we are both wrong and right. Where you are in Texas you have a state law that has them non recourse. 11 other states have that too. In Indiana that is not the case. Fannie and Freddie loan are definitely recourse here. And they will sue you for difference. I doubt you’d find a bank in Indiana that would even offer non-recourse loans under a million.

So there you go. Ask your local lender to get the scope. Learn something new everyday.

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