Credit partner / personal guarantor

11 Replies

Hi All,

Recently I met up with a gentleman who has a few REI businesses. Very personable guy, I liked him. We discussed REI over lunch and he mentioned he is looking for a credit partner to complete a current project and suggested I may be interested in becoming one. I don't know if the two are the same but essentially it's a personal guarantor for his LLC to obtain business line of credit, approx. $150,000.

My biggest concern is a potential default as I would be personally liable and if I could be protected in some way. He mentioned that I would be a guarantor as well as a member of an LLC that owns this one property as well.

To me the best way to minimize my risk would be to have a contrast stating in case of a default, I keep the property or some other collateral. Would that be something that’s common/normal to ask, and does anyone have any other input on credit partner and/or a guarantor?

You're co-signing a loan.  Are you prepared to repay that loan?  Are you getting something in return that would make it worthwhile for you to repay that loan out of your own pocket?  Will having that loan on your credit report interfere with anything you want to do?

If you can't guess, there's no way I would do this.  The only way I would co-sign a loan is for a CLOSE family member to purchase an asset and I would have my name on the asset. An unsecured credit line for a stranger?  Might as well write them a check for $150,000 and walk away.

@Hiro Kitagawa That is very common in the HML world. Often you have an experienced flipper (other other REI) that partners with several different people that provide the PG and creditworthiness to get loans, and also usually the down payment and closing costs. It is usually a JV agreement and the benefit to the flipper is he essentially has an unlimited capacity with a lender if he can just keep getting new parters to invest. The benefit to the partner is they get 30-50% (usually) of the profits and remain fairly passive or learn the ropes from their partner.

I don't know how well it translates to bank financing though

Step one, be extremely cautious.

Step two, find out why he needs a credit partner. Why can't he do it himself for only 150K when he "has a few REI businesses) You're taking on a lot of liability and it sounds like this person maight have gotten themselves in a poor position before. Will he put you in a similar poor position?

Also, take your time on this. Partnerships (imo) should be looked at as long term whenever possible. Getting rushed into commitments is con-man 101

I don't know the specifics of the deal to be able to see how you can shift liability, but there are always creative ways to do so. When I borrow money I put the lender on as first lienholder so yes that gets done, just make sure there is equity so you have leverage. No point in being on the deed if you'll just be underwater at default. You have to know this deal inside and out (as you should anyway).

edit - poster above me says this is common. Maybe I'm dead wrong LOL

@Jon Holdman yes sir, it would be a co-sign.  Prepared to repay that loan, would be a no.  If Im' getting something in return, would be a yes.  Either way I am wanting to figure out if a clause can be added to the co-sign process to the point that I get something of value in case of default to partially cover the loss, or if it's as simple as I get stuck with the loan with nothing else to show for.  

@Jason Hirko yes and the profit margin is lower than that for the reason that some legwork has been done (house already purchased, partially rehabbed, etc). But you make a good point on bringing up HML. A HML would would only receive 10-15%, but would usually recoup a collateral if a loan defaults, correct?

@Alexander Felice yes absolutely, I would like to be as cautious as possible.  I am just wanting to get the whole picture of what the risks are.  I asked him the same question - "why can't you borrow it yourself".  The reason was that he is completely leveraged out.   I don't necessarily thing that's terrible, but how typical would it be for an investor to be in this position? 

@Hiro Kitagawa Yes, but remember 10-15% annual interest not the same as those percentages of the total profit - that is the upside that a partner has over a lender. 

when you co sign and or guarantee a note, it is nowhere near the same as being a hard money lender.  As a lender you will be receiving a (usually) first position lien on the property.  As a guarantor, if every possible favorable (to you) provision is executed as a side agreement, you will be able to assume the owners position in case of default.  if no favorable side agreements are obtained, you can be sued by the lender for the complete amount of the note, and your only recourse is to sue the property owner - a person you indicate who is already overextended.

About 50 years ago there was the case of a minor Rockefeller heir who inherited $185,000,000.  He collected guarantor fees of in excess of $15,000,000 per year for 2 years and still had all the interest, dividends and capital growth on his   $185,000,000 principal.  In year 3 a couple of his guarantees were called.  After significant time and litigation he filed for bankruptcy protection. He ultimately exited bankruptcy with 90% of his assets lost.

@Don Konipol thanks for the input and yes sir I believe we're on the same page that some type of protective provisions are needed.  One lender I spoke with suggested that I file a second lean on the property for the full amount of the line of credit.  I will consult an attorney further, but generally speaking should that essentially protect the guarantor in case of default?  (provided that the property is well performing and is valued higher than the line of credit)

@Hiro Kitagawa Not necessarily. In the event of foreclosure, backed taxes get paid, then the first lien on the property gets paid, along with fees associated. If there's anything left over, it goes to the second lien holder. The first lien holder is generally going to be handling the foreclosure, and they're goal is to make themselves whole as fast as possible, so there's no guarantee they'll hold out for enough to get you paid

@Jason Hirko noted.  I'll have to check how it is in this case, but generally speaking, would the first lien holder be the property owner if it is a property that is already paid for?  

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