Suppose you borrow private money for a deal and the deal goes bust. Now with a bank mortgage there in normally a 'deficiency clause' allowing the bank to try to seize other assets you may have if the foreclosure proceeding nets less than the bank feels it is owed. What about a private money loan ? Are most private money loans written WITHOUT deficiency clauses ?
A private money loan can be structured anyway that both parties will agree to.
Almost every hard money loan, except those made to a retirement plan, will require a personally guarantee. Rest assured that if your deal goes bust, to the degree you have other assets, the HML will go after you with a vengeance to recover any losses. Loans to retirement plans cannot include a personal guarantee so these present a greater risk to the lender. As a result, not all HML's offer these.
With Ellis's comment in mind, you can try to cut any deal you want, but it's doubtful any HML would easily allow you to walk away from a deal gone bad.
Thanks for your information Ellis and Jeff
And Jeff I would NOT have expected private money lenders to demand a personal guarantee from the borrower because a private money lender supposedly makes his entire decision to fund a loan based on the deal itself. He is guided by an LTV, he demands first position on the title, he gets involved only to the extent that he feels he is protected by the assets within the deal itself. He is indifferent to the credit worthiness of the borrower, his credit score, his assets etc. I would never have expected private money lenders to try to recover their investment by coming after the private assets of the borrower.
@Robert Carpenter I don't disagree with what you say, but it depends on the private lender. As an exercise, in public record where you are look up all the borrowers who have a lender as Equity Trust Company. These will be 'private lenders' via a Seld Directed IRA. See what the mortgage or deed-of-trust says for these borrowers. That will be your best guide where you are. And you will also learn who is lending (maybe just account numbers, but often names as well) from their SDIRA.
Depending on the hard money lender and state some loans will be non or full recourse. A personal guarantee is asked for on full recourse loans if the loan is in the name if an entity. If a foreclosure from a HML you may not worry about a deficiency judgement as the loan should be at a low enough LTV to cover the principal and interest.
I find it hard to believe that hard money lenders would pass on a personal guarantee. If I was lending my money (i.e., private money loan) you bet your life I would get a personal guarantee. I ask my lenders on every deal if I can get a nonrecourse loan and they always provide the same answer. They simply LOL.
Lending without recourse is ill advised in my opinion. It's called a Hard Money Loan because its secured by a Hard asset (the property). We lend 1st and 2nd and GAP funding, when lending 2nd and GAP you have to lend based on the borrowers other assets and the ability to recoup your principal from that borrower if a deal goes south. If "investors" could borrow money with out any recourse, we would see nothing short of the wild west played out. When I look at a deal to lend to, it's not just about the deal... it's also about the borrower (the funds they bring to the table, other assets, etc) and our fund or investors money we are lending. A good hard money lender should analyze every deal from all angles so the borrower can perform and make money, the fund or investor makes money and business continues with a solid relationship paved for the future. Sometimes the best thing a HML can do is not laugh at you, but help you to find good deals... educate you and grow each others business. It should be a partnership.
I agree with @Jeffrey Reyes . It is important to look at the borrower, just as any other lender would look at willingness and ability to pay back the loan. And yes the lender should analyze the entire deal with the borrower in mind. If it is not a good deal for the borrower, the lender should advise their client that maybe they should stay away from the deal. Most lenders are good and are in the business to make successful loans not in the business to foreclose on a property ("loan to own" as some call it).
Feel how you want to feel, give your opinion, however THERE ARE lenders that provide non-recourse loans (Not us). You may need great credit, a proven track record, and money in the bank, but the loan will be non-recourse.
Not to many entities or people will loan without a personal guarantee. I never see. Personal guarantees can show your stupidity or confidence.
If someone doesn't want to personal guarantee a loan or looking forward to getting a non recourse loan, they are out to take advantage of the lender.
If you're looking for a loan with no personal guarantee, it tells me, either:
1--You're planning on not paying me back
2--- You're not confident enough in your own deal to sign the guarantee.
In either case, don't let the door hit you in the.......
Here is how I define lenders & yes I know it's imperfect because there are plenty exceptions.
1) Institutional lender: banks, hedge funds, insurance companies etc.
2) Corporate lender: Hard money lenders, licensed individual or corporate entity, usually using warehouse lines, or pooled & syndicated money lend.
3) Private lender: unlicensed direct lender, a retired landlord, friends, family, neighbors, professionals, business owners, or executives with discretionary funds. They set
4) Seller Financing-Owner Carry
Depending on the situation, the lower you go down the list, typically, the more latitude & flexibility an agreement can be made.
I believe it is a false assumption that there is malice intended, or a lack of confidence in a deal.
Every person has a different risk tolerance, need & definition of what works for them is.
My personal line in the sand is "just say no to unsecured debt", even with a personal guarantee and an immaculate FICO score. ( There are plenty of people on prosper & other peer to peer lending sites doing this everyday without flinching, I couldn't stomach it.)
I have been on both sides as a lender & a borrower.
As a lender, I would trade additional cross collateral instead of a personal guarantee any day. Chasing people down & suing people in court for a deficiency judgment isn't my idea of a good time.
As a borrower,
I have acquired apartment buildings along time ago where the offer sheet spelled out:
"Recourse loan terms are: X"
"Non-recourse terms are: Y" ....choose.
I have signed many times as a co-guarantor (the words "jointly & severally" still make me sweat) on a multi-million dollar commercial or construction loan, where I only had fraction of the ownership interest. Nonetheless, I was technically personally liable for the entire amount and my net worth could have been wiped out in one fell swoop. On my credit report, I had the entire multimillion dollar debt count against my credit score, not just my portion of the ownership. There are certain nights where I didn't get a whole lot of sleep.
So my motto is whether you are lender or a borrower,
Either party can say yes or no.
I want to thank all of gentlemen for taking time to answer my question so lucidly, so personally, so thoroughly. I knew biggerpockets had a reputation for quick, useful, and detailed answers to submitted questions but the answers given back on this question exceed all I may have dared expect. Ellis your response in particular expands beyond mere prose wandering perilously close to the realm of literature, something one might have expected to read in a short story or essay :) You are surely right in the observation that the fairness of the terms of a deal is always shaped and conditioned by whichever side of the table one is sitting on. Again thank you all for giving me a much deeper appreciation for the subtitles involved in the question. The takeaway I get is that either party can make offers which the other party can accept or decline.
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