Personal guarantee commercial loan

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Personal Gurantees
Posted by: Newcomer Aug 24 2004, 07:10 PM

I’d first like to say thanks for a great website. I think the author is right on target. Now that the brown nosing is out of the way, here is my question.

Is it industry standard for banks and lending institutions to requre a personal gurantee when financing deals?

Let me explain my situation. I am a businessman who would like to begin investing in real estate. I intend to permanently hold/control most of the property I purchase. I am interested primarily in Appartment complexes. Here are negatives to my situation that I can see.

1. I dont have a large sum of money for down payment. (this can be fixed)
2. I have never obtained a commercial loan before.

It’s a proven fact, it’s who you know, not what you know. I would like to establish a relationship with a specific lender and work with them over the course of my carrer. It’s definitely about relationships, and I’d like to work with the same person over and over rather than start fresh every deal.

This being said, I am unsure of whether to tough it out with a local bank that I do most of my business with now, or price shop to a new lender who will be less likely to be sympathetic to my situation.

I expect to be forced to start small and earn the lenders trust. I’m thinking about a loan of around 1 to 1.2 mil for a small appartment complex. Here is what I was quoted by a Wells Fargo rep with who I’ve done some buisiness.

Permanent Financing for 1 mil and up.
75% LTV
25% Down
1% Origination fee
Credit score of 680 and up needed
DSR must be 1.25% or greater

Does this sound standard? Also, is it the norm to REQUIRE a personal gurantee? It seems to me that the larger deals I’ve seen don’t have personal gurantee requirements.

Thanks for your time and consideration.

Posted by: loanuniverse Aug 24 2004, 07:29 PM
The personal guarantee is pretty much standard and will be waived only if the overall relationship with the lender warrants it or if the loan-to-value is so low that the possibility of a deficit is remote even in the worst of situations.

The numbers quoted by the Wells Fargo rep are pretty much close to standard. The one thing that I would say is that with a loan around $1MM, you can probably negotiate that fee down to 0.5% with a bank lender. If you were talking about a $180,000 loan to buy a small 4-unit apartment building, I would say that chances for negotiating the fee down are low. However, you will be placing a million dollars at once. Your loan is a lot more attractive.

I would recommend going with at least two lenders and see which one comes up with the better financing terms once you have a contract in place. You can play them against each other to get either a better rate, a longer amortization or a lower commitment fee.

Don’t worry about not having had a commercial loan before. It is mostly about cash flow for these kinds of loans.

Good luck
Posted by: Commercial Lender Aug 26 2004, 06:30 PM
Volume is also one of the most important factors. When you have the volume, you have the power to get people to jump when you say so. Relationships form automatically. As in any other business, even in lending the best customers i.e one with the highest volume get the most time, attention, exceptions and favors. In dealing with lenders you will find that every lender specializes in one thing and the loan officer/consultant/point of contact is usually the most important relationship you will have. Feel free to ask me for details id you have any questions. thanks. Naj
Posted by: Newcomer Aug 29 2004, 05:15 PM
Thanks Naj, you’ve made a good point. I agree that things come quicker when your doing regular deals. It’s definitely about relationships.

I think the difficult part for my company will be getting the ball rolling. I would like to start small, somewhere in the area of 1.2MM. Our main problem is coming up with a formula for doing consistant deals. From what I can see we basically need 25% of the purchase price in cash for whatever we want to purchase. This can be a problem because even if we secure $350k for the first deal, we’ll need another $500k to start another. It would seem to me that unless you had an abundance of cash, it would be nearly impossible to continually do deals.

Are there financing solutions that address this idea, conventional or otherwise?

Your thoughts?

Posted by: Commercial Lender Aug 29 2004, 09:20 PM
As you said the problem is that you can put the cash down on only so many properties before you run out of it and are locked into financing with prepayment penalties which prevent you from getting out/ReFi-ing despite any appreciation. One of the facts of real estate investing is that unless you are getting into flipping properties or construction & development, you are in it for the long run.

The remedy (which also has its limits) would be to put as little down as possible on multiple properties which have a very high likelihood of appreciation in the short run. This is the difficult part. How do you figure out what will appreciate rapidly and what will not? For this you need the intelligence of a sharp real estate agent or connections/input from developers. There are properties all over the country that are in rapid appreciation mode. Properties that are on the fringes overpopulated suburbs. Examples can be found in the New York Tri-State area, MA, Atlanta, GA, Suburbs of Seattle, and of course Florida. As suburbs push out, developers develop the residential neighborhoods. Along with the new burbs come supportive real estate in the form of Retail, Mixed-Use and Multifamily properties. In addition to built properties, land also has the propensity to jump multiples in value. Get a list of the biggest home builders in the country, find out where they are breaking new ground and get in touch with the real estate agents there…see what they have to say. Rapid appreciation is the steroid that will grow your investment now come the strategic part…cultivating it. Depending on the property and loan amount you may want to avoid getting into a mortgage with prepayment penalties. Sometimes the state where you buy has a lot to do with it i.e. on multifamily in NJ, lenders are not allowed to impose prepayment penalties. What to buy and where to buy is like a discussion on politics, it go on and on blink.gif

Here is what I would suggest. First if you have and issues with your personal credit, resolve them. Maintain a FICO of over 700 and the red carpets will be rolled out. Understand that it will take time. Find the right property i.e. a property where the owner is willing to work with you and will hold a 2nd for a significant amount which will allow you to put down 5% to10% max. Debt service is a whole other post! If you go with a stated loan you can get as much as 80% LTV. I would recommend mixed use properties over multifamily since business tenants involve less complications that residential. As far as a portfolio strategy goes, I would recommend that you also maintain a certain percentage of land in a few strategic area in the country, the trading of which will result in the cash you need to generate funds for additional investments. Depending on how hands on you would like to be you may also want to explore construction properties. Also be on the look out for investment pools. If I think of anything else i’ll post again. Hope that helped. Naj.
Posted by: MikeF Aug 29 2004, 10:25 PM
If the deal is good enough then its possible to get more financing.
We offer 80-10-10 financing on comm apartmentcomplex.
the seller can carry 10 procent and you only need to come up with 10%.

If you have a good deal that will stand on its own then your credit
is not that important. If the income from the property will pay
all bills and mortgage etc and still bring in some profit then it is
easy to find 80-10-10 financing. And if it dont then you dont want that property…=o)

I wish you good luck my brother,
anything is possible
Posted by: Newcomer Aug 30 2004, 11:52 AM
Thanks for the detailed feedback Naj and Admin. I’ve been thinking about this investement scenario for quite some time. I’ve thought about development, however there are an enourmous amount of variables. Land development is something I feel I should have started when I was young. (I’m 27 currently) Ideally I’d like to work underneath a knowledgable broker, developer, or investor.

My primary background is in marketing and business opperation. I own a smaller sized software company and am looking to eventually get out completely. Real estate is definitely more my style, I’m a details and people person. The problem as you said is barriers to entry and repetitive deal making.

This may sound like a strange question, but does either of you know of an investor/developer looking for an understudy? I am willing to offer my services without pay. In return I would seek to learn from their experience and knowledge. I would be hoping to learn; Practical applications of real estate procurement, deal making, and repetitive acquisition techniques.

I feel I am a very valuable asset to any firm. I have excellent interpersonal communication skills. I am extremely hardworking and driven, and have extensive business experience. I am also a liscensed real estate agent in two states. I can fill virtually any void needed outside of manual or repetitive labor.

I appreciate your responses. There is nothing more valuable and appreciated than opinions from individuals in your field.
Posted by: Commercial Lender Aug 30 2004, 12:14 PM
“This may sound like a strange question, but does either of you know of an investor/developer looking for an understudy?”

Honestly, the info is out there all you need is a little direction to learn the right info. Skills such as underwriting take a more professional education and tons of experience. If you have the time (and if you are serious) get into commercial mortgage brokering (you need a lic for residential). The best experience you can get is handling deals yourself. Being in software you are def detail oriented and It will take you a few months to pick up lending principles and limits and more importantly you will see first hand HOW deals go wrong and what not to do more importantly than what the gen rule of thumb is. You will learn first hand not to mention make a decent amount of money. You can also dable with contsruction and get your feet wet. Work for your self and touch base with various lenders from various areas (i.e hard money, contruction etc) rather than work for one individual/company. Let me know if that is something you would be interested in. Naj.
Author: Commercial Loan Underwriter