Guarantee a loan, if that’s what you have to do.
But be smart about it.
I’ve said a hundred times that you should never buy real estate investment property in your own name.
Instead, you create a business entity, and then have the business entity buy the real estate. Any of my books will tell you how to do this.
And the business entity of choice is usually a Limited Liability Company (LLC).
But the big problem with going this route is that most Lenders will not make loans to a brand new business entity, one that has no other assets and no credit history.
However, there are some Lenders that will make such loans, provided the owner of the business entity will guarantee the loan, and will sign a legal document called a Guaranty Agreement, or Loan Agreement, or something similar.
And that’s what we’re talking about today.
Not all of these Agreements are the same (in fact, none of them are), and so they all have different terms.
And, although you don’t usually think of doing it, you can actually negotiation these terms, and you should.
Let me show you the differences in the Agreements, and you can decide the best route to take.
GUARANTEE A LOAN WITH A PERSONAL GUARANTY
A Personal Guaranty means that an individual is assuming personal liability for payment of a debt that is not his personal debt.
As I said, this often happens when a person has a business entity such as an LLC, or a Partnership or Corporation, and that business entity borrows money.
Normally, the money is used to buy real estate or other assets, or to make improvements to an existing asset.
If the Lender feels that there is too much risk involved in the loan, the Lender will require the owner of the business entity to personally guarantee the repayment of the loan.
This is not an unusual event.
But most people, when they go to Closing, will just sign the document that they are presented, without question, and often without reading it.
They think they don’t have a choice.
So, they sign the Personal Guaranty Agreement.
It is a blanket guaranty, meaning that you, the Guarantor, are promising to repay the loan.
This means that if a payment is late, the Lender contacts you, and you are expected to deal with the situation.
However, there are other ways of doing the same thing.
GUARANTEE A LOAN WITH A SECONDARY GUARANTY
Think about what the Lender wants, and then think about what you are willing to do.
What the Lender says it wants is a blanket guaranty, which is the Personal Guaranty described above.
But what the Lender ultimately wants is to make sure the loan is repaid.
So, you might be able to negotiate other options, giving the Lender the security that they want, but making it a little easier for you.
You could become a Secondary Guaranty.
This means that if the payment is late, the Lenders deals directly with the business entity, notifying the entity that the payment is late, and stating what must be done.
The Lender is usually willing to do this part, since it actually happens automatically anyway as part of the software management system.
And they are allowed to add fees for doing it, although they are incurring no actual expenses.
If the loan goes into Default status, the Lender pursues collection procedures against the business entity, leading up to posting the collateral for foreclosure, again adding extra fees for doing so.
At the point where the property is posted for Foreclosure, you are required to take over and pay off the loan.
In return, when you pay off the loan, the Lender will transfer to you, personally, the First Lien on the property that is securing the loan to the LLC.
(This is especially useful for a situation where you and a friend created the LLC and did the investment, but it went south, and now the friend will not share the responsibility of dealing with the problem. You can personally foreclose on the property and get it out of the name of the LLC and into your name, and then start over alone.)
In most cases this will not require your use of your cash funds. You will just arrange for other financing from another Lender.
Under the circumstances, you might have to provide other additional collateral, but you should always keep unencumbered property for this purpose, as well as other similar purposes, anyway.
GUARANTEE A LOAN WITH A LOSS GUARANTY
The third option is that you could become a Loss Guaranty.
This means that the Lender deals with the business entity all the way through Foreclosure on the real property.
Then, if the Net Sales Proceeds from the Foreclosure Sale are not enough to pay off the loan, then you will make up the difference.
The difference is called a Deficiency.
You are guaranteeing that the Lender will not suffer a loss, no matter what happens.
As you can see, there is more than one kind of Guaranty, and they are very different for you.
So it will benefit you to know and understand the differences.
The Lender just wants to be secured, and to be compensated for any expenses of collection, and to be guaranteed that they will suffer no loss.
Provide these assurance to them, and that will work to your advantage.
Remember, the Lender wants to keep your business, because they know that you have a very positive value to them as a lifetime customer, now that they have created that relationship.
You will continue to bring in profits for them without them having to spend any money in the process.
For the Lender, you are just another “stream of income.”
Be aware of your value.
And use it to make your best deals.
I touch on this same concept in more than one of my books, but the one with the most detailed information is “Do This, Not That!” If you would like to preview it, you can go here on this website to look at it first, use the 3D Flip Reader to look at the Contents and read the first few chapters.
The paperback is available on my Amazon Author Page, along with my other books.
And I have related Articles about real estate investing and other real estate matters from other perspectives on my LinkedIn Page.
I am also active on Quora.com where I have answered over 300 questions, and they have almost 3 Million views.
If you happen to be doing, or if you are considering doing, a Section 1031 Like Kind Exchange, then you should start with a Dictionary, and I have done one, in 3 separate Blog Posts here: Part 1, Part 2, and Part 3. And I have a lot of material for you to consider on my S1031 Exchange website.
You should always check out the credentials of anyone, like myself, who you are relying on for accurate information by looking closely at their Biography. Here’s mine.
And if you think you might like to read one of my books, but can’t decide which one, here are four that I recommend.
I am an Attorney licensed to practice in Texas, North Carolina, Virginia, and the District of Columbia. But I am not your Attorney. I would be honored if I were, but I am not. Reading this Blog does not created an attorney-client relationship between us. Internet content should not be used as a substitute for the advice of a competent Attorney admitted or authorized to practice law in your state or jurisdiction.