Nonrecourse Financing Idea
Would a bank provide a blanket non-recourse loan for a portfolio of lets say 10 single family properties?
For example, purchase 10 properties, fix them up, rent them out. Use the financials (income/expenses) from the properties after x months/years to show bank that debt service would be well above their required ratio and any other financial requirements would be met.
Would a bank lend? Would the bank value this portfolio of single family properties as a whole? Or, would this be a situation where the individual parts is worth less/riskier than the sum of the portfolio?
In this scenario, would the bank be wiling to lend up to 80% or more if the portfolio has a strong performance record/strong financials?
Obviously, the properties are all single family assets, but what if you create one entity that holds all of the properties then try to get financing based off of that entity's financials?
Thinking out loud, may be well out of bounds.
You're probably pretty far out of bounds right now. If you're talking about commercial finance where you're getting, say, a $20 million loan via, I don't know, Wells Fargo Multifamily Capital then, yeah, LLC lending would be pretty par for the course. However, you're talking about single family properties--most banks either originate or buy single family debt in a standardized form so that the debt can be 1) easily serviced or 2) easily sold.
A bank--in 2012 America--will not be valuing a 10-loan portfolio as a set. Each loan will have its own risk factors and each loan will have a principal responsible for the loan. Even conforming conventional loans that have a lot of secondary market liquidity you're talking about an upper limit max (VERY MAX) of 10 loans per individual. It's possible that a portfolio lender will have an LLC program but they would be unlikely to take on the risk of 10 loans to a certain LLC.
It's possible that a bank would finance you 10+ properties that are difficult properties to sell that are in foreclosure. But basically what you're talking about with LLC lending (or non-recourse to the individual) was done on a regular basis up until 2008 when the market collapsed. That's essentially a dead model today.
Thanks guys! Virginia Tech 4ever, what you wrote makes sense. I would imagine that a bank would value each property separately since each properties carries its own set of risks.
I can definitely understand why a bank would want to provide financing for some troubled assets. Thanks for the info.
I know of a bank that is doing something similar right now, full recourse to the sponsor though. Non recourse was impossible given uncertainty in the resi market. The Borrower is able to admit properties to the facility for a few months at LTC ~65%. Converts to term after a few months.
Creating one entity is the best way to get this done. Most banks would make you and your partners personally guarantee the loan in addition to taking the properties as collateral.
I fixed this for you.
You'd probably have to go to a hard money lender who would probably want 30% down and 7% interest. Or you could just buy in a nonrecourse state.
There are funds (at least three that I know of) doing this on foreclosed homes, but they are buying up thousands of homes at a clip, and have a big infrastructure of people to deal with repairs and maintenance. Their ideas differ but the standard premise is that you buy at a steep discount, so you can rent it out to them for what their previous mortgage payment was, and since their credit is fucked, they wouldn't be able to get a loan. Then when their credit is repaired (couple years), then you let them buy it back for a predetermined price (that is a win for both) and they exit the deal.
Long winded way to say, yes people do this but it is much larger more sophisticated groups, since the transaction costs of doing 10 houses is similar to doing 1000s.
Too small of a deal to get any traction with the big guys.
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