What can be use as collateral and leverage?

Question

Ok guys, I need a little professional insight and guidance!

Iâ€™ve obtained a commitment to fund a project from lender A (65%). Can I use the LOC as leverage or collateral to secure additional funding from lender B (35%) to close the deal?

If so, what is the best way to approach the this?

Jon Holdman · Answer

I think you're asking if you can get two loans, one for 65% and another for 35% and purchase a property with no cash.

Probably not.  This was commonly done during the boom, and that one one of the things that contributed to the crash.  This practice has fallen out of favor with lenders.  Lenders will generally want to see some of your own cash into the deal.

Now, that doesn't mean 35%.  So, it might be possible to get a slice of that 35% funded by someone.

Not sure I understand your situation, though.

If you mean you have a committment to fund a 65% LTV loan on a house or apartment building, then I would think you could find someone who would do a 75% LTV loan.  Above that's going to be very tough.

But if you mean you've found a line of credit that's not secured against the property, and you could take that money and put it into your bank account for three months and then buy a property with a 35% (or, 40-45%, after closing costs and holding some cash in reserves) LTV loan, that might well be possible.  The question in that case becomes your debt ratios.

Another option might be a money partner or investors.  Are you talking about $35K with a $65K LOC to purchase and fix and flip a house?  If so, you might try finding a money partner who will do the whole deal. Typical profit split if 50/50 for a case like that.  Or, do you mean you have $6.5 million for a $10 million deal?  In a case like that, you might do a syndication to get enough investors for the remaining amount.

Darryl Dahlen · Answer

Jon offers some great advice. Since you used the word "project", I'll take some liberty and assume you are talking about non-residential endeavor. I.E. Commercial.

Be very careful of anyone who claims to be able to help you as 2nd are near impossible to in the commercial arena. When they are possible, it is usually on a property where the borrower has owned it long enough to give the lender a measure of comfort.

That, and most lenders are simply not comfortable these days going behind a larger 1st in this market. Too much risk with evaporating values and NOIs.

Still, you can seek out owner financing, a JV/equity, LOC on another property, using another property as pledged collateral, stock/mutual fund loan, etc. to find the money you need.

Jon covered a lot of those options, but they were good enough to mention again.

Craig Grella · Answer

Finding those 100% LTV lenders are nearly impossible in this market. There are still a few private lenders who will fund 100% of the purchase price...if you're buying at 50% value of course.

With that said, I completely agree with Jon and tell the same to my clients all the time. Sometimes its easier, quicker, and cheaper to find a money partner than it is to shop an impossible deal to all corners of the country for a lender that doesn't exist.

Bill Gulley · Answer

Rod, your question is as clear as mud to me. Asking what can be used as collateralk and then asking if a committment can be assigned, there are two totally different things going on here. People are having to speculate and even making under the radar attempts to take you down a road for them to possibly profit from your efforts.

As to the title, collateral can be anything of value. It is better if it is readily marketable. How long would it take to sell a ski boat? I have taken RVs, boats, cars, motorcycles and even an airplane for collateral to fill the LTV gap. These types of loans can sometimes be done with any lender, but when your collateral begins to get on the strange side, you'll be looking at a private lender. For example hosehold items, camera equipment, machinery can be used but it will take a special "dealer" to use such for collateral. You're looking at a pawn shop deal!

As assigning a committment letter or line of credit, by the nature of the type of legal contract made here, these obligations to provide funding can not be assigned without lender consent, and I have never heard of consent being given.

As Jon pointed out, borrow the money and put it your account. When you apply, you'll need to disclose the loan your made, otherwise you are looking at loan fraud.

If in your deal the seller has 35% equity, the best thing is for him to carry that back as a second, if that is permitted by the lender. The last resort, in my opinion is giving up part of your deal in a JV arrangement, but that can make the deal work.....something better than nothing!

I suggest you find a local JV partner that you can work with. There are vultures in this business, that's about all they do is take the lions share of deals that other investors find.....not much effort on their part all they do is look for people like yourself that can't swing deals! Some are leaches, OTH, some are fair and serve a need in getting investors started, so be careful who you hook up with. Someone local that you can be friends and partners with is always better, IMO, than some suit on the phone.

Please don't take the question comments personally, just that more information and perhaps a clear goal being expressed will help get the answers you really need.....don't make us guess. Good luck, Bill

Bryan Hancock · Answer

I agree that it is difficult to understand what you are trying to do from your post, but my guess is the same as Jon's and Darryl's.

It seems you need to raise some equity capital to make up the remaining 35% tranche for your capitalization.

As Jon stated, a syndication would be proper here.  There is a BP group on syndication if you would like to join and explore how to do this with your fellow BP members.

Rod Mcdaniel · Answer

Great advice Jon thanks...

RM if i do find someone i'll let you know...

Dale Osborn · Answer

If you find someone to do the deal with a first of 65% and a second of 35% - let all know the source as there are others who might want to do the same thing!

What can be use as collateral and leverage?

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