Loan Out Your Equity (Not Your Cash)

[Carey Dodson]

Do any of my BP colleagues have experience or more info on a concept that I will refer to as equity loans with equity partners? This would be where Investor A owns equity in a property or several properties and allows Investor B to use that equity as collateral for a note.

I’ve heard of this concept before but haven’t really seen a good case study on it nor am I sure what it is called. A few challenges I could see are as follows:

• 1)Investor A needs to have assurance that if their property sells that the cloud placed on it by Investor B can be easily remedied. One example may be that the notes placed by Investor B have subordination and substitution clauses that allow them to be placed in a junior lien position or moved to a different property when Investor A’s property goes to market.
• 2)Investor B needs to have assurance that Investor A is not interested in placing the subject property on the market within the terms he needs.
• 3)Consideration for Investor A – If the note(s) held by Investor B has a term greater than a term that Investor A is willing to go, how should an agreement be structured? And what is a reasonable amount of dollars for allowing your property to be used as collateral?

I can see the incentive for Investor A earning a premium for allowing their property to be used as collateral. I can also see the incentive for Investor B having a place to park their notes during a time where their equity may be running low or tied up on a fix and flip. But I suspect there are considerations such as those mentioned above and others I haven’t thought of.

[Dion DePaoli]

This scheme will not work.

Only an owner can pledge property as security for a loan.  In the example here, Investor B doesn't own the property so they can not give a mortgage to any lender.  Borrowers GIVE mortgages or deeds of trust to lenders.  The mortgage or deed of trust secures the note.

Investor A would have to add Investor B to title to the property in order for the property to be pledged in any manner by Investor B.  This means as joint tenants Investor B now owns 50% of the property or as tenants in common Investor B is now X% owner.  Investor A would have to foreclose Investor B's interest out of the collateral property when push comes to shove.  If any sale of the property takes place Investor B would have claims to the equity since he is vested in title for the same.

In the eyes of the Lender, Investor B is meaningless in this equation.  Investor A is the only one who can offer security and would be the only one dealt with for a loan secured by real property.  

Investor A could mortgage his property and pull cash out and offer that to Investor B under agreeable terms.  That is probably the shortest path to accomplish the goal here.  All parties being present and things being equal.

There are no case studies because this scheme doesn't exist.