184 Do You Personally Guarantee Hard Money Loans? | REI Show- Hard Money For Real Estate Investors
Join the Carolina Capital team every Thursday at 12 pm Eastern for the Real Estate Investor Show – Hard Money for Real Estate Investors!
This week Bill Fairman, Wendy Sweet & Jonathan Davis give an answer to the following Ugly Questions:
1. I’ve heard some seasoned lenders say they always require a personal guarantee from their private borrowers and some say it’s not necessary. What do you think?
2. When is lending in the 2nd position ok to do and what should a lender require of the borrower to protect their principal?
0:01 – Introduction: “ Is it worth your while to get a personal guarantee on your loan?“
3:26 – Breaking News
3:48 – New Unemployment Claims are 375,000
5:50 – Inflation May Last Longer
8:55 – The GDP for the 2nd quarter 6.7%
12:19 – Any advice on how best to adjust for the supply chain interruptions when approaching remodels? Order supplies well in advance of needing them?
15:24 – Ist Ugly Question: I’ve heard some seasoned lenders say they always require a personal guarantee from their private borrowers and some say it’s not necessary. What do you think?
21:48 – When is lending in the 2nd position ok to do and what should a lender require of the borrower to protect their principal?
Carolina Capital is a hard money lender serving the needs of the “Real Estate Investor” and the “Small Builder” borrower who is striving to build wealth and generate income for themselves and their families. We offer “hard money rehab loans” and “Ground-up Construction Loans” for investors only in NC, SC, GA, VA, and TN (some areas of FL, as well).
As part of our business practices, we also serve as consultants for investors guiding them to network with other investors and educating them in locating and structuring transactions. Rarely, if ever, will you find a hard money lender willing to invest in your success like Carolina Capital Management.
Listen to our Podcast: https://thealternativeinvestor.libsyn.com/
Visit our website: https://carolinahardmoney.com
YouTube Channel: https://www.youtube.com/channel/UCYzCFOvEt2n9TchgECLwpww
Bill Fairman (00:00):
Hey! We are live and, Scott was helping us though. So have you ever wondered whether it’s worth your while to get a personal guarantee on a loan? We’ll let you know right after this.
Bill Fairman (00:31):
Hi folks. Thank you so much for joining us on the Real Estate Investors Show, Hard Money for Real Estate Investor. I’m Bill Fairman, this is Wendy Sweet. Jonathan doesn’t like us so he’s hanging out in another room.
Wendy Sweet (00:47):
Actually it’s the last day of the Month.
Jonathan Davis (00:49):
The last day of the month
Bill Fairman (00:52):
Also the last day of the quarter.
Jonathan Davis (00:53):
Quarter in, month in.
Bill Fairman (00:56):
It’s called earning season now where everyone has to talk about their earnings for the past quarter. So we are Carolina Capital anagement, and we are lenders are real estate investors in the Southeast. If you’re interested in borrowing money, go to CarolinaHardMoney.com and click on the apply now tab. If you are a passive investor, looking for passive returns, click on the accredited investor tab, don’t forget to like share subscribe, hit the bell. And don’t forget to sign up with Wednesdays with Wendy. Wendy gives up 30 minutes of her time, every Wednesday, not just per person.
Wendy Sweet (01:52):
Well actually, six hours
Bill Fairman (01:54):
Per person, talking about anything real estate. Here’s a link to her calendar. She’s usually booked out a couple of months in advance to go ahead and get on the calendar.
Wendy Sweet (02:06):
And actually, we did not lock Jonathan into his room. That is a self containment that he put himself in to take care of business today. Thank you for your sacrifice, Jonathan. We appreciate it.
Jonathan Davis (02:24):
Absolutely. No, like we said earlier yet it’s a quarter in, month end and this is been a great quarter, great month. And just want to make sure that we get everything across the finish line that we’re supposed to
Wendy Sweet (02:36):
That’s right. Awesome. Thank you.
Bill Fairman (02:38):
In case you’re wondering, that it’s not shiplap on his wall. Jonathan, you know how styles, you know, kind of go around?
Wendy Sweet (02:47):
Yeah. Like grass cloth paper.
Bill Fairman (02:48):
Wendy Sweet (02:49):
It’s coming back in.
Bill Fairman (02:51):
When we bought this building, it had 1980s grass cloth paper, and Jonathan loved it. So he wanted to keep it.
Jonathan Davis (02:58):
I think it’s seventies. I think it says,
Wendy Sweet (03:00):
It is seventies. Yeah. It didn’t even make it to the eighties. It is seventies and it looks awesome.
Bill Fairman (03:05):
Who says so?
Wendy Sweet (03:05):
He’s a decorating guru, you see him rearrange his office?
Bill Fairman (03:14):
Yes, I did.
Wendy Sweet (03:14):
It’s good. Looks good, Jonathan.
Bill Fairman (03:14):
It’s much more functional. Okay. Enough about us. Let’s talk about us. Let’s talk more about us.
Wendy Sweet (03:24):
That’s right. So what’s on your mind?
Bill Fairman (03:26):
Well, let’s get to some, we’ll call it breaking news because that’s what our little highlight things so breaking news!
Bill Fairman (03:48):
So it’s not necessarily breaking, but it is the news of the week and the day. Let’s talk about unemployment claims, new claims. We’re at 375,000, which is a little more than they expected. Continuing to 2,000,800, which is a little bit below what they expected, but these numbers have been virtually the same now for how long, Jonathan? I mean, we’ve been in these, these numbers have almost been identical for the,
Wendy Sweet (04:17):
It’s growing mold for six months.
Jonathan Davis (04:20):
Yeah. It’s been a while.
Bill Fairman (04:20):
And they’re going to continue to do this because you’re going to have all these people that are going to lose their jobs for not getting the vaccination throughout the areas that are requiring it.
Wendy Sweet (04:33):
Some counts are down. Like, all the COVID counts are down in both North and South Carolina. That’s a good thing.
Bill Fairman (04:40):
That’s beside the point.
Jonathan Davis (04:45):
I’ll interrupt you, Bill but it’s a big win for us. I mean, our eight year old has not missed any school this year.
Wendy Sweet (04:53):
Jonathan Davis (04:54):
In person, so that’s a good thing.
Bill Fairman (04:59):
It is always good, especially for your wife.
Wendy Sweet (05:03):
Well, and the test scores for schools are just off the charts terrible from what they’ve tested from last year. So it was almost like last year was a wash.
Jonathan Davis (05:14):
You know, I’ll brag on brag on, uh, on my daughter. She, they did the test for her and she scored where they want the kids to be at the end of this year. And most of the other kids in the class are below where they should have been at the end of last year and
Wendy Sweet (05:33):
Chip off the old block.
Jonathan Davis (05:33):
Ah, man. Well, most of that credit goes to my wife for homeschooling.
Wendy Sweet (05:41):
Bill Fairman (05:42):
Well, I’ve been tested too, but it’s just to see if I’m crazy or not.
Wendy Sweet (05:48):
And he failed it.
Bill Fairman (05:48):
You know, the fed chair announced that inflation may last longer than they thought.
Jonathan Davis (05:58):
I saw that, I saw that. It’s going to be a little bit more, longer transitory than we thought. And it’s like, can you just drop the word transitory? We’re going to have transitory inflation for the next decade. It’s like, when? I don’t know if that works.
Bill Fairman (06:19):
Well, it is a transition is just over a long, it’s more like a glacial
Wendy Sweet (06:26):
That’s not melting.
Bill Fairman (06:29):
So obviously that caused some rates to go up a little bit. And so Freddie Mac, their 30 year fixed rate mortgage is all the way up to 3%.
Wendy Sweet (06:42):
Oh that’s it. It’s going to stop.
Bill Fairman (06:45):
So as I’m listening to the business shows, I’m just giggling because they’re saying, oh yes, now that rates are up, prices are going to come down because people aren’t going to get rid of their houses or they can’t afford the new houses and blah, blah, blah, blah, blah, blah. And I’m like, it’s 3%, people. It’s still very affordable. And there are some people that are speculating that prices home values will start coming down, which we all know is a bunch of crap. You might lower your asking price, but you’re not going to be lowering values. It may lower the rate of appreciation, but we’re not going to see values go down.
Wendy Sweet (07:31):
Yeah. And I think terms are going to change more than anything. And by that, I mean, who’s going to end up paying closing costs? Are there going to be seller credits available for things that may need to be repaired? You’re not getting as many multiple offers on a house as you were previously it’s, so those kinds of terms are gonna change all that.
Bill Fairman (07:51):
So we can always come back out with the 40 year term too
Wendy Sweet (07:56):
Yeah. That would be wise.
Bill Fairman (07:59):
Well, most people don’t keep 30 year mortgages. It’s just that it’s just the payment term. Most people are going to move or refinance or do something so you can put them for 50 years. It doesn’t really matter.
Wendy Sweet (08:13):
Well, you know, the other thing that’s interesting too is Freddie Mac and Fannie Mae have kind of backed off of reducing the amount of investor mortgages and second mortgages in their portfolio. So they’re now allowing more and buying more. I think they realized that was a big mistake to run away from the investor world because they’re the ones that are paying it.
Jonathan Davis (08:40):
They’re the ones paying, even though the moratoriums have negatively affected them the most
Wendy Sweet (08:47):
That’s exactly right. Well said, well said. That’s exactly right.
Bill Fairman (08:53):
Okay. One more piece of great news.
Wendy Sweet (08:55):
You’re so excited, Bill.
Bill Fairman (08:56):
I am so excited.
Jonathan Davis (09:04):
Calm yourself, Bill. Easy.
Bill Fairman (09:04):
Our GDP for the second quarter. They did the final reading for the second quarter and it was at 6.7%. This is a little bit late in the game, but it’s up a full percentage point higher than their first reading. Again, this is rearward facing. So I see things slowing down because we have inventory issues and then with the D variant, there was a lot of places closed or not having much traffic. I know that Bed Bath & Beyond changed their forecast going forward. They can’t get anything and no one’s showing up at your stores.
Wendy Sweet (09:47):
Well, that’s what I’m really wondering how we’re really going to be affected. Somebody posted on a Facebook page this morning, a picture of a Sherwin Williams store, and the shelves literally, were empty. There might’ve been two or three cans of paint where there once were hundreds of paint to choose from. And it’s, just the supply chain is off the chain. It’s, there’s nothing going on. And I wonder how much longer that’s going to last. I mean, it’s affecting everything in our construction world. It’s affecting everything.
Bill Fairman (10:29):
Yesterday I was looking at a fishing website and they had two new spinning broad additions to their menu, so to speak.
Wendy Sweet (10:42):
Obviously, he’s wasting his time, Jonathan,
Jonathan Davis (10:46):
But we know you were.
Bill Fairman (10:50):
So anyway, it said, there’s these two rods and it says new! Big picture, new! You click on it, out of stock and you’re probably going to notice that on Amazon items too, you’re going to see stuff that’s either out of stock or they’re going to have shipping delays.
Wendy Sweet (11:09):
Oh Christmass trees, I hear you need to go out and buy your Christmas tree. If you’re going to do a fake one.
Bill Fairman (11:13):
It’s a Christmas tree lobby,
Jonathan Davis (11:17):
I mean, I’ve been trying to buy a dryer. Well on, you know, a washer dryer set. You can get washers, which is not really what I need. I need a new dryer, but I can’t get a dryer.
Wendy Sweet (11:27):
Jonathan Davis (11:28):
Wendy Sweet (11:30):
Bill Fairman (11:31):
You’re going to have to do it the old fashioned way. You don’t have to put up a,
Wendy Sweet (11:34):
Bill Fairman (11:34):
Jonathan Davis (11:36):
I just, actually, I just tie it to my kids’ bicycles and just let them go through the neighborhood.
Wendy Sweet (11:42):
Jonathan Davis (11:42):
It’s thee quick dry.
Bill Fairman (11:46):
Okay. So that’s the breaking news.
Wendy Sweet (11:52):
That is it, okay. That’s all you got?
Bill Fairman (11:52):
Yeah, pretty much. But we do have two ugly questions that I’d like to go over.
Wendy Sweet (11:58):
Bill Fairman (11:58):
It’s time for the ugly question.
Wendy Sweet (12:00):
Bill Fairman (12:11):
And those of you who are listening to the audio podcast, that was the ugly questions falling from the sky.
Wendy Sweet (12:18):
Hope no one got hurt.
Jonathan Davis (12:20):
And don’t miss the question, Connor,
Wendy Sweet (12:23):
Yeah. I’m looking at that right now. Connor has a question. Any advice on the best, there we go. The best supply channel. Well, that’s any advice on how to adjust for the supply chains when approaching remodels order way in advance. That’s that’s really the only thing he can do, right?
Bill Fairman (12:44):
Yeah. I mean, typically
Jonathan Davis (12:46):
Avoid custom items as much as you can and
Wendy Sweet (12:49):
Oh yeah, yeah,
Bill Fairman (12:52):
Yeah. Really, that’s the only thing you can do. Go ahead and order everything and hope that it shows up when it’s time to put it in.
Wendy Sweet (13:01):
Yeah. I mean, we’re limited to even colors of vinyl siding that can be used. There’s going to be a lot of gray and white houses everywhere. There’s no more color helping. It’s all gone.
Bill Fairman (13:12):
You are going to be limited to the stuff that’s the most popular or the most used. So if it’s white, you’ll probably be able to get it. If it’s an off color, probably not. I mean, that the same problem when I was, redoing our deck, the lattice around it, I’m getting vinyl so I don’t have to paint it and guess what? I have to get, I had to paint the vinyl because I can’t get the color that matches the same.
Wendy Sweet (13:44):
Yeah. So it’s still a double cost of what you’re having to do.
Bill Fairman (13:46):
Yeah. But I still don’t have to worry about it ruddy.
Wendy Sweet (13:48):
Yeah. That’s for sure. Yeah. That only thing is to order in advance. I’m rehabbing three houses right now. Yes, three. And my contractor is driving to, he’s an awesome guy and I’m not giving any of y’all his name, but he’s driving to all of these different wholesale companies that buy items from, you know, close outs from Lowe’s and Home Depot and all those places. He’s driving to them like every other day, just to check to see what’s coming in, to see if he can grab, you know, interior doors, appliances, cabinets, all kinds of stuff. He’s just grabbing what he can. Windows that’s windows is a big thing, trying to find. Windows that fit. I mean, now it’s almost better just to buy the windows that you have and either close them up or open them up so they fit into the holes you got.
Bill Fairman (14:45):
Yeah, other things you can do is you can drive by your re-store.
Wendy Sweet (14:52):
Bill Fairman (14:54):
As long as you have a place to store some of this stuff. There’s good items that are in there that you can do some tweaking to yourself, cabinets, vanities, all kinds of stuff that are gonna be in there.
Wendy Sweet (15:07):
Cause a lot of people have remodeled, so those stores are loaded up with good stuff.
Bill Fairman (15:09):
You’re probably not going to get appliances that are stainless, but you know, if you want to stick with the white, that’s where you can find stuff.
Wendy Sweet (15:18):
White appliances are the hardest ones to find right now.
Bill Fairman (15:21):
Wendy Sweet (15:21):
Yeah. Isn’t that crazy?
Bill Fairman (15:23):
Well, let’s move on. I hope that helped answer your question. So the question is I’ve heard some seasoned lenders say that they always require a personal guarantee from their borrowers. Some say it’s not necessary. What do we think?
Wendy Sweet (15:43):
Well, personal guarantees are pretty much worthless, in most cases. Jonathan’s cracking a smile over there.
Jonathan Davis (15:55):
Always have that, always, the saying is, you know, all personal guarantors have one thing in common.
Wendy Sweet (16:03):
Jonathan Davis (16:03):
They don’t pay and it’s not that they wouldn’t pay on a loan. It’s that if you have to rely on your personal guarantee, the, the time, effort and money that it will take to enforce that most times outweighs the benefit because you know, you can freeze bank accounts and stuff like that. But you know, typically unless there’s like, fraud or something like that, odds are, if the project has failed and your guarantor isn’t paying you, they don’t have any money. So freezing their accounts is probably not going to recoup, you know, what your losses so there are a lot, like, it allows a lot of leverage allows a lot of different maneuvers that you can do legally and it’s also a, you know, it’s a psychological factor as well, but you know, I’ve only seen a personal guarantee in the last 10 years pursued once and it ended up costing more to pursue to get that, you know, the money recouped from the personal guarantor then if they would’ve just walked away from the deal and cut their losses.
Wendy Sweet (17:25):
Yeah. Best case scenario, you can put, you know, leins across whatever they own. And you know, if they go to sell something, you might get a piece of that, but you’re exactly right. So why doesn’t everybody offer non-recourse loans in that case? Because that’s really the point, right?
Bill Fairman (17:47):
Let me throw my 2 cents.
Wendy Sweet (17:48):
Bill Fairman (17:49):
When you’re doing high loan to value loan, you’re going to have more reason to have the personal guarantee. Because they don’t have enough cushion in that deal to recoup losses. Most of it is institutional investors and banks that are requiring this just because they want to be able to cover all their bases if a deal does go south. When you’re dealing in loans, like we do, we have enough cushion and the only time we would ever pursue somebody for a personal guarantee is if they maliciously damaged and took stuff out of the property that they shouldn’t have and again ,purposely. And really, are we going to get any money out of it? No, we’re doing it for spite because they were being bused and we’re going to be a button right behind it.
Wendy Sweet (18:44):
Eye for an eye, tooth for a tooth
Jonathan Davis (18:49):
If someone does that, I mean, you know, slapping judgments leins across all their properties. You know, here’s the thing. Is there things that we can do to make your life very difficult with, you know, if you sign a personal guarantee and you’re malicious about how you exit the property, you know, yeah, absolutely. We, you know, we can file judgements leins in every county that you do business in. We can pay an attorney to freeze all the bank accounts that are tied to those LLCs, even your personal accounts. Yeah, we can, you know, will that stop? Like, is that the end all be all, no, there, I mean, we live in a world where there’s always ways around things, but we could make it very, very difficult. And you know, that’s one of the things you have to quantify, whereas the lender is going to that level to make it difficult for that person going to make the deal more equitable for you as the lender. And that’s the thing you have to weigh. It’s, you know, pros versus cons. Can I pursue something that will result in, you know, a higher yield or if I pursue this, will it result more often in a lower yield? And that’s the thing you have to weigh. And personally, I’d rather have to weigh that option than not have that option to way.
Wendy Sweet (20:16):
I just collect, yeah, right. I just collect food from the farm and mail it to them in a nice little package.
Jonathan Davis (20:27):
Well, you know, as, as a lender, you know, one of the sayings that that I like is, you know, as a lender, we like options, not obligations. So if I do a non-recourse loan, I’m obligated to not be able to pursue you. If I do a full recourse loan, I have the option to pursue you. So we, you know, when you were setting something up, I will say it again, give yourself options, not obligations.
Wendy Sweet (20:56):
Bill Fairman (20:57):
And at the same time, if you’re a borrower and you’re concerned about being personally responsible, I wouldn’t worry too much about it again, the only time you’re ever going to be pursued is if you’ve done something malicious and if you don’t intend to be a Butthead and do stuff that’s malicious, then there’s not really any worry. In our business specifically, if you’re doing conventional loans where you’re at 95% loan to value, you’re going to have to sign it regardless. And you may have somebody that would pursue that. But again, as long as you’re not being malicious in how you leave the property, you don’t have to worry about a personal guarantee. It costs them more money than it’s worth in a personal guarantee.
Wendy Sweet (21:40):
That’s right. And malicious means don’t go dark, have communication, all of that good stuff, right?
Bill Fairman (21:46):
Yeah. We’re running out of time.
Wendy Sweet (21:47):
Bill Fairman (21:48):
So let’s do our second question, which I can’t remember what it was. Oh, there it is! Is a lender in second position. When is it,
Wendy Sweet (21:58):
When is lending in second position okay to do and what should a lender do, what should a lender require of the borrower to protect their principal?
Bill Fairman (22:09):
The best time to be in second position is when you’re also in first
Wendy Sweet (22:16):
Or when, you know, who’s in first position and you have the availability or the option to be able to take first position over. If having a relationship with the first position holder, I think, is really, really important, whether it’s you or whether it’s somebody you know,
Jonathan Davis (22:37):
It really bothers me that principal is misspelled. That’s the wrong kind of principal
Wendy Sweet (22:46):
I didn’t even notice. Good thing he was homeschooling
Bill Fairman (22:53):
That said, what you should do, you require from the borrower can make sure that your principal is paid. They make their payments. You require them to make their payments. I don’t know how to answer that, frankly. There’s not really anything you can do to guarantee other than making sure that your loan to value stays low enough to where if you do have to foreclose, there’s enough cushion to recoup all your money.
Wendy Sweet (23:23):
That’s really important. If you’re in second position behind, you know, somebody like us, that’s at 70%, if you’re in second position behind us, don’t go any higher than 75 or 80% in that second position. And even 80% is scary to be there because that last 20% can disappear really quickly. Real estate commissions, closing costs, unpaid interest, you know, renewal fees, all kinds of things. It can disappear really quick.
Bill Fairman (23:56):
You know, that said, you’re a fly in the ointment if that house is being sold so you will get your money. If it goes into foreclosure, maybe not, but if the house is sold, you’re getting money.
Wendy Sweet (24:11):
Yeah. What were you gonna say, Jonathan?
Jonathan Davis (24:12):
Yeah. So when you live in second position or any junior lien position, you want to look at combined loan to value, your CLTV. So you want to take the positions in front of you, add them to whatever amount that you’re wanting to potentially lend and see what that total loan to value would be that combined loan to value. You’re a hundred percent, right. Yeah. I mean, when you get above 80% on investment loans, it gets a little scary because here’s the thing, I mean, when you get that high up and you turn a property into a distress property, that 20% has gone. You know, the reason, once a property moves from, you know, end-user buyer like retail, and it goes to distressed 10 to 20% of the value is gone. It’s shaved right off immediately because no one wants to pay retail for a distress property. Ad then the other piece would be, I would advise anyone if you’re lending in a junior lien position, only do so if you have the wherewithal to take out the first lien, because if you don’t do that, you stand the potential of, of losing, you know, being extinguished out through a foreclosure action. I mean, nothing’s worse than even if you’re at a 60% LTV. Nothing’s worse than the first foreclosing and you can’t do anything about it. You have no ability to, you know, to buy the first out. And then it goes to, you know, to sell and it clears the first, you know, it just clears the first lien holder’s lein amount, well, now you get nothing.
Wendy Sweet (25:59):
You lost alll your money.
Jonathan Davis (26:00):
Again, you know, if you’re lending in second lien position, I would advise only doing so if you have the ability or the wherewithal to take out the first.
Wendy Sweet (26:09):
Bill Fairman (26:10):
Lastly, this is very important to make sure check to make sure if you’re in a super lein state as well and what that means is an HOA can foreclose in a super lein state on someone that didn’t pay their dues. And they don’t have to inform either the first or second mortgage holder in order to,
Wendy Sweet (26:32):
Take that house.
Bill Fairman (26:35):
Take that house to foreclosure. And both of you get wiped out. So I would check that first before I did anything.
Wendy Sweet (26:42):
Awesome. Were out of time.
Bill Fairman (26:43):
Alright. Yep. We are at a time. Don’t forget. We have a show coming up at one o’clock.
Wendy Sweet (26:48):
Jeff Watson’s back.
Bill Fairman (26:51):
Jeff is coming back to talk to us about what actions have taken place so far on the IRA legislation that is coming up.
Wendy Sweet (27:02):
You don’t want to miss it.
Bill Fairman (27:03):
There’s a link to it right there. What else? Anything new?
Wendy Sweet (27:06):
Bill Fairman (27:07):
Thank you guys for joining us. We really appreciate it. This is the Real Estate Investors Show Hard Money for Real Estate Investors. We are Carolina Capital Management. We are lenders for real estate investors in the Southeast. If you are interested in borrowing any money, go to CarolinaHardMoney.com and click on the apply now tap. If you’re a passive investor looking for passive returns, then click on the accredited investor tab. Don’t forget to like share subscribe, hit the bell and sign up with Wednesdays with Wendy. And we’ll see you at one o’clock shortly. Take care. Thanks so much.