Typically when a lender makes a loan on a real estate asset, they ask the borrower to personally guarantee the debt. This is know as “recourse” financing. This means that the borrower’s personal assets are at risk if they are unable to meet the debt service and the property is foreclosed on.
This is the most common type of loan, and any banks in the business of lending money for real estate acquisitions will make recourse loans.
Both personally, and in partnerships, I only work with “non-recourse” lenders. In a non-recourse situation, the lender looks solely at the asset you are financing as collateral. If a deal doesn’t workout, the lender can foreclose on the property, but the borrowers other assets are not at the mercy of a bankruptcy proceeding.
As a general business practice, non recourse financing is always superior to recourse from a risk standpoint.
It also is a necessity in real estate partnerships where there are passive investors. I would never expect one of my partners to guarantee any debt with their personal guarantee. I personally would not guarantee the entire balance of a loan for a partnership that I might be a minority partner in as well. This caveat is what makes non-recourse financing great for partnerships. In my opinion, it is an absolute necessity.
So what’s the catch? Why would anyone borrow money on a recourse basis if non-recourse is on the table?
Well, many lenders don’t lend money on a non-recourse basis.
Some only want to give non-recourse financing out to highly qualified institutions.
Many times you may have to pay a premium rate versus traditional recourse.
Sometimes, like in the case of CMBS (Commercial Mortgage Backed Securties) non-recourse deals, the loans are downright predatory to the borrower.
Don’t let anyone tell you it is impossible to get non-recourse financing. Call the lenders in your market, ask if they would entertain lending money on a non-recourse basis, and build a relationship with them.
That’s how I’ve done it.