Allowing a Lender to Cross Collateralize Against Additional Property
Written By: Edward Brown
Thursday, December 13, 2018
In many cases, this cross collateralization may not be something the borrower worries about, as the borrower intends to pay the lender in full. The general plan is for the borrower to refinance the target property at anbsp;point where a new lender does not require cross collateralization, pay off the existing lender, and the existing lender >
The danger here is that the lender may hold up the sale because it does not want to >
Now, letrsquo;s say that the borrower receives an unsolicited offer for the first rental of 525,000, and he wishes to accept it. If there was no cross collateral against this property, the borrower could accept the offer, pay off the existing first of 200,000, and pocket the remaining 325,000. However, because the rental has been crossed, the lender has 550,000 against the property in second position. That means that there is technically 750,000 of liens showing up against the property. The borrower cannot accept the 525,000 offer without having the second [the crossed loan] >
For this reason, it is imperative for there to be an agreed upon >
For example, if the crossed rental was sold at a 5 CAP rate, and the crossed lenderrsquo;s interest rate was 7, the borrower may choose to sell the rental and come up with money to satisfy the lender should the lender want more than the 325,000 net proceeds from the sale. In other words, there are times when it makes economic sense to come up with money in order to sell property. Another similar scenario like this occurs when there is a blanket loan covering multiple properties, as is the case when an apartment building has been converted to condos and the owner of the building desires to sell off one condo at a time. A typical lender on the building will usually have >
Borrowers who overlook >
Many lenders may be willing to work out a reasonable amount for >
This is the primary reason why typical banks do not usually cross collateralize their loans. Most banks do not like a lot of moving parts. They want to focus on one property and the risk associated with it.
Borrowers should make sure that the lender does not hold any of the borrowerrsquo;s properties hostage and that >
Edward Brown is an investment expert and host of the radio show, "The Best of Investing." He has multiple published words, including an interview with the Wall Street Journal, and has also served as a chairman of the Shareholder Equity Committee to protect 29,000 shareholders representing 500 million REIT. Edward is also a recipient of the prestigious MBA Tax Award.
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