Cross-collateralization is a term used to describe a loan that is collateralized with multiple properties. One loan with multiple recorded liens. Most investors prefer the term “blanket loan” which essentially means the very same thing. One loan attached to several properties. And it’s a great option for real estate investors when a deal comes up and funds are needed quickly and the investor has equity in several properties but not enough equity in one single property. Cross-collateralization allows investors to tap into unused equity.
Let’s look at an example that explains this process. Say that an investor has three properties, all valued at $100,000 each. There are no liens against the properties. The investor sees an opportunity to buy a small commercial deal listed for sale at $120,000 but does not have the cash available to make an all cash offer. If the investor doesn’t move quickly the deal will get snapped up by someone else. The investor then applies for a blanket loan, cross-collateralizing all three units with one loan. Each property now has a new lien. $300,000 in total equity and a $150,000 loan at 50% LTV. The investor buys the property for $120,000 and now has $30,000 available for needed repairs.
The property is acquired and three months later is ready for sale. The investor listed the property very early on in the process while the unit was being repaired. A buyer is found and the property is sold. All three liens are then released and the equity is available once again for the next transaction.
In the previous example we looked at three identical properties and they were all 2-4 unit properties in a residential neighborhood. However, it’s not necessary that the properties being cross-collateralized be the same type of property. Real estate investors can have multiple property types in their portfolios with equity in them all. It’s not uncommon for a real estate investor to snap up a new listing using funds obtained from a blanket loan and the liens are filed against a single family rental, a duplex and a strip mall.
At ABO Capital, we don’t require a full, formal appraisal report for properties currently valued at $2 million but when cross-collateralization is involved, we do, as well as for properties with five or more units. Blanket loans evaluate available equity on multiple properties which extends the risk on the loan but this risk is addressed with a proper appraisal.
As property values overall have not only recovered their equity lost during the 2008-2009 but provided investors with additional equity over time. It’s possible that an investor’s equity position has grown substantially more than realized and those funds can be used to acquire even more real estate quickly and cost-effectively. With multiple properties, cross-collateralization is an excellent tool.