ADVISOR LOANOLOGY
Want to sell your practice to a wholesaler?
Go ahead.
Seasoned Wholesalers
Acquiring Financial Practices
Wholesalers acquiring advisory practices operate from an SBA loan perspective just like it does when a W2 advisor (or other employee) is buying out the practice.The downpayment requirement is 10% of purchase price or a standby seller note. Most seasoned wholesalers have strong PFSs and it seems to be it is the wholesalers who always have the six figure down payments in cash available. But the SBA allows for the seller to fulfill the equity injection requirement. So, just like a W2 advisor buying out the practice.
With 10% Cash Down
If you have 10% of the purchase price in cash then you are good to go and satisfy the requirement by making that cash down payment. Lenders vary in how they verify funds but usually the last two months of statements of where the money was sitting prior to the deposit will be required.
With No Cash Down
How a wholesaler can purchase with no cash down payment if the seller agrees to a 10% seller finance note with these options and conditions:
Full Standby:
The seller can eliminate the need for the buyer to come up with a 10% cash down payment with a full standby seller note. The 2 conditions is the note can't have a balloon payment and must not have any payments (P&I) paid during the first 24 months. These are typically 7-10 year terms with the first 2 years on standby.
Partial Standby:
The seller can reduce the buyer's 10% cash down payment to only 2.5% with a partial standby seller note. Partial standby is where interest only payments are made during the first 2 years. The Applicant’s historical cash flow needs to show it can support the ability to make the payments.
Dealing With House Collateral
Conventional loans do not require personal property collateral. SBA loans do not require property collateral on your home if the loan is under $500,000 and if you have less than 25% equity. If you have less than 25% equity then your home would not be required as collateral for any loan amount size. In our experience most wholesalers are getting more than a $500,000 acquisition loan and have more than 25% equity in their home. So if you’re a wholesaler on the prowl for an acquisition these are key SBA collateral requirements to know about the house.
Personal Property Collateral
When is personal collateral potentially required?
Personal property collateral is not part of standard conventional advisor lending and the SBA does not require borrowers to have equity in a house/property to qualify.
The SBA does not require lenders to collateralize the loan with personal property if the borrower has less than 25% equity of fair market value.
It is an SBA requirement that for loans at and above $500K, if you have 25% equity in any personal real estate, including residential and investment property, that it be required as collateral, up to the full loan amount.
Real estate can be valued at 85% of the market value for the calculation of “fully-secured.”
HELOC
Will a HELOC prevent a property from being collateral?
Any amount taken out in a Home Equity Line Of Credit is deducted from the 25% equity rule. If the property with a HELOC is being collateralized, then the SBA lender would be in third lien position, with the mortgage in first, and the HELOC in second.
Mitigating Collateral
Mitigating collateral requirements?
Real estate transferred by the applicant to a spouse or minor children within six months of the date of the application will not be exempt from consideration as available collateral.
If you take a HELOC before you officially apply for your SBA business loan, and the mortgage plus the HELOC leave you with less than 25% equity in your house or investment properties, then a lien will not be required.
Liens on a personal residence or investment property may be limited to 150% of the equity in the collateral, if there are tax implications associated with the lien amount in the particular state where the lien is filed.
Future Equity Access
How would a house lien impact ability for a future HELOC?
You can refinance a collateralized house but no cash out refis are allowed. While you can keep any existing HELOC in place, you would not be able to get a new HELOC after the SBA loan is funded.
Selling House With Lien
What happens if I sell a collateralized property?
You would notify the lender of this. The process is that you sell the house and the mortgage lender gets paid off, your equity goes to the bank to be held in escrow, and they release the lien.
When you purchase another house/property this amount can be applied to your purchase and the lender will take a lien on the new house/property. If the equity is not applied to another house/property then it has to be applied to the SBA loan balance.
Securities Instead?
Can I use securities instead of property?
If you are required to use property as collateral then you could instead replace with securities only if the collateral would cover the full amount of the loan. Whole Life Cash Value and Marketable Securities can’t be used in lieu of a residence, unless it fully secures the loan amount.