Real estate investors, what happens if your lender goes bankrupt?

Credit, finance, Fix and flip, Foreclosures, Hard money loans, Mortgage, Real Estate Investing, Rehab / By

As we are writing this post, it is early morning the week of March 20, 2023 – and tension is mounting. First Republic Bank is poised at an incredibly sensitive moment, Signature Bank has seen its branches absorbed by NYCB Flagstar Bank, Credit Suisse was just bought by its Swiss counterpart UBS….and who knows what’s going on behind the scenes with everyone else? Real estate investors, what happens if your lender goes bankrupt?

So how do you keep your real estate empire humming and, even growing? A lot depends on when a lender bankruptcy happens in your own deal cycle. The best case is if your loan is a simple acquisition loan AND it’s been funded already — then you’ll suffer minimal disruption.  More on that below. 

Things can get complicated if your situation, loan structure, or timing are different. Consider a few of other situations, below:

Before going any further, keep in mind – Times like this call for expert guidance. While we provide quick tips below, you should reach out to our expert loan advisors at Diggifi. Just click HERE to set one up.

Here are some situations to consider:

  1. Construction Loan – In this case, you wanted to fix up your property, either for sale, AirBnB or long-term rental. You may have a construction component to your loan and it’s milestone-based. Milestones mean ongoing funding over time….and that whole time you have continued exposure to your bank and the solidity of its finances. Uh-oh (potentially)!
  1. Loan in Process – In this situation, you are simply earlier in process with a lender and they have not yet funded your loan. You are mid-way through your approval and you might think that all systems are go, but…. the bank is NOT telling you everything. Dirty laundry stays in the family, right?

    They might be in a tenuous situation OR they may be fine, but their regulator may still be breathing down their neck to slow activity, in order to avoid future crises. 

Now what?

  1. Credit Facility – In this seemingly safe situation, you closed on your loan already and your bank included a credit facility as part of your structure. 

Uh…what if your bank goes belly up before you’ve drawn down your credit facility? 

Before answering and so keeping the suspense up for one more paragraph – keep in mind that institutions funded by deposits seem to be the ones at greatest risk now – as they don’t really have a stable base of capital.  Ones funded by large-scale, chunky deposits – like those concentrated in real estate owners or venture-funded businesses – have even more risk. After all, any smartphone owner can drain his/her account in milliseconds and any group of panicked smartphone owners can cause a newfangled, yet old-fashioned, bank run.

So, now what? To address each of these situations in order:

  1. Construction Loans – The WSJ reported last week on uncertainty and (feared) chaos already brewing in these situations. It’s not clear what happens and you should make sure you have a confirmed understanding/commitment with your lender…or alternative construction lenders lined up as a Plan B.
  1. Loans in Process – In this situation, it’s vital to have optionality – ie: Plans B and C.  Your lender may have a surprise in store for you and you should have alternatives tee’d up with other lenders, so your real estate portfolio-building isn’t slowed.  Moreover, if your lender is a deposit-funded bank, you should be particularly careful – as noted, we are in an era of smartphone bank-runs by depositors.
  1. Credit Facility – See situation (1) above – “confirmed commitment” is the name of the game. 

Times like this call for great advice and careful structuring by experts in real estate finance – which is why you should reach out to our expert loan advisors at Diggifi. Just click HERE to set one up. 

Of course, as noted above, you’re sitting pretty if you’ve got a simple acquisition loan and you’ve already been funded on it. They’ve already “shown you the money” and you’ve already bought the property.  The simple script: A new “rescue lender” will step in and buy the loans from your “defunct lender” often under the guidance of a banking regulator. The technical, legal process is one known as “assignment.”  In this case, the loans themselves are still alive, as are your obligations. You’ll need to adjust who you pay and communicate with….but all you have to do is pay the loan back…along with living up to whatever other contractual obligations (like property taxes and insurance) you’ve signed up for.