Recourse vs. Non-Recourse: How Much Are You Personally on the Hook?

It comes down to what a lender can collect from if the loan goes bad. On a recourse loan, the lender may go after you or your guarantors for any shortfall after the property is sold. Under a non-recourse loan, collection is generally limited to the property itself, with some important exceptions.

Recourse in plain terms

Example: You owe $300,000. The loan defaults, and the property sells at foreclosure for $260,000. On a recourse loan, the lender may pursue the $40,000 gap, plus costs, from the borrower or anyone who signed a guarantee, subject to state law.

Most short-term private loans for flips, construction and bridge deals are recourse. The lender is taking on a property in transition, and recourse helps justify the speed and leverage.

Non-recourse in plain terms

On that same loan written as non-recourse, the lender would generally take the property and absorb the $40,000 loss.

Non-recourse is more common in larger commercial lending and some long-term rental loans. It usually comes with tighter terms, like lower leverage or stronger property requirements, because the lender is accepting more risk.

The "bad boy" carve-outs

Even non-recourse loans usually include carve-outs, often nicknamed bad-boy provisions. If the borrower commits fraud, misapplies funds, transfers the property without permission or files bankruptcy to stall the lender, the loan can become partly or fully recourse. Read this section closely.

Where the LLC fits

Most investment loans are made to an LLC. Owning the property through an entity can help separate liability for some purposes. But if you sign a personal guarantee, you've promised to stand behind the loan yourself. The LLC doesn't shield you from a guarantee you signed.

RSC Private Lending's Fix & Flip, New Construction, Bridge and DSCR Rental programs all lend to LLC, LP or corporation borrowers with a personal guarantee.

Questions to ask before closing

• Is this loan full recourse, limited recourse or non-recourse?
• Who has to sign a guarantee, and for how much?
• What carve-outs could convert it to recourse?
• Does the guarantee end when the loan is paid off?

State law also affects whether a lender can seek a deficiency after foreclosure, so outcomes vary by location.

What this means for you

Assume a short-term investment loan is recourse unless the documents clearly say otherwise. Understand your guarantee before you sign it, size your deals so a bad outcome won't sink you personally and talk to your attorney if anything is unclear.

Have a deal and questions about the guarantee? Send RSC Private Lending your scenario for a term sheet in 24 hours. Subject to underwriting.