Leveraging... - Posted by Kevin

Posted by Eric C on August 12, 2003 at 23:38:52:

Hi Kevin -

Substitution of collateral is just what it sounds like: persuading a lender (private or not) to agree to move an existing loan onto other collateral while simultaneously releasing their claim on the original security (collateral).

The process is sometimes referred to as “walking the mortgage”.

It is an important concept and one that would be well worth your time to learn.

Take care,

Eric C

Leveraging… - Posted by Kevin

Posted by Kevin on August 10, 2003 at 22:37:21:


Is it possible to buy lets say a $700K+ apartment building and a year from now buy another. However, instead of using cash as a deposit, can you use the first property as collateral to buy the second? Is this strategy allowed? Has anyone tried anything similar to this? Thanks.

Leveraging… - Posted by Eric C

Posted by Eric C on August 11, 2003 at 23:54:05:

Hi Kevin -

Yes, it’s possible and it has been done. That said, just because its possible doesn’t mean its advisable.

The process of tying properties together and pledging them to obtain loans is usually known as “cross collateralization” or more commonly, a “blanket mortgage”.

Lenders love them – and why not? After all, they get to keep the borrower on the hook and maintain a greater margin of safety for themselves.

On the other hand, these deals are rarely good for investors/borrowers. One screw-up, and all your good work (that hard won equity in those other properties)is for naught.

You would do well to remember the childhood tale about Humpty Dumpty.

Take care,

Eric C

PS - these things pose another less obvious problem for you (as a borrower) – they transfer more control and power to the lender than a single-property/single loan scenario would – (just my opinion).

Don’t take on the additional risk unless you:

  1. fully understand the consequences; and
  2. have a plan B – for moving those loans.

PPS - of course, you could have been thinking of a “substitution of collateral” agreement which is an entirely different animal.

Re: Leveraging… - Posted by Kevin

Posted by Kevin on August 12, 2003 at 22:25:05:

Good info. But what is “substitution of collateral?”