SS206: Advantages and Disadvantages of Agency Loans

SS206: Advantages and Disadvantages of Agency Loans

Every type of real estate loan has pros and cons. In this episode, Charles discusses the advantages and disadvantages of agency loans.

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Talking Points:

  • Agency and non-agency loans are two financing options for commercial real estate investors. Agency loans, also known as Government-Sponsored Enterprise loans (GSEs), are backed by government entities. Private lenders offer non-agency loans. Each financing option has advantages and disadvantages.
  • First off, what is an agency real estate loan?
    • Agency loans are loans guaranteed by government entities. We are going to focus on Fannie Mae and Freddie Mac in this episode. Still, some other agencies include the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), the U.S. Department of Agriculture (USDA), and the Small Business Administration (SBA).
  • What is a non-agency loan?
    • Non-agency loans are not backed by the government and are offered by private lenders, including banks, credit unions, and non-bank financial lenders. Non-agency loans offer greater flexibility and accommodate a more extensive range of commercial real estate assets.
  • Some of the main differences between agency and non-agency loans include:
    • Loan Guarantees
      • Agency loans are backed by government entities, as mentioned previously, which adds an additional layer of security to agency lenders that private, non-agency loans do not have. This makes non-agency loans riskier for the lenders.
    • Borrower Requirements
      • Agency loans have standardized loan guidelines and borrower requirements. This includes requirements for liquidity/cash reserves, net worth, experience, and professional property management.
      • Non-agency loans provide more flexible borrower requirements that are not preset from institution to institution and may be relaxed for repeat borrowers.
    • Loan Amounts and Terms
      • Agency loans are more structured and have certain loan limits and terms determined by the government entity backing the loan.
      • Non-agency loans offer more flexibility with loan amounts, repayment schedules, and terms. Tailoring the loan product to the individual borrower and deal.
      • One advantage agency loans have over many non-agency loans is they are non-recourse. In other words, a borrower’s personal assets are not pledged against the loan, so if the borrower defaults, the lender can only take back the property, not the borrower’s personal assets. This comes with many carveouts and fine print. Check out episode SS124 to learn more about recourse and non-recourse loans.
    • Acceptable Property Types
      • Agency loans are mainly for residential properties.
      • Non-agency loans cover a wider range of commercial real estate assets, including office, mixed-use, retail, mobile home parks, self-storage, industrial, and multifamily residential.
    • Interest Rates and Fees
      • Agency loans usually have lower rates since the government backs them, but they typically have additional fees, the largest of which is normally the pre-payment penalties charged by agency lenders.
      • Non-agency loans often have higher rates but might have lower fees, especially if you go directly to the lending institution. Pre-payment penalties with non-agency lenders are usually much more manageable, and rates and fees are always negotiable with non-agency lenders.
    • Approval Process and Required Documentation
      • Agency loans are processed through a more standardized process, which usually results in more documentation requirements and longer processing times.
      • Non-agency loans will require your standard loan documentation, but other document requirements and the approval process generally depend on the lenders themselves.
    • Government Oversight – The Hidden Agency Downside
      • When you take money from the government, you now have to play by their rules, which adds another level of regulation and complexity to your real estate investing business. This comes in two primary forms:
      • Additional Inspections: Agency lenders are notorious for regular, non-scheduled inspections, during which investors are given a report outlining what issues they need to rectify. You can buy a property with an agency loan, renovate it, and sell it, with everyone getting paid and still being cited by an agency lender.
      • Government Intervention: The government consistently adds new regulations and rules with loans they are backing. I witnessed this firsthand with a smaller apartment building I owned during COVID. A tenant stopped paying rent for over a year; it was 2021, and the State of Connecticut just opened up evictions again unless you had a government-backed loan; luckily, this property’s loan was not government-backed.
      • I just received documentation stating that in February 2025, Freddie Mac and Fannie Mae will institute new guidelines for rent increases, lease expirations, and grace periods for late rent payments.

Agency loans and non-agency loans have advantages and disadvantages. I find agency loans better for permanent, long-term financing on newer, stabilized multifamily properties. This minimizes inspection issues, interest rate fluctuations, and large pre-penalty payments. Non-agency loans really fit most other situations, making it popular to purchase properties with non-agency debt and then refinance into agency debt after the property has been renovated and stabilized. Investors need to be fully aware of what agency lending actually means as investors and not just be swayed by lower interest rates and longer-term loans.

Transcript:

Charles:
This episode will change your thoughts about agency loans forever. We’re breaking down the surprising truth most investors overlooked when considering agency loans versus non-agency loans. Having analyzed hundreds of real estate deals, I can tell you the crucial factors that make agency loans stand out. And after years in this industry, I’ve pinpointed what you absolutely need to know. Welcome to Strategy Saturday. I’m Charles Carillo and today will discuss the advantages and disadvantages of agency loans. What exactly are agency loans? How do they differ from non-agency loans? And stick around as we answer that question and uncover what makes these loans both an opportunity and a challenge for real estate investors today. Agency and non-agency loans are two financing options for commercial real estate investors and agency loans, also known as government-sponsored enterprise loans or GSEs are backed by government entities. Private lenders offer non-agency loans. Each financing option has advantages and disadvantages.

Charles:
So first off, what is an agency? Real estate loan agency loans are loans guaranteed by government entities and we’re gonna focus on Fannie Mae and Freddie Mac in this episode. Still some other agencies that include the Federal Housing Administration, FHA, US Department of Veteran Affairs, the va, the US Department of Agriculture, USDA and the Small Business Administration, which is the SBA. And what is a non-agency loan? Non-Agency loans are not backed by government and are offered by private lenders, including banks, credit unions and non-bank financial lenders. Non-Agency loans offer greater flexibility and accommodate more extensive range of commercial real estate assets. Some of the main differences between agency and non-agency loans include loan guarantees. So agency loans are backed by government entities and as mentioned previously this adds an additional layer of security to agency lenders that private non-agency loans do not have.

Charles:
And this makes non-agency loans a riskier for the lenders. Number two is borrower requirements. Agency loans have standardized loan guidelines and borrower requirements. This includes requirements for liquidity, so cash reserves, net worth experience, and professional property management. Non-Agency loans, on the other hand, provide more flexibility to the borrower and the requirements are not preset from institution to institution and maybe relaxed for repeat borrowers. So having that relationship, it’s gonna make it easier for you to get loans in the future. Number three is loan amounts and terms. So agency loans are more structured and have more certain loan limits and terms determined by government entity backing the loan. Non-Agency loans offer more flexibility with loan amounts, repayment schedules and terms, and really tailoring the loan product to the individual borrower and the individual deal. One advantage that agency loans have over many non-agency loans is that they are non recourse.

Charles:
In other words, a borrower’s personal assets are not pledged against the loan. So if the borrower defaults, the lender can only take back the property, not the borrower’s personal assets. And this comes with many outs and fine print. I would check out episode SS 1 24 to learn more about recourse and non-recourse loans. Number four is acceptable property types. So agency loans are mainly for residential properties. Non-Agency loans cover a wider range of commercial real estate assets including office mixed use, retail, mobile, home park, self storage, industrial and multifamily residential, just like agency loans. Number five is interest rates and fees. So agency loans usually have lower rates since the government backs them, but the typical have additional fees and the large of which is the prepay penalties charged by these agency lenders. Non-Agency loans often have higher rates but might have lower fees, especially if you go directly to the lending institution.

Charles:
So you’re cutting out like any type of brokers there, it becomes a lot less expensive prepayment penalties with non-agency loans are usually much more manageable and the rates and fees are always negotiable with non-agency lenders. So kind of the word is when you get your term sheet from the lender from like a private bank or credit union, you get that term sheet, you can kind of mark it up and send it back to them and you know, start the negotiation process. Not so much with agency lenders. Number six is approval process and required documentation. So agency loans are processed through a more standardized process, which usually results in more documentation requirements and longer processing times. Non-Agency loans will require your standard loan documentation, but other document requirements and the approval process that generally depend on the lenders themself and also the relationship you have with them.

Charles:
Number seven is the government oversight. So this is really the hidden agency downside, which isn’t really spoken about much. You have a lot of people that talk about the great terms with agency loans, the lower interest rates with agency loans all this kind of stuff, but in the non-recourse. But they don’t talk about how you’re now getting, you know, you’re now getting, becoming a partner again with the government here when you’re taking out these loans and you know, when you’re taking money from the government, you now have to play by the rules, which adds another level of regulation and complexity to your real estate investing business. And this comes in two primary forms. Number one is additional inspections. Agency lenders are notorious for regular non-scheduled inspections. And during which investors are given a report outlining what issues they need to rectify. And you can buy a property with an agency loan, renovate it and sell it with everyone getting paid and still be cited by an agency lender.

Charles:
Okay, because maybe you told them you were gonna renovate 50 units, you renovated 25 of them, and then some buyer came along and purchased it and they go, well, well why didn’t you renovate what you’re gonna say? You know, they, you have to do exactly what you’re saying. And it becomes you have this other partner in there and they’re not more of a lender, they’re more of a partner. You know what I mean? When you’re having with, I’ve never had any type of private bank come into my property and be like, oh, or contact me afterwards and say, how many units did you really renovate? What really happened there? So that’s one more thing you have to be really knowledgeable about. Making sure that whatever you tell ’em you are gonna do 100% a government intervention. So the government consistently adds new regulations and rules with loans they’re backing.

Charles:
This is, this is a new, this is something that they keep on adding to. And I witnessed this firsthand with smaller apartment building I own during covid. It was a, it was a mixed use building, so it has some like commercial and then it had residential above it and a tenant stopped paying rent for it for over a year. And this was 2021 and the state of Connecticut just opened up evictions. So about a year after they stopped it and it was opened unless you had a government backed loan. Luckily this property as loan was not government backed. I got emails from the lender, I got all that stuff over to my attorney, made sure that he had all this when he went to court. And all that information was just something that says that, you know, you’re gonna be able to only evict people now at this point if it’s not a government backed loan.

Charles:
So it means if you do have a government backed loan, you’re stuck. You took money from the government. We are making laws. We’re not allowing you to evict this person. So it could have gone a much different way. That person would’ve been there for much longer. They weren’t even living in there anymore. That’s how bad it was. They were gone. I was paying their electricity. They even turned off their electricity. But the thing though is that I wouldn’t be able to get ’em out if it was a government backed loan. So you really have to understand what you’re getting involved with when you start partnering with the government with these loans. And I just received documentation stating that in February, 2025, Freddie Mac and Fannie Mae will institute new guidelines for rent increases, lease expirations and grace periods for late rent payments. So this means that you have to follow their guidelines if you take money from them for rent increases for lease expirations.

Charles:
And then they tell you how many days before you can start charging late rent. Now find out when one tenant finds this out and then the rest of your complex finds this out as well. I mean, it could be something where you just consistently get late rent payments at your property and agency loans and non-agency loans have advantages and disadvantages. And I find agency loans better for permanent long-term financing on newer, stabilized multi-family properties. And this minimizes inspection issues because your property’s in good shape interest rate fluctuations ’cause you’re getting it for a long term. So it’s great. You understand exactly what you’re gonna be paying in interest year one and you know, year eight, whatever going forward, you’ll know exactly throughout whole term. So there won’t be anything that changes. And large prepay penalties is gonna be the one downside to this.

Charles:
And this is something where typically what happens is that early prepay prepayment penalty will come up if you’re refinancing any time, but like the last six months before the term of the loan ends. So these are things that you have to be mindful. So everything’s great, but you just have to know that I’m getting tenure debt. I’m gonna hold this for, you know, 10 years, right? It’s not something that you’re gonna be, well maybe I’ll sell in one year if I get the right price or three years. ’cause They also have a lockup period, which is usually 12 months, which means that you can’t sell it at all, even if you wanted to in the first 12 months. So these are important things that you have to know. And then, you know, non-agency loans really fit most other situations. Making it popular, purchase properties with non-agency debt and then refinance into agency debt after the property has been renovated and stabilized.

Charles:
And investors need to be fully aware of what agency lending actually means as investors and not just be swayed by lower interest rates and longer term loans, which we went through a very big increase in interest rates over the last couple years. And it was something that now you have a lot of people getting agency debt that we’re gonna get bridge loan before because they feel it’s safer. But the thing though is that they might be paying seven figures in prepaying penalty if they sell that property maybe three years down the road if they got five year debt. So they really have to be knowledgeable about what they’re doing and making sure that their business plan really matches their debt. And as I said, the best way I think they’re doing it is getting private debt to purchase your property, purchase it fast get it renovated, build up some value in it and then renovate it into some long-term product.

Charles:
And that could be perfect with an agency lender. So I hope you enjoyed, please remember to rate, review, subscribe. So comment some potential show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndicationsuperstars.com. Look forward to two more episodes next week. See you then.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

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Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure. Subscription documentation at are subject to all applicable laws. Please consult an appropriate tax, legal, real estate, financial, or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of syndication superstars, LLC exclusively.

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