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The Private Money Investor

A book that we must read

January 19th, 2017

Clay Sparkman

This book strikes me as a must read for anyone in the lending business. I have not read it yet, but I intend to get started now. Have any of you read it, and if so, what was your take away?

Here

The Unbanking of America: How the New Middle Class Survives

Lisa Servon. Houghton Mifflin Harcourt, $27 (272p) ISBN 978-0-544-60231-1

The failure of banks to meet the needs of the 99%—and the cottage industries filling the gap—are thoughtfully explored in this startling and absorbing exposé from Servon, a professor of city and regional planning at the University of Pennsylvania. As she describes, commercial banks now cater largely to the wealthy, and more Americans are turning to alternative financial services, including check cashers, payday lenders, and a variety of informal arrangements. To better understand the options available, Servon took jobs at RiteCheck, a check-cashing establishment in the South Bronx, and Check Center, a payday lender in Oakland, Calif. Surprisingly, she concludes that the seemingly predatory “shadow” banking system may simply be a reasonable (if inconsistently regulated) approach to customer demand. In layperson-accessible language, Servon explains the effects of banking regulations—both recent and historical—and of technological innovations in consumer financial services. Most notable is the breadth of people she finds who have removed themselves, or been removed, from the world of conventional banking, including those with chronically low income, students, and entrepreneurs. Required reading for fans of muckraking authors like Barbara Ehrenreich, this fascinating look at the future of money management insists that the ever-growing number of the “unbanked” are a sector deserving of respect and solid options. Agent: Adam Eaglin, Cheney Literary. (Jan.)

Here’s to a good year for all in 2017!

– Clay (clay@privatemoneysource.com, 503-476-2909)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964. Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Resources for private money profesionals

January 6th, 2017

Clay Sparkman

I posted this article in 2011, and am sad to say that I haven’t come across much in the way of new resources since. I’m going to re-post, with a few small changes, and please let me know if you know of any useful resources available to private money professionals.

These days–with uncertain markets—tools and resources which provide us with information and data are more crucial than quite possibly ever before.

I am always trying to find more resources that will be of use to both me and readers of this blog. Here are a few items that have popped up lately.

ALTOSResearch offers this wonderful site, offering “real-time real estate data.” I haven’t fully researched the treasures on this site, but have been quite impressed by their market specific data (just click on the “Take me to the data” tab off the main page.” It is free to use at a basic level and offers a very useful set of analytics giving you invaluable data on the current state of various real estate markets. The section for Portland looks like this.

CNNMoney is an interesting site, with worthwhile articles regarding investing in general, and from time to time, real estate based investing.

One of our readers, Devin Schumacher, was kind enough to offer the last two items. Thank you Devin!

First of all, I have long searched for a good beginning text book on private money investing and private money loans. Devin found something that might be pretty good.

Devin says, “The first book I just finished might be worth referencing on your blog.  It is a very basic intro to how the business works, and how a person would go about setting one up.  It reads almost like an intro to private money lending textbook might read if there was a class on the subject.  But nonetheless, probably a good starting point for a lot of people to get an understanding of how it works on a very fundamental level.”

The book is, Private Mortgage Investing by Terri B Clark & Matthew Stewart Tabacchi. You can find it here on Amazon.com (where it gets good ratings, by the way).

And then this last juicy little morsel, a novel apparently built around the financial realm of hard money. You will find it here on Amazon.com. I haven’t read it and neither has Devin, so it is hard to say for sure that they mean Hard Money as in the sense of Private Money. If anyone ventures to read it, please let us know.

And with that, my well is dry for now. If you know of any other resources that might be of interest to the readers of this blog, please share them with us either via the comment section or in a direct email to me (so that I may in turn share in a future post).

Here’s to a good beginning in 2017!

– Clay (clay@privatemoneysource.com, 503-476-2909)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964. Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Private money for maijuana grow and sell operations

December 29th, 2016

Clay Sparkman

Good article in the Los Angeles Times:

Lending money to pot businesses is a high-risk move: ‘This is not for the faint of heart’

A few years back, this was starting to look like a pretty good place to consider investing your private money. Several things were favorable: (1) The general trend nationwide was clearly toward legalization of marijuana for recreational use (as well as medical use), and (2) Obama had sent clear signals that he wasn’t going to be shuttering state legal grow and/or sell operations.

Today, I wouldn’t even consider making such a loan, and so I wouldn’t even consider offering it to my investors.

So many things are up in the air as we wait for the president-elect to take office. His signals have not been clear and consistent with regard to what he plans to do in many realms of public policy, and this area is certainly no different.

My advice: Don’t even consider it! Not until we are a year or two into the first Trump term and have a better idea of what to expect. In the meantime, it would be far too risky.

Caveat: I guess if someone wants to offer you a 20% LTV position, you might want to consider it. Short of that, just say “no.”

Please weigh in if you have any additional thoughts regarding this matter. We would appreciate your input.

– Clay (clay@privatemoneysource.com)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Examining an FAQ about Trust Deed investing

December 20th, 2016

S. Clay Sparkman

TNG (The Norris Group) published the following FAQ on their site. I thought it might be fun to go through this and see where I agree and perhaps disagree, and offer my annotations (in red).

Frequently Asked Questions About Trust Deed Investing

1. What is a trust deed investor?

A trust deed investor is a person seeking a competitive rate of return by loaning private funds on real estate. In short, you’re the bank. The loans are secured by real estate. A trust deed investor makes a higher interest yield than would typically be obtained by a regular bank and is secured by the borrower’s equity in the real estate transaction.

SCS: Agreed.

2. How much money do I need to start?

In 2013, the California Bureau of Real Estate (formerly the Department of Real Estate or the DRE) released new guidelines via SB978 that makes qualifying for trust deed investing much clearer. No one trust deed can be more than 10% of your net worth. This does not mean you can’t have more than 10% of your net worth invested in trust deeds.

As an example, if The Norris Group has a $100,000 trust deed available, a potential trust deed investor should have a net worth of at least $1,000,000. This same investor can come back and do another trust deed investment that meets the same 10% criteria.

The California Bureau of Real Estate (CBE) requires brokers like The Norris Group to have investors fill out an Investor Questionnaire (also known as Real Estate form 870 of re870).  We are audited by a third party auditor that reports back to the CBE on a quarterly basis and the CBE expects this form to be on file for each transaction. The form was created to ensure each investment is “suitable” for the investor.

The questionnaire is simple and asks information like name, contact info, education, experience, income, net worth, liquid capital, and goals for the investment. You can download this form and email it back to us or fax to (951)780-9827 to be added to our First Look Program to be first to see upcoming available trust deeds.

SCS: This part is specific to CA. I’m not going to comment on the CA portion, as they probably know more than I do. Beyond these CA specific issues, you need maybe $100k to get started making full TD loans (that is about the minimum size), and if you wish to make fractional loans (more than one lender has a share of the beneficial interest as security), then you need at least $50k to lend through us, but also note that you must be an accredited investor to do this type of investing with an institution that does not have a securities license or does not otherwise have some special exemption. (Note: In the United States, for an individual to be considered an accredited investor, they must have a net worth of at least one million US dollars, not including the value of their primary residence or have income at least $200,000 each year for the last two years (or $300,000 together with their spouse if married) and a reasonable expectation of the same income level in the current year.)

3. Can I use my IRA funds or 401k for trust deeds?

Yes. The Norris Group actively places funds from IRAs, Self-firected IRAs, Roth IRAs and several other retirement accounts. Trust deed investing is a fantastic way to diversify your retirement portfolio and to leverage these types of accounts.

However, please contact your plan representative as all IRAs have different rules and regulations.

SCS: Agreed. True for FFS as well.

4. What’s the typical property you loan on?

The Norris Group only lends on non-owner occupied homes in California. We mainly focus on single family homes and units (1-4 only). We offer everything from fix and flip to long-term holds to new constuction. Our programs change occassionally to adjust to the California market.

SCS: TNG specializes a bit more than FFS. We make commercial, business, and investment loans secured by property in OR, WA, ID, CO, MT, and NV (some other states as well, but this is where our focus is right now.

5. What is the yield?

Annualized yield will depend on the length of individual investment and the availability of a property for rollover. Some investments last for three months and some last for several years depending on the program you choose.

In our 6% trust deed program, investors will most likely see a 6% return annually because of the 3-year term on the loan and the one-year prepay typically ensures the investment stays in place for a longer period of time.  Many investors seeking consistent cash flow with less in-and-out tend to invest with this program.

In our shorter-term Fix and Fix and new construction programs, there is no prepayment penalty. Loan lengths vary and annualized rate of return will depend on how quickly the loan pays off and whether there is another investment available for the same amount immediately after the close of the first.

SCS: This really depends on who you are working with. FFS secures yields of from 10% to 14%. Our typical yield is 11%.

6. Do you pool my money with other investors?

The Norris Group does not typically pool funds. We will consider immediate family members, entities, and family trusts. We feel this method has served us well over the years and gives the trust deed investor more control over their investment. This is also often referred to as fractionized loans.

SCS: See above for my answer to this question. We don’t pool, but wee fractionalize.

7. Is it safe?

Every investment has risk. However, unlike many other investment vehicles, trust deed investing with The Norris Group ensures you own a first trust deed on a specific California property. This means you have ultimate control and a physical asset that can be sold or rented out.

SCS: This is a fair statement.

8. Once I’ve committed to be a private lender, what should I expect?

To find out more how the trust deed process works at The Norris Group, click HERE.

SCS: n/a

9. How large are the loans?

The Norris Group has brokered loans from $30,000 to over $1,000,000.  However, our main focus in this market is first time buyer inventory as it makes up the majority of the market. That being said, most of our loans range from the $40,000-$350,000 range.

SCS: Our numbers are similar at FFS.

10. What is your loan to value that you loan on?

The Norris Group loans up to 60-70% of the After Repaired Value (ARV) of the home. If the property is in our long-term rental program, it is already repairs so it’s the loan-to value we look at but it still falls within the range of 60-70% LTV.

When deciding on how much to lend, The Norris Group considers property location, repairs needed, investor experience, and property type.

SCS: FFS is in the same realm with regard to LTV.

11. What are points?

Points are the fees paid by the borrower to The Norris Group for acting as broker in a hard money loan transaction.

SCS: Agreed.

12. Do you offer 2nd and 3rd trust deeds?

No. The Norris Group only offers first trust deeds on all of our investments as we feel this offers a more secure investment with much lower risk.

SCS: That is good policy. We rarely take on subordinate position loans, but if a loan is extremely solid and well secured, we may vet it fully and offer it to our investors.

13. Why is my return 6% when it says 6.9% on the website? What is servicing?

The Norris Group charges a servicing fee annually on all of our programs. Servicing includes collecting checks from the borrowers and remitting them to all trust deed investors monthly. The Norris Group monitors property tax payments and insurance requirements on all investments and communicates with the borrower and trust deed investor as needed. The Norris Group also handles end-of-year tax requirements and paperwork.

SCS: FFS does not charge a servicing fee, and so you receive the full stated amount of interest.

14. Why don’t I skip you completely and work with an investor directly?

Regulations require a professional broker to obtain higher returns and for trust deed investors to be in complaince with usury laws (read more on usury laws at the California Office of the Attorney General)

In addition, using a professional and experienced broker allows you to make higher annual returns because you’re adopting an established team that finds, structures, and services the investment. It expands the marketplace for you, lowers your risk, saves you time, and ultimately increases your return tremendously.

SCS: Agreed. It is a big job to do this entirely on your own.

15. What does loan servicing include?

Loan servicing includes the back-office tasks of collecting payments from borrowers, disbursing payments to the investor, mailing required notices and statements, year-end tax documents for the IRS and franchise tax board, maintaining adequate borrower insurance coverage, and coordinating foreclosure proceedings if necessary (rare).

SCS: Agreed. Similar for FFS.

16. Who in my network might be able to advise me on these types of investments outside of the Norris Group?

Having an excellent team is always important and we suggest you check with your tax advisor, financial or retirement planner, and/or your attorney. The trifecta of estate planning!

When selecting professionals, please be advised that not all will be comfortable or allowed to help make decisions on real estate and alternative investments. It is a specialty and we always encourage our network to work with professionals that will consider a client’s entire portfolio including real estate. In our experience, real estate has been a major component of create wealth. Work with those that like the vehicle and will look at your situation holistically to do what’s best for you.

Feel free to call for referrals. We have several financial planners, lawyers, and CPAs that specialize in working with real estate.

SCS: Fair enough.

17. Where can I find more information about trust deed investments in California?

The California Department of Real Estate (DRE) has been renamed the California Bureau of Real Estate.

SCS: n/a

They have an entire document you can read on the subject of Trust Deeds.

18. Who can invest in trust deeds?

Private individuals, corporations, pension plans, 401Ks, custodianships, LLCs, retirement funds, IRAs, Roth IRAs, Self-Directed IRAs, Charitable Remainder Trusts (CRTs), Foundations, endowments, family trusts, family members, and SEP accounts. Some retirement amounts have limits so please check with your custodian or agent. The Bureau of Real Estate simply requires that no single trust deed can be more than 10% of your (or an entity’s) net worth. We’ll have to have the BRE’s Investor Questionnaire on file as they look for this as part of every transaction. You can see this HERE.

SCS: Agreed.

19. Do you require fire insurance on the property?

Yes. Not only do we require fire insurance but we require the investor inform the insurance company that the property is vacant. We require coverage in the amount of the loan or replacement guarantee.

SCS: Agreed.

20. Will I be given a complete profile on the property?

By the time we present the property for funding, we’ve already had an independent appraisal done on the property.  We’ll send to you a copy of that appraisal along with the address for you to view the property.

SCS: Agreed. However, with FFS, if we can get a good set of well annotated comps, that may serve as the valuation instrument. Probably 90% of the time, we work with an appraisal.

Please weigh in if you have any additional thoughts regarding the items discussed here. We would appreciate your input.

– Clay (clay@privatemoneysource.com)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Twenty-eight questions you must ask

October 7th, 2016

Clay Sparkman

I first wrote and published this piece in its original form in September of 2009. I am of the firm belief that the key to success (defined as: having fun and maximizing your return, two closely correlated phenomena), is rigorous and comprehensive vetting of the loan proposal. If you do this right, the rest tends to follow. With that in mind, a quick review of this list tells me that not much has changed in this regard, in spite of going through the greatest economic depression since the great depression. So I see it fit to publish this again, with a few slight variations and several rather important changes (the three new items). You can never overthink and over-analyze the vetting process. So here you go:

I’m going to make a list today of twenty-five important questions that I believe an investor must ask prior to funding any private money loan transaction. I’m not going to elaborate much on each particular item here, but will drill down on each of the individual items in future posts. For the sake of simplifying this discussion to a reasonable level, I’d like to start with several assumptions: (1) we are only talking about loans secured by real property, (2) we are only talking about first position loans, and (3) we are not talking about land development or raw land loans. (Each of these exceptions, if removed, would be good for another whole list of special questions; we’ll save those particular scenarios for future discussion.)

(1) What is the Loan-to-Value (LTV) ratio of the loan you are considering and how does that fit with your own risk limits regarding this particular loan and property type?

(2) If this is a value-added loan (construction, rehab, or development), what is the front-end LTV?  Font-end LTV refers to the LTV immediately after the close of escrow but prior to any construction/development or disbursement of construction hold-back funds. (I generally reference this as FLTV, and it is understood that LTV, for a project, actually refers to the LTV upon completion of the construction/development and full disbursement of any/all hold-back funds.)

(3) How confident are you of the value?  The “L” part in LTV is easy.  It is the “V” part that can be quite difficult to accurately determine, and in fact it must be understood that any such determination (no matter how good) is only an estimate. (I.e., It must by definition be an estimate.)

(4) What are the recent market trends for the area in which the property is located? Given the real estate market of the past two years, this question is particularly relevant.

(5) How is the borrower’s credit? What is the mid-score, what are the issues, if any, and what is the trend?

(6) If the loan is a refi: how is the borrower’s pay history on the existing loan?

(7) How much “skin” will the borrower have in the game at the close of escrow? In other words, how much cash or additional collateral is the borrower bringing to the table?

(8) If this is a real estate development or investment loan or a loan to a business owner occupying his own property: what is the relevant experience and background of this borrower?

(9) What is the purpose of the loan and how will the funds be utilized?

(10) What is the term of the loan?

(11) Can the borrower afford to make payments OR does the loan scenario otherwise involve an adequate interest reserve?

(12) What is the borrower’s plan/exit strategy, and–upon careful evaluation of the project/plan–how likely is the borrower’s likelihood of success?

(13) What is the borrower’s net worth and how liquid are the borrower’s assets?

(14) If there are one or more structures on the property, will you be listed as loss payee on a hazard insurance policy or a builder’s risk policy at the close of escrow (or prior to the beginning of construction if new construction is being funded)?

(15) If there is a construction hold-back, who is administering this and do you trust them to do so effectively?

(16) Have you reviewed the operative preliminary title insurance policy and approved any liens that your title insurance policy will be listing as exceptions to your position?

(17) Is your loan compliant with all state and federal disclosure and usury laws?

(18) Will all property taxes be paid current at closing?

(19) What is the likelihood that there are any serious hazardous waste issues associated with the property?

(20) What is the likelihood that there are any wetland issues associated with the property?

(21) If relevant: what is the status of all required permits, entitlements, and/or other government approvals?

(22) What is the likelihood of one or more construction labor/materials liens taking precedent over your lien position?

(23) Does the loan size/amount, location, type etc. allow you to obtain optimal diversification?

(24) What is your plan for servicing the loan?

(25) If the loan involves a fractional interest, how comfortable are you joining with the other lenders involved in the loan?

—(end of original article)—

That was my list seven years ago (prior to experiencing the great fall from beginning to end. Now I realize that I must add two more items:

(26) Is the property in or near a major city? Keep in mind that if values fall, the fall tends to begin in rural areas, and the fall tends to be more dramatic in such areas over time.

(27) How is the area performing currently? What does the price trend look like over the past few years?

(28) And perhaps most importantly: What are the leading indicators of potential future value changes telling you? Keep in mind that price trend is a trailing indicator. You cannot assume that because values have gone up 10% per year in a given are for the past two  years, that the next two years will be an extension of the same. If we learned anything over the past 8 years (and oh … how we learned it), it is this. You must look at leading indicators if you want to get any kind of real handle on where values might be going. I recently published two blog entries on this subject, If you haven’t read them , please do. They are at Three potentially useful indicators of the likely movement of property values and Leading real estate value indicators.

I may well have left out some important items, so please provide feedback as to which items you agree with, which ones you don’t. Surely we can get this list up to 30!

– Clay (clay@privatemoneysource.com)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

10 things You should do before you start investing

September 27th, 2016

Clay Sparkman

Most of my discussions on this blog have to do with private money investing, and trends related to such.

I cam across a Lifehacker article recently–one that I had saved in The Pocket to read *later* (if you know what I mean), and was reminded that before one can make sensible private money investing decisions/choices, they mus evaluate their more general readiness for investing. And so, in the interest of taking a step back and gaining some important perspective, I offer you the following for consideration: 10 Things You Should Do Before You Start Investing.

If you are an investor in the realm of private money lending (or in some other realm) or if you are considering investing, I think that you will find this quite interesting and potentially useful in making solid moves into the realm of financial investing.

Please share any thoughts that you may have with regard to these indicators, and let us know of any other indicators that you look at when evaluating potential future price trends in a particular area.

Best, Clay

- Clay (clay@privatemoneysource.com)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Leading real estate value indicators

August 23rd, 2016

Clay Sparkman

Of particular interest to private money investors is to analyze and spot potential trends in real estate pricing. I recently posted an article, Three potentially useful indicators of the likely movement of property values, which proposed three potential indicators to watch.

The following article, Unlike prices, real estate jobs not back at peak, published in The Orange County Register, added some useful numbers to look at, and which I hadn’t really thought about previously.

If you are an investor in the realm of private money lending, I think that you will find this quite interesting and potentially useful in making investment decisions.

Please share any thoughts that you may have with regard to these indicators, and let us know of any other indicators that you look at when evaluating potential future price trends in a particular area.

Best, Clay

- Clay (clay@privatemoneysource.com)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

A guide for private money lenders

July 14th, 2016

Clay Sparkman

I thought that this set of blog posts, A Guide For Private Money Lenders (in four parts), by Thad Merrill, was both interesting and informative, and so I thought I’d share them with you. (Ever vigilant: I’m combing the web for you.)

http://www.fortunebuilders.com/becoming-private-money-lender-part-1/

http://www.fortunebuilders.com/becoming-private-money-lender-part-2-breaking-private-money-loan/

http://www.fortunebuilders.com/becoming-private-money-lender-part-3-attract-investors/

http://www.fortunebuilders.com/private-hard-money-lenders-part-4/

Best, Clay

- Clay (clay@privatemoneysource.com, 503-476-2909)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Fairfield Financial – Information for investors

July 8th, 2016

Clay Sparkman

Here is our *Information for Investors* section. It is direct and to the point. It tells you what you can expect of us and what we will expect to you, in a broker-relationship.

http://www.privatemoneysource.com/investors.php

Best, Clay

- Clay (clay@privatemoneysource.com, 503-476-2909)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Private money according to Wikipedia

July 1st, 2016

Clay Sparkman

It is never easy to come up with a universal definition/description of private money. I thought it would be interesting to see what Wikipedia had to say about it, so I looked it up and this is what I found:

Here

I have to say, I think *they* did a pretty good job of it. This is more accurate and precise than most of what I read. What do you think? Do you see anything that is wrong? Do you see anything that is there, which shouldn’t be? Or do you not see something important that you would like to see?

I’d like to hear your thoughts.

Best, Clay

- Clay (clay@privatemoneysource.com, 503-476-2909)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Private money – the rules of physics may not apply

June 3rd, 2016

Clay Sparkman

I first posted this article in August of 2009. That was right about when I was just getting started with the blog. It is hard to believe that it has been nearly seven years now. At any rate, I feel that this article deserves a second look (or a first look, if you are a more recent subscriber and haven’t been combing the archives). So here you go. Enjoy!

I would like to make a proposal. I would like to propose that the standard universal laws don’t necessarily apply to private money lending. That is, the things which we most take for granted—or assume to be true–may not be true in the realm of private money lending.

Let’s talk about systems for a moment. Let’s take physics as an example. Physics is the scientific mechanism which man has devised for describing, conceptualizing and predicting the behavior of the physical world. In the realm of physics, if one rule or one aspect of the system is called into question—even a small matter—then the entire system must be called into question. This has happened on various occasions as the science of physics has evolved, and as you can well imagine, it has caused quite a fuss among those who study physics.

My goal here is to break your notion that the things which you “know to be true” in the realm of private money lending can be correctly assumed to be true all the time. Let’s start with something absolutely fundamental.  Everyone agrees that there is a direct relationship between the perceived risk of loss of investment capital associated with a particular investment and the rate of return from that investment.  And I think it would be fair to say that pretty much everyone in the field agrees (1) that private money loans are riskier than their institutional counterparts (hereinafter referred to as institutional loans, a category to include conventional loans, sub-prime loans, and everything not included in the category of private money) and thus carry higher interest rates, and (2) that within the private money realm, riskier loans carry higher interest rates than those which are perceived to be less risky. I would be quite surprised if any of my readers take issue with either of these two basic notions. Let me clarify one more time because this is important: when I speak of risk here, I am referring to the risk of direct monetary loss of investment capital.

So let me now proceed to turn these two basic notions upside down. Fundamental notion #1 suggests that private money loans are riskier than institutional loans and that this is the reason why they carry higher interest rates. This is quite simply wrong. Institutional lenders don’t avoid risky loans per say. In fact, the sub-prime realm tends to thrive on them. Institutional lenders can (and do) factor known risk into their lending process. What institutional lenders will not tolerate is this: they will not tolerate loans which cannot be analyzed or characterized within a specific manageable and objective framework. Put another way, institutional lenders are only interested in commodity loans—as opposed, let’s say, to custom loans.

And why is this true? It is true because institutional lenders choose to manage risk as objectively as possible, and this can only be done effectively within a commodity-based loan system. Even though these lenders can accommodate almost any degree of risk, they prefer to factor out (wherever possible) risk which is anticipated buy not measurable. Using FICO scores and other specific measures, the typical institutional lender can predict to within a dime the value of their loan portfolios that will go bad (with the primary exception being vast rapid swings in the greater economy; there are many indicators, but ultimately these can only be  guessed at). Any given loan involves a certain amount of risk, but the risk associated with a portfolio of commodity loans is considered measurable.

In case you’re not buying this particular line of logic, and you think that I’m just working with smoke and mirrors here, let me offer some (fairly) objective data.  At Fairfield Financial, we manage a portfolio of 200+ private money loans at any given time, a package that adds up to about $30 million dollars in face value.  Our average mid-score for that package is between 650 and 660.  That portfolio sees an average of 2 loans per year go to REO.  That is a 1% foreclosure rate.  Those are good figures: 650-660 mid scores and 1% foreclosure rate. I suspect that many institutional lenders would rather enjoy such numbers. And thus, it seems that our loans are not necessarily more risky—or even as risky—as their institutional counterpart. Then of course our rates must be on par with the institutional realm as well, yes?  No. Our median interest rate is 13% (fixed).

Okay fine. Certain irregularities occur in the risk-reward relationship when crossing from the institutional money realm to the realm of private money. But surely we can say—with complete confidence–that within the realm of private money, riskier loans carry a higher rate of interest than those perceived to be less risky. Here again, I would respectively suggest: it just aint so!

Private money lenders are averse to risk–as are all investors.  However, private money lenders on the whole are particularly averse to risk of default (as opposed to risk of loss). Risk of default involves (a) temporary cash flow interruptions (something we affectionately refer to as “cashflowus interuptus”), (b) lying awake at nights and worrying about non-performing or sporadically-performing loans (which we call “bad boys”), and (c) lots of hassles and many hours of work (which tend to accompany the bad boys).

In fact, I would assert that on the whole private money lenders are less averse to risk of long-term potential loss then they are to risk of default, which we shall refer to hereafter as the “bad boy problems.”  I have spent the past 15 years of my life pricing private money loans and have a pretty good idea of how the market works. Pricing private money loans is a little like pricing antiques but tougher; it is a highly subjective process. But of course there are certain guidelines. One takes a hard look at the long-term risk of the loan and at the potential for bad boy problems. I would argue that the best indicator of long-term risk is LTV. Bad boy problem indicators (such as credit, income, and pay history) may play into the risk equation, but as any private money lender will tell you, they are betting on the equity first and the borrower second—and in fact the borrower is a distant second. Having established LTV as a risk indicator, let’s look for a bad boy indicator. Let’s go with FICO mid-score. I have found that FICO mid-score is indeed a very reliable indicator of the likelihood that you will have a bad boy on your hands. When it comes to financial responsibility/performance, it seems that the past is a very good predictor of the future.

So now we have two objective scales to work with: LTV and FICO mid-score. Here I’m going to take a giant leap (very unscientific, but also very interesting) and make the assumption that these two scales are basically linear. The LTV scale for private money loans basically runs from 0% to 75%.  The FICO mid-score scale runs from 300 to 850.  So that now we have established a ratio of 7.33 between the two scales ([850-300]/75). Thus we can say that a 10% change in LTV on the risk scale is roughly proportionate to a change of 73 in FICO mid-score on the bad boy scale.

If risk is the primary factor driving interest rate, then a 75% LTV loan to a borrower with a 700 mid-score would carry a higher interest rate than a 55% LTV loan to a borrower with a 554 mid-score. Well, in fact just the opposite happens.  Equalizing for other factors, I would tend to price the first loan at 12-13% and the second loan at 14-15%.  So you see, long-term risk is a distant second to bad boy factors when pricing a private money loan.

Someone I respect immensely recently said that it is not what we don’t know that endangers us the most. It is what we think we know but know incorrectly.

If you go away from this post knowing that the risk-reward relationship as applied to private money is a myth, then you have learned a little something. If you lie awake tonight and wonder if things that go up in the private money universe really must come down—then that, dare I say, may qualify as an epiphany.

Clay

- Clay (clay@privatemoneysource.com, 503-476-2909)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Several perspectives on private money and changes happening in the industry

May 24th, 2016

Clay Sparkman

With regard to forward thinking (that is, how is the industry changing?): I thought you might appreciate this article, Private Lending Sector Making Big Noise for Real Estate Investors, by Ben Stoodley:

Here

Certainly he is correct with regard to his interpretation of current trends, and one must wonder how far this might all go.

And with regard to the growth in private money as an investment vehicle, the following blog post, Real Estate Most Successful Investment for Self-Directed IRA Investors in 2015, According to IRA Financial Group Survey, is telling.

Here

I believe that we are entering a new future–a brave new world. As a family, we’ve been in the Private Money Lending business for 52 years. It hasn’t changed much during most of that time. However, I fee it changing rapidly now. I recommend that we all remain vigilant. There will be an advantage for those who recognize the changes and trends and act on them accordingly. May that be us.

All comments, as always, are welcome.

Thanks,

Clay

- Clay (clay@privatemoneysource.com, 503-476-2909)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Into the mainstream

May 13th, 2016

Clay Sparkman

I thought that this recent article in The National Real Estate Investor would be worth sharing with the private money investors in this group. It certainly rings true with those of us at Fairfield, as we have had to work with our investors to adapt our programs and strategies to a changing market (becoming more competitive in whatever ways possible without generally taking on a significantly greater deal of risk).

Click here

Our median rate has dropped from 13% to 11% and we are more flexible on points. I also feel that we should consider lending up to 70% LTV for strong loans. (Currently most of our loans are at 65%.)

Please weigh in and give us your opinion on any of this.

Thanks,

Clay

- Clay (clay@privatemoneysource.com, 503-476-2909)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Three potentially useful indicators of the likely movement of property values

April 25th, 2016

Clay Sparkman

Any good private money investor should be attempting  to assess whether property values are rising, falling,  or holding in the area of his/her latest potential investment. After all, the core issue  when assessing investment risk is LTV, and if the “V” part of “LTV” falls during the time of your investment, your investment is becoming increasingly risky. Given so, if you sense that values are likely to fall in a certain investment region, you had better take that into account when deciding whether or not to invest. And if you decide to invest, given this information (whatever it may lead you to believe), you will be able to better assess your investment criteria and determine what you consider to be a safe LTV.

The direction of property values is not an easy thing to predict, but if one really wants to inform themselves with regard to what property values might be doing in the near future, than there are three pretty good things to look at.

But first, what not to count on: If you are looking at whether or not property values are rising, falling or holding today, just remember that this is a trailing indicator. At best it will tell you what is happening now, and even worse, it may be a better indicator of what happened several months ago. Look at this info, but don’t take it very seriously as an indicator of what is going to happen next.

And so, here are three leading indicators that I would recommend you consider:

(1) The rural test: Ask  yourself what property values are doing in rural (or more remote) areas. Those values tend to lead the values of properties in more concentrated areas. So, if you are suddenly witnessing a notable fall in values in rural areas, chances are that other values in the region will follow.

(2) The time-on-market test: Determine what the average time on market is as you assess potential opportunities . For residential properties 3-6 months is fairly normal, and would tend to indicate that values will be holding for awhile. Last time I checked in Portland, the average time on market for residential properties was 1.7. This is a very low number and a very good indicator that values are on the rise.

(3) Look at the ratio of replacement cost to purchase price. If the ratio of replacement cost to purchase price is high, then property values are likely to rise, at least for the near-term future.

Let me know if you have any other indicators that you use. We would like to hear about them.

- Clay (clay@privatemoneysource.com, 503-476-2909)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

25 questions you must ask

January 22nd, 2016

Clay Sparkman

I originally published this article in September of 2009 on this blog.

I’m going to make a list today of twenty-five important questions that I believe an investor must ask prior to funding any private money loan transaction.  I’m not going to elaborate much on each particular item here, but will drill down on each of the individual items in future posts.  For the sake of simplifying this discussion to a reasonable level, I’d like to start with several assumptions: (1) we are only talking about loans secured by real property, (2) we are only talking about first position loans, and (3) we are not talking about land development or raw land loans.  (Each of these exceptions, if removed, would be good for another whole list of special questions; we’ll save those particular scenarios for future discussion.)

(1) What is the Loan to Value (LTV) ratio of the loan you are considering and how does that fit with your own risk limits regarding this particular loan and property type?

(2) If this is a value-added loan (construction, rehab, or development), what is the front-end LTV?  Font-end LTV refers to the LTV immediately after the close of escrow but prior to any construction/development or disbursement of construction holdback funds.  (I generally reference this as FLTV, and it is understood that LTV, for a project actually refers to the LTV upon completion of the construction/development and full disbursement of any/all hold-back funds.)

(3) How confident are you of the value?  The “L” part in LTV is easy.  It is the “V” part that can be quite difficult to accurately determine, and in fact it must be understood that any such determination (no matter how good) is only an estimate.

(4) What are the recent market trends for the area in which the property is located?  Given the real estate market of the past two years, this question is particularly relevant.

(5) How is the borrower’s credit?  What is the mid-score, what are the issues, if any, and what is the trend?

(6) If the loan is a refi: how is the borrower’s pay history on the existing loan?

(7) How much “skin” will the borrower have in the game at the close of escrow?  In other words, how much cash or additional collateral is the borrower bringing to the table?

(8) If this is a real estate development or investment loan or a loan to a business owner occupying his own property: what is the relevant experience and background of this borrower?

(9) What is the purpose of the loan and how will the funds be utilized?

(10) What is the term of the loan?

(11) Can the borrower afford to make payments OR does the loan scenario otherwise involve an adequate interest reserve?

(12) What is the borrower’s plan/exit strategy, and how likely is the borrower of success?

(13) What is the borrower’s net worth and how liquid are the borrower’s assets?

(14) If there are one or more structures on the property, will you be listed as loss payee on a hazard insurance policy at the close of escrow (or prior to the beginning of construction if new construction is being funded)?

(15) If there is a construction hold-back, who is administering this and do you trust them to do so effectively?

(16) Have you reviewed the operative preliminary title insurance policy and approved any liens that your title insurance policy will be listing as exceptions to your position?

(17) Is your loan compliant with all state and federal disclosure and usury laws?

(18) Will all taxes be paid current at closing?

(19) What is the likelihood that there are any serious hazardous waste issues associated with the property?

(20) What is the likelihood that there are any wetland issues associated with the property?

(21) If relevant: what is the status of all required permits, entitlements, or other government approvals?

(22) What is the likelihood of one or more construction labor/materials liens taking precedent over your lien position?

(23) Does the loan size/amount, location, type etc. allow you to obtain optimal diversification?

(24) What is your plan for servicing the loan?

(25) If the loan involves a fractional interest, how comfortable are you joining with the other lenders involved in the loan?

So that’s my list for now.  There is nothing special about the number twenty-five, and I may well have left off some very important items, so please provide feedback as to which items you agree with, which ones you don’t, and what other items you might feel absolutely must be on a list of this sort.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

How to read an appraisal

November 17th, 2015

Clay Sparkman

This article was originally published, on The Private Money Broker Blog. on 8/9/10. Some 5+ years later, I feel it is worthy to be modified slightly and published again. Whatever you do in the real estate business, I highly recommend that you give this post a good read.

The most important thing that you must understand about any appraisal (or other real estate valuation instrument) is that it is only as good as its logic.  So that—in other words—you must never accept an appraisal’s conclusion regarding value without looking beyond the surface to understand the logic that leads to the conclusion and without making some reasonable determination as to the quality of the logical argumentation.

With that in mind, I offer you ten critical steps to follow when reading/analyzing (and thus attempting to assess the “goodness” of) an appraisal.

(1)    The very first thing you must ask as you analyze an appraisal is to what degree is the appraisal transparent?  In other words, how much of the logic leading to the value conclusion is on display for you the reader?  If the answer is none, the appraisal is useless.  Throw it away.  If the answer is some (in other words there are gaps in the logic) then you must either (a) once again, decide to toss the appraisal, (b) decide to accept some degree of uncertainty, (c) attempt to fill the gaps on your own, or (d) contact the appraiser and see if she can provide the missing logic.  (Sometimes the appraiser will have the information you need on file, but they just didn’t include it in their final report.)  Ideally the answer is none or very little, and the appraisal can be said to be highly transparent.  At any rate, you will need to be asking this question throughout your analysis.

(2)    The next thing you need to do is get a handle on what is being appraised.  Is it a home, a commercial building, a parcel of land?  What are the basic specifications?  Where is it located?  Is it urban or rural?  How desirable is the surrounding area?  Are there functional inadequacies?  If it is land, what horizontal infrastructure is in place or lacking and what does the current zoning allow?

(3)    I have never heard anyone else say this, but I stand by it (at least when valuing buildings and structures; for valuing land, not so much): one of the first things I do after getting a basic sense of the property is go straight to the photos.  (And by the way, make sure you have an original appraisal or color copies.  The photos can be quite useful, but not if they are blacked out by copying and faxing.)  I study the photos of the subject property and then I compare them to the photos of each of the various comps.  You will be surprised at how often you will begin to sniff some bad cheese at this point in the process (particularly when dealing with structures).  What you are looking for here is: (a) whether or not the comps are in the same general condition as the subject property, and (b) whether or not the comps are in the same general “class” as the subject property.  By class I am referring to the level of quality and distinction of the property.  If the answer to one or both of these is no, it is not necessarily game over, but you will now be looking even more closely at the adjustment matrix later on to see if the apparent differences are effectively accounted for to your satisfaction.

(4)    Next, you will want to check the effective date of the value given.  How current is the appraisal?  In a steady up economy we used to be comfortable using appraisals that were as much as 1-2 years old.  We would adjust the value to be in-line with changes in the market.  With the chaos of the past 5+ years, this method is not as effective and must be utilized with great care.  Generally speaking (though this would depend to a certain extent on the region) you would want your appraisal to be less than 6 months old.

(5)    Check carefully to see if there are any “subject to” items associated with the value.  Generally this will initially be indicated by checking a box that indicates the appraised value is subject to certain additions, improvements, or modifications as indicated later in the appraisal.  This of course is a critical item, so make sure you have read through the entire body of the appraisal so as not to miss any such “subject to” items or conditions.

(6)    Look to see if any extraordinary assumptions are made by the appraiser.  Here again, you will be forced to read through the entire body of the appraisal to be sure.  On more than a few occasions I have seen what looked to be a perfectly reasonable appraisal completely neutralized (or actually nullified) at the discovery of one or more extraordinary assumptions.  The problem with most extraordinary assumptions is that they are indeed extraordinary.  If I am evaluating a parcel of bare land zoned rural agricultural, and an extraordinary assumption in my appraisal states that “The zoning will be changed to allow multi-unit residential at 8 units per acre.” … well chances are, the gig is up.  Even if some serious local zoning change is in the works, what is the chance that you can count on it to come through and thus turn this “straw” property into gold?

(7)    Take an accounting of the methods utilized for valuing the subject property.  In my opinion, a market sales comparison approach is ALWAYS essential and should be the primary method—and the one given most weight—in valuing a property.  The only true value in a  market economy is the amount that others are willing to pay for it, and thus the attempt to estimate market value by looking at recent sales—though still at best a process of estimation—is the only method we have that goes to the heart of the matter.  Beyond that, it would be nice to have a cost approach and an income approach (where relevant) but these are, in my opinion, at best a good way to cross-check the market value derived by the comparison approach.

(8)    Another thing you need to take a close look at is the aging of the comps.  If all the comps were sold quite recently, then you are good in this department.  But if one or more of the comps are more than 6 months old, this may be a problem.  The next step would be to look at the comp matrix to see how much the appraiser adjusts the target value to factor comp aging.  If one or more of the comps are listings … well then, these aren’t really comps at all.  I have seen comp workups using nothing but listings.  This is totally unacceptable. Anyone can list a property for any price they want.  It would perhaps be reasonable to have 1-2 listings along with at least as many “true” comps, but even this is getting into squishy territory.  So here again, you would have to look at how the appraiser adjusted the subject value based on the “listing” comps.

(9)    You should spend the majority of your effort fussing over the comp matrix.  This is the matrix which compares various characteristics of the subject property with various characteristics of the comps and makes specific adjustments for each of the comps to arrive at adjusted values for the comps (effectively attempting to monetarily “convert” each of the comps into the subject property).  If you have: (a) many adjustments, (b) large adjustments (relative to the price of the property), and/or many seemingly subjective adjustments, then you may want to seriously question the integrity of the appraisal.  You will want to walk through each and every adjustment, and here again, you must look for transparency.  Does the appraiser explain the logic behind his adjustment decisions?  If not, you have a transparency problem.  At the end of the day, you must be comfortable with the adjustments and you must feel that they are objective, transparent, well thought out, and seemingly reasonable.  If not, you must either (a) discard the appraisal, (b) contact the appraiser for further explanation, and/or (c) revise one or  more adjustments and revise the final subject value accordingly.

(10) And finally you will want to be sure and take a look at other methods of valuation utilized (generally income and cost on commercial appraisals).  And then you will want to determine how the appraiser has gone about reconciling the different values arrived at utilizing different methods.  Sometimes a weighted value approach is used.  If so, how much weight is being given to the comp value approach relative to other methods utilized.  As you may have guessed by now, I generally like to see all or at least the vast majority of weight given to the comp analysis.  If the appraisal doesn’t explain the reconciliation, you have a transparency problem.  If the comp value approach is not given enough weight, you may want to fall back on the value arrived at by the comp value approach as your own final value.

And there you have it.  There is a great deal more that can be said about reading an appraisal, and certainly this list of ten items is far from exhaustive, but it does give you a few things that you will not want to overlook.  If anyone has their own favorite “crucial” steps, I would love to hear about them.  Please let me know and I will share them with the group.

Last word:  Don’t think that you don’t need to “read” an appraisal just because you are the loan broker or the borrower, thus relying on the work of the appraiser to be true and accurate given their credentials.  I often ask brokers and borrowers if they have read the appraisals they have submitted, and what their opinion was. If they haven’t read the appraisal or clearly haven’t put the effort in to attempt to understand and make sense of it … well that wouldn’t necessarily kill the deal, but to my mind it highlights a potentially serious credibility issue.  As a broker (and certainly as a professional investor borrower), you must read and understand the items that you are submitting.  Anything less will generally become apparent to the lender and will ultimately undermine your ability to do your job effectively.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

The cost of hard money

October 23rd, 2015

Clay Sparkman

After 50 years in the hard money business (as a family operation)  and 20+ years personally, you’d think we’d know what to expect. But let’s face it, no one really knows what to expect in the complex globally based financial world.

For my first 15 or so years working in the hard money industry, I was always amazed that no matter what conventional rates seemed to do, hard money rates seemed to remain amazingly constant. Rates pretty much always fell into the 10-15% range, with 13% being, more or less, our mean and our median rates. Fees pretty much remained constant.

Over this past year we had to acknowledge the fact that we were having a tough time competing with others private money sources. We decided that we would have to face up to the fact that–with bank rates low and with many more banks lending–the cost of hard money had simply fallen. We lowered our rate range to 10-13%, with most of our loans being placed at 11%, and in certain cases, we lowered our front end fees.

Sure enough: We began securing more high quality loans, our lenders were happy to invest at 11% (still a darned good rate for a solid loan secured by real property), and we were willing to take a hit in our fees from time to time in order to increase our overall loan flow.

Now, we must remain vigilant. Real estate starts and prices seem to be leveling off a bit, and this would tend to lead to higher bank rates and thus higher hard money rates–but for now this is where we stand.

I would be interested to hear the prognostications of any of my readers, so please feel free to comment.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Loan offering in Portland, Oregon

April 29th, 2014

Clay Sparkman

We’ve had a lot of nice solid little loans come in lately. (As you know, we have a tradition of, from time to time, presenting one of the loans that we have placed or are in the process of placing, so that blog readers can (a) see the types of loans that we are placing, (b) see how we feel that loans should be presented, and (c) be presented with potential investment opportunities.) Keep in mind that this is only the summary. If an investor expresses interest in reviewing the details of a loan, we put the prospectus on top of all of the relevant documentation and send it via e-mail in an Adobe file.

This particular loan is live and we are in the process of placing it as either a fractional or a whole loan, so if you are an accredited investor looking to put a relatively small amount into a fractional loan at this time, please let us know.

Kristopher Gillmore

Fairfield Financial Services, Inc

16055 SW Walker Road, #247, Beaverton OR 97006

Phone (503) 319-7294 / Fax (503) 419-4219 / E-mail: gillmore@privatemoneysource.com

REAL ESTATE PROSPECTUS

SECURED LOAN

New construction of property located on SE Fir, Portland OR 97206

Loan Details

  1. Loan Amount: $190,000
  2. Term: 6 Months – with automatic monthly extensions (automatic extension not to exceed an additional 6 months) provided that the payments are timely and the loan is in good standing
  3. Interest Rate: 12%
  4. Monthly Payments: $1,900 Interest Only
  5. Security:  Deed of Trust in 1st Position security interest in real property located at xxx,  Portland OR
  6. Construction Holdback:  $180,000
  7. Projected Value by Borrower’s Estimate based on CMA: $285,000
  8. Projected LTV by Borrower’s Estimate based on CMA:  67%

Loan Overview

yyy and  zzz are the members of aaa, LLC, and will be personally guaranteeing this loan.  Dave Sheldon is a licensed contractor and is the owner of his own construction company, Home Resources, LLC.  zzz is very experienced in rehabbing houses and will be doing the work himself.  His resume has been provided.  To summarize the relationship between yyy and zzz – yyy is the numbers/financial guy with good credit/income and zzz is the contractor.

The borrowers purchased a lot in March of 2014 for $55,000, and have invested approximately $49,675 into the lot to divide the lot into 2 separate buildable lots, totaling $104,675.  A list of these costs has been provided in the full packet for your review.  It should be noted that $30,000 of the $180,000 construction holdback is allocated for site development costs reimbursed to the borrower through the draw process.  Overall, they have a fair amount of skin in the game on this transaction.

The borrowers have secured a different private money loan for new construction on one of those lots, and are requesting this loan through Fairfield to provide funds for new construction on the other lot.  It is their intention to build both houses together to reduce the costs.

The borrower’s intend to exit this loan with the sale of the property.

Pervious Projects with Fairfield

This will be the Third loan that we’ve done with John and yyy and zzz.

The first loan was a purchase rehab loan on a property in Salem, OR, with a construction budget of $22,000.  All of their interest payments were on time, and the construction was completed under budget in approximately 3 months.  The property has been sold, and the total length of the loan was approx. 8 months.  The borrowers have posted photos of the construction by date (including the original pre-construction photos) which can be viewed at: http://s1062.photobucket.com/user/hisfinancing/library/Boulder/Boulder26JUN2013?sort=3&page=1 .  Note – there are other projects on here as well.  The Boulder property was the subject for the above mentioned loan.

The Second Loan was a purchase and rehab loan on a property in Hubbard, OR with a $40,000 rehab budget.  This loan was originated approximately 4 months ago, and the construction was also completed on budget in approximately 3 months.  The loan is in good standing and all of the interest payments have been on time.  Photos of the work can be seen at: http://s1062.photobucket.com/user/hisfinancing/library/3484%20Hillside%20Court?sort=3&page=1 .  This property is currently for sale, and the listing can be viewed at:  http://www.redfin.com/OR/Hubbard/3484-Hillside-Ct-97032/home/26356992

Property Info / Valuation

The borrower’s will be building a 3 bedroom, 2.5 bathroom 2 story craftsman with a 1 car garage.  The home will be 1,800 square feet, and on a 3,700 square foot lot.  Plans for the property as well as a line item budget have been provided in the full packet for your review.

A CMA has been provided by the borrower’s realtor, which based on an average sold $/sf of $159, the borrower estimates a completed value of $285,000.  This CMA has been provided in the full packet for your review.

Income

A signed 1003 has been provided.  Yyy  is stating a monthly income of $8,125, and a worth of $222,279. Zzz has stated an annual income of $60,000, and a net worth of $197,000

Credit

yyy has a mid-credit score of 722, with no accounts past due, and no accounts with any late payments.

Zzz’s mid-credit score was last reported (from the 1st loan) to be 485.  He has reported that his credit is deteriorated because of medical expenses that he incurred in 2010.  He has not yet been able to catch up with those bills.

Note – Initially yyy was going to guarantee this loan alone because he’s the only with decent financials.  However, I told them that it would be more beneficial to have a weak borrower on the hook as well.  Zzz’s personal financials and credit are not good, but his additional personal guarantee certainly doesn’t hurt.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Rehab loan in WA state

April 14th, 2014

Clay Sparkman

We’ve had a lot of nice solid little loans come in lately. (As you know, we have a tradition of, from time to time, presenting one of the loans that we have placed or are in the process of placing, so that blog readers can (a) see the types of loans that we are placing, (b) see how we feel that loans should be presented, and (c) be presented with potential investment opportunities.) Keep in mind that this is only the summary. If an investor expresses interest in reviewing the details of a loan, we put the prospectus on top of all of the relevant documentation and send it via e-mail in an Adobe file.

This particular loan is live and we are in the process of placing it as a fractional loan, so if you are an accredited investor looking to put a relatively small amount into a fractional loan at this time, please let us know.

Kris Gillmore

Fairfield Financial Services, Inc

3327 SE 50th, Portland, OR 97206

Phone (503) 319-7294 / Fax (503) 419-4219 / E-mail: gillmore@privatemoneysource.com

REAL ESTATE PROSPECTUS

SECURED LOAN

Purchase and rehab of SFR in Vancouver, WA

Loan Details

  1. Loan Amount: $395,000
  2. Term: 12 months
  3. Interest Rate: 12%
  4. Monthly Payments: $3,950.00 Interest Only
  5. Security:  Deed of Trust in 1st Position security interest in real property at AAAAAAAAAA., Vancouver, WA
  6. Construction holdback:  85,000
  7. Completed Value based on Realtor’s Comps:  650,000
  8. Completed LTV based on Realtor’s Comps:  61%

Loan Overview

XXX, an experienced contractor in CA is requesting funds for the purchase and rehab of a Single Family home in Vancouver, WA.  The loan will be made to XXX’s company, YYY, Inc., and personally guaranteed by XXX.  XXX’s brother, ZZZ, an experienced licensed contractor in WA, lives nearby and will be making the renovations to the property.  ZZZ has been a contractor working on new construction and restoration since 2001.  ZZZ’s license, bond, and insurance info can be seen at:

<link redacted>

He has thoroughly inspected the property and reports that structurally the house is sound, only needing cosmetic upgrades to appeal to consumers at this price point.

The purchase price of the property is $359,000 and the borrower will be making a down payment of $75,000.  The cost of repairs is $85,000, and the property will be getting a new roof, flooring, paint, with upgrades to the appliances, cabinetry, and fixtures.  A copy of the construction budget has been provided for your review.

The borrower intends to exit this loan with the sale of the property.

Property

The subject property was built in 1995 and is 4,782 square feet, with 5 bedrooms, 3.5 baths, and sits on .29 acres with a river view.  The property is on a corner lot, and the borrower’s realtor reports that the property is in a highly desired neighborhood.  Photos of the property have been provided in the packet for your review.

Valuation

The borrower’s realtor has provided a CMA with a suggested after repair value of $650,000.  She provides 4 sold comps in the past year of similar properties, but does reference a similar sized property that’s currently listed for $549,000.  She reports that this listing is inferior to the subject because of the dated interior, which is critical when selling a home at this price point.  The CMA has been provided for your review, and the realtor will be available by phone should there be any questions you wish to discuss with her directly.

In addition – a property inspection to further evaluate the comps and construction budget is pending

Income

XXX has provided a signed 1003 and reports an annual income of $203,000, and a net worth of $488,600.

Credit

XXX has a mid-credit score of 533.  He has several disputed accounts and an erroneous tax lien, for which he has provided a written letter of explanation.  Currently, XXX only has 2 outstanding loans:  a HELOC and a student loan.  Both are currently in good standing.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the

Loan offering in Washington state

October 17th, 2013

Clay Sparkman

We’ve had a lot of nice solid little loans come in lately. (As you know, we have a tradition of, from time to time, presenting one of the loans that we have placed or are in the process of placing, so that blog readers can see (a) the types of loans that we are placing, (b) how we feel that loans should be presented, and (c) be presented with potential investment opportunities.) Keep in mind that this is only the summary. If an investor expresses interest in reviewing the details of a loan, we put the prospectus on top of all of the relevant documentation and send it via e-mail in an Adobe file.

This particular loan is live and we are in the process of placing it as a fractional loan, so if you are an accredited investor looking to put a relatively small amount into a fractional loan at this time, please let us know.

Kristopher Gillmore

Fairfield Financial Services, Inc

3327 SE 50th St, Portland, OR 97006

Phone (503) 319-7294 / Fax (503) 419-4219 / E-mail: gillmore@privatemoneysource.com

REAL ESTATE PROSPECTUS

SECURED LOAN

Refi and construction of SFR Ridgefield, WA, with additional industrial zoned land as cross collateral.

Loan Details

  1. Loan Amount: $262,000
  2. Term: 24 Months
  3. Interest Rate: 12%
  4. Monthly Payments: $2,620  Interest Only
  5. Security:   Deed of Trust in 1st Position security interest in real property at XXX, WA
  6. Construction Holdback:  $98,903
  7. Cash out to pay extension fee on existing land loan:  $13,000
  8. Projected Value by lowest $/SF on BPO:  $416,926
  9. Projected LTV based on BPO:  63%
  1. Additional Collateral security:   Deed of Trust in 3rd Position in real property at YYY, WA

11.  As-Is Value of Additional Collateral based on BPO:  $550,000

  1. Current liens on Additional Collateral:  approx. $300,000

NOTE – the Additional Collateral does strengthen the loan as there is additional security, but has not been used in any LTV calculations.

Loan Overview

XXX currently owns the subject property held by his company, YYY, LLC.  This property is over 100 years old, and has been in XXX’s family the entire time.  After falling on hard times and losing the property in a foreclosure in 2011, XXX re-acquired this property in February of 2012 with a purchase loan through Fairfield.  The purchase price was $170,000 and after closing costs and all other fees, XXX made a down payment of approximately $74,000 to purchase the property.  The principal balance of the loan is currently $125,000

Currently, XXX is requesting funds to refi the existing loan and an additional $99,000 to be held in a construction holdback account for the expansion and updates to the house.  The construction funds will be used to add 1,300 square feet of living space, a new upstairs bathroom, grandmother’s quarters, full wrap around porch, and 2 a car garage.  A line item budget has been provided for the proposed work.

In addition, he is also requesting $13,000 to be used to pay the extension fees on an existing land loan for a property that XXX owns with his father.  The land has a current 1st of $150,000, as well as an IRS lien for $150,000.  It has been reported that the IRS lien is inaccurate, and will be reduced to somewhere in the range of $8,000 to $20,000.  A representative of the IRS has signed a statement from the borrower saying that this is accurate (the IRS representative was unable to write the letter herself – but agreed to sign it if it was prepared by the borrower and accurate).  Ultimately, the combined 1st and 2nd on this land should be no more than $170,000.  To strengthen the loan (and to compensate for the cash out), this property can be used as additional cross collateral for the loan, and is valued by a BPO at $550,000.

XXX’s pay history for the past 18 months has been solid, (with the exception of a payment in January 2013 that was 2 days late, and his most recent payment, which was late because XXX thought he’d be able to refinance the loan before that payment was due).  The loan is currently in good standing.

As the property has been in XXX’s family for over 100 years, he intends to keep it that way and plans exit the loan with a conventional refinance.  He is currently holding this property as an investment property under his company, YYY, and will continue to do so.

Property

Primary Collateral

Currently, the property is 1,580 square feet, with 3 bedrooms and 1 bathroom.  It sits on a level 4.6 acre lot with several outbuildings and was built in 1901.  He plans to expand the house to 2,880 square feet with an additional bathroom, grandmother’s quarters, full wrap around porch, and 2 a car garage.  A line item budget is provided in the packet, and plans can be provided upon request.

Cross Collateral

The secondary collateral is two unimproved 5 acre lots with Commercial zoning, located just south of the core “XXX” Industrial warehouse district, and just north of the commercial district near the YYY County Fairgrounds.  Utilities, including city sewer, water, and electricity are available at the road.  Currently, the lots are owned by XXX and his father, ZZZ.  XXX will eventually be buying his father out, and plans to do so with a long term refi after the IRS liens get sorted out.  A BPO with photos of the property is provided in the packet.

Valuation

Primary Collateral Projected Value – A BPO has been provided by a local realtor.  Using 3 sold comps and 3 active listings; he estimates a value of $500,000, subject to the completion of the proposed construction.  This BPO is provided in the full packet for your review.

NOTE: The realtor does report that there are not a lot of comps available for homes of this age, as not many of them remain, and that there is a wide range of values.  (However, keep in mind that the effective age of the property will be significantly less and more in line with current values) The Lowest $/SF of the sold comps provided is $146.80/SF, while the lowest $/SF of the active listings provided is $149.47/SF.  Using the projected square footage of the subject property times the lowest $/SF of all the sold/active comps would yield a value of $416,926.  For the purposes of this report, this more conservative number is used in the LTV calculation.

A formal appraisal has been ordered to give additional support to the valuation.  This will be available for review as soon as we receive the report.

Cross Collateral

The same realtor has provided another BPO with 3 sold comps and 3 listings for this property as well.  He reports that there are very limited sold comps, and the most weight is given to a listing with a very similar property within one mile from the subject.  Note – this listing has been on the market for 2 years at $550,000, so a sale price at $550,000 for the Cross collateral seems optimistic.  This BPO has been provided for your review.

Income

XXX owns his own trucking company, which reported a gross income of $414,000 in 2012.  Bank statements have been provided to verify this income.  A P&L has been provided, and his net income is reported to be $65,940.  It should be noted that his company is currently paying all of his personal expenses (house payment, cell phone, food, land loan interest payments, etc…).  With these personal expenses being considered income, that would yield a net personal income of approximately $94,000

Credit

XXX has a mid-credit score of 662.  He went through some financial troubles about 3 years ago, but since has cleaned up his credit, and is current on all his accounts.  Currently, he only has 3 balances being reported.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Rehab loan offering in Oregon

October 3rd, 2013

S. Clay Sparkman

We’ve had a lot of nice solid little loans come in lately. As you know, we have a tradition of, from time to time, presenting one of the loans that we have placed or are in the process of placing, so that blog readers can see (a) the types of loans that we are placing, (b) how we feel that loans should be presented, and (c) be presented with potential investment opportunities. Keep in mind that this is only the summary. If an investor expresses interest in reviewing the details of a loan, we put the prospectus on top of all of the relevant documentation and send it via e-mail in an Adobe file. This particular loan is live and we are in the process of placing it, so if you have an interest, please let us know.

Kristopher Gillmore

Fairfield Financial Services, Inc

3327 SE 50th St, Portland, OR 97006

Phone (503) 319-7294 / Fax (503) 419-4219 / E-mail: gillmore@privatemoneysource.com

REAL ESTATE PROSPECTUS

SECURED LOAN

Loan against two properties:  The use of funds for Subject property 1 is for cash out and rehab.  This property is free and clear. The use of funds for Subject property 2 is a for the purchase and rehab of the property

Loan Details

  • Loan Amount: $330,000
  • Term: 24 Months
  • Interest Rate: 12%
  • Monthly Payments: $3,300  Interest Only
  • 6 month Interest Reserve:  $19,872
  • Security:  (Subject 1) Deed of Trust in 1st Position security interest in real property at xxx, Nehalem OR
  • Subject 1 As-Is Value by Borrower’s Estimate:  $180,000
  • Construction Holdback Subject 1:  $25,515
  • Subject 1 Projected Value by Borrower’s Estimate/comps:  $240,00
  • Security:  (Subject 2) Deed of Trust in 1st Position in real property at yyy, Nehalem, OR
  • Subject 2 As-Is Value by Borrower’s Estimate/Tax Assessed Value: $267,000
  • Construction Holdback Subject 2:  $26,618
  • Subject 2 Projected Value by Borrower’s Estimate/comps: $320,000
  • Combined As-Is Value by Borrower’s Estimate:  $447,777
  • Front End CLTV by Borrower’s Estimate: 63%
  • Total Combined Projected Value of Subject 1 and Subject 2 by Borrower’s Estimate/comps: $560,000
  • Total CLTV based on Projected Value by Borrower’s Estimate/comps: 59%

Loan Overview

The Borrower, xxx, under her company yyy, LLC is looking for a $330,000 loan secured by two properties.  Subject 1 is currently free and clear with the exception of some property tax liens that will be paid at closing.  Subject 2 is currently under contract for purchase at $161,000.  Details on each property are provided below.

xxx is an experienced rehabber, who reported to have purchased and sold 7 houses, two of which were over 100 years old.  Furthermore, she grew up in a construction oriented family.  Her father, brother, and nephew are roofers, and she also has contractors, concrete professionals, painters, and a plumber in the family.

Subject 1

xxx, under her company yyy, LLC, owns this property free and clear.  She reports investing approximately $30,000 for improvements to the property, and is requesting $25,515 to complete the renovation.  The budget with proposed improvements, as well as a list of completed improvements has been provided for your review.

The property was built in 1954, and is 1,684 Square feet on .36 acres.  The property has 3 bedrooms, 2 baths, and covered carport.  The property is currently vacant and in the process of being renovated.

Subject 2

xxx currently has this property under contract for $161,000.  She believes this is greatly undervalued, and that the bank that owns the property doesn’t know what they have.  The current tax assessed value of this property is $267,000, which is what xxx believes to be a more realistic as-is value.  She is requesting $26,618 for cosmetic renovations to this property.  The budget and list of proposed improvements has been provided for your review.

This property was built in 1920, and is 2,688 square feet on 1.04 acres.  It has 6 Bedrooms, 2 bathrooms, a parlor, laundry room, 2 car garage, and 10 foot ceilings throughout the house.

Exit Strategy

The borrower will exit this loan through the sale of the properties, and has requested a release clause to allow for individual sales of the property.

Property / Valuation

Comps have been provided by a local realtor and were used to estimate the completion values of each property.  These comps can be viewed through the following link: www.xxx

The borrower feels that after the renovations, her properties will be just as nice as the comps, but will be superior in location.  Ultimately, she believes that she will be able to sell Subject 1 for approximately $240,000 and Subject 2 for approximately $340,000

A site visit by one of Fairfield’s inspectors is scheduled for 10/7 (pending a tentative commitment of funds) in order to evaluate the sufficiency of the borrower’s construction budgets as well as evaluate the comps that she has provided.

Income

A signed 1003 has been provided by the borrower, who is stating a monthly income of $5,000 and a net worth of $222,000.

In addition, there is 6 months of interest reserve included in this loan which will allow her to build her cash reserves.  If she is unable to sell either of the properties within this time frame, she is confident that she’ll be able to service the debt from her cash reserves and monthly income.

Credit

xxx has a mid-credit score of 612.  Her credit report shows very little debt – a total of $2,632

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

A private money loan offering

September 11th, 2013

Clay Sparkman

We are in the process of placing a loan that I really like. We have worked with these borrowers in the past and they have been excellent in both payment and performance.

It has to happen pretty fast (by 9/20, a week from Thursday), and we will most likely place it as a fractional loan (though there is the possibility that–given the tight time frame–we would elect to place it with a single lender.

The prospectus is included below that so you can have a quick fly-over. Is this something that you would consider pursuing?

Let me know. I have a full packet ready to go, and can send it out for you to review, right away, if you have a serious interest.

Kris Gillmore

Fairfield Financial Services, Inc

3327 SE 50th, Portland OR 97206

Phone 503-319-7294, e-mail: gillmore@privatemoneysource.com

REAL ESTATE PROSPECTUS

SECURED LOAN

A cash out refi of eight bungalow vacation rentals in a popular coastal town in Washington State—both a tourist destination and a desirable community

Loan Details

  1. Loan Amount: $670,000
  2. Term: 3-5 years
  3. Requested Interest Rate: 12%
  4. Security:  Deed of Trust in 1st Position security interest in real property at XXX, WA, 98569
  5. Value by Borrower estimate/comps:  $960,000 – 1,032,000
  6. LTV by Borrower estimate/comps:  65 – 70%

Loan Overview

YYY and ZZZ are a successful Realtor/Builder husband and wife team.  XXX is a prominent realtor in the town in which the property is located, as well as the owner/manager of a property management company.  YYY is a licensed contractor and skilled home builder specializing in small high end homes/cottages.

XXX and YYY took out a private money construction loan in 2011 in order to build eight small bungalows intended for individual sale.  The commercial zoning of the property allows for these bungalows to be used as residences or vacation rentals.  More recently, upon consideration of the potential rental income, they have decided to keep these units as rentals.

Their initial lender has agreed to extend, but only as a rate and term refinance.  They would prefer to pull some cash out for addition furnishings and funds to market the rentals and would prefer a longer term.  Ideally they’d be looking for a loan of 3-5 years, and will exit the loan with a long term conventional refinance of the property. (It should be noted that they have an alternate back-up plan of selling individual units, should their primary exit strategy fail them.)  The loan would be held under their company, QQQ, LLC, with personal guarantees by both XXX and YYY.

Borrower History

This will be our 3rd loan with XXX and YYY.  The two previous loans were both for the construction of small cottages, relatively similar to the subject property.  Their performance with regard to the construction was excellent, as was their pay history.  They exited both these loans with the sale of the properties as planned, with prices on par with their initial projections of value.

Property

Each of the eight units are 432 square feet, with one bedroom, one bath, and loft space that will sleep four people.  They are new construction (with construction beginning at the end of 2011) with a total cost of $755,000 (including soft costs).  Photos and additional descriptions of the property may be viewed on their website at: www.AAA.

Valuation

XXX has provided several comps, mainly consisting of property that they have built and sold themselves, as well as one additional commercial zoned property on BBB Dr.  She believes that these units could sell at $120,000 each.  (Note: on her 1003, XXX lists the value of these units at 1,032,000, which is slightly higher than the estimate of $120,000 each, or $960,000 total.)

XXX has also commented that their units have always sold for a higher price per square foot than other new construction in the area due to the quality of the construction and components, and she expects the same for these.  Also note that smaller property tends to sell for a high price/square foot than larger property, and with the efficient layout and detailed high quality of construction plus the commercial zoning, these units should be able to be sold at a premium.

Currently, these units are listed for sale at $150,000.  XXX has stated that they are not doing much to market the sale of these properties as they intend to keep them as long term rentals, but at this price point, they would consider selling.  They have made it clear that they would not want to sell any of the properties for much less than $150,000.

Rental Income

Five of the eight units have been available for rent beginning in June.  A detailed breakdown of the rental income from June – August 26th has been provided showing a gross income of $46,343.  XXX has provided the following comments regarding this income:

“Please note that not all units were in service the entire time.  We started with Bungalow 1 in June and added 2, 4 &5 by July 4th.  We then added 6 & 7 and then finally, 8.  We are still working on 3 as it is the ADA unit and is modified so we need to furnish slightly differently.  We hope to have three up and running shortly.

As you can see, the income is pretty good even with our late start, and we are also starting to see reservations start coming in for the fall which is promising for our slower season.”

They anticipate that they can reach 50% occupancy within a year, at which point the property should generate approx. $140,000+/year.  Because they own their own property management company and YYY is able to perform all the maintenance (which should be minimal as this is new construction), expenses will be minimal.

Financial Status

Fairfield was provided with a 1003 for XXX and YYY, who will be personally guarantying the loan.  They state a monthly income of $33,133 and a net worth of $1,313,609.  In addition to the 1003, they have also provided a chart of their liabilities and real estate owned.  These items have been provided and are bookmarked separately in the packet.

Credit

XXX and YYY both have fairly consistent credit scores in the mid to upper 600’s.  Their credit payment history is excellent, with the exception of one 30 day late payment that they are disputing.  The loan in which that late payment allegedly occurred has been paid in full.  A credit report has been provided as a separate attachment.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Sweet private money loans

August 27th, 2013

Clay Sparkman

Historically we have placed loans in the 12-14% range, but in the current market we are finding that this may be a bit high. Especially if a lender is willing to come down to 10-11%, there are little golden nuggets of opportunity presenting themselves.

Here, by way of example, is a loan that we just placed. (The prospectus has been redacted to protect the privacy of the parties involved.)

What’s not to like?

Kristopher Gillmore

Fairfield Financial Services, Inc

16055 SW Walker Road, #247, Beaverton OR 97006

Phone (503) 319-7294 / Fax (503) 419-4219 / E-mail: gillmore@privatemoneysource.com

REAL ESTATE LOAN SUMMARY

SECURED LOAN

Rate and Term refinance of property in Superior, Colorado.

Loan Details

  1. Loan Amount: $158,000
  2. Term: 3 years
  3. Interest Rate: 10%
  4. Monthly Payments: $1,316.67 Interest Only
  5. Security:  Deed of Trust in 1st Position security interest in real property located at XXX, Superior Colorado.
  6. Estimated Value, based on purchase price in May, 2011:  $650,000
  7. Estimated LTV based on purchase price in May, 2011:  24%

Loan Overview

This property was purchased on May 31st, 2011 by XXX LLC, with a guarantee by XXX, who is occupying the property part time.  The purchase price was $648,900, and the initial loan was $325,000 with a down payment of approximately $350,000.  After a year of interest only payments, the loan was paid in full.

Shortly after the loan was paid off, the borrower had an investment opportunity and borrowed 150,000 secured by the same property.  The pay history on this loan has been excellent, with one late payment that was promptly submitted after we contacted the borrower (XXX had his payments set up through an auto pay with his bank, but the auto pay expired after one year and he became aware of this after we followed up on the missed payment). The borrower wishes to keep this loan in place, but is looking for a longer term loan at a lower interest rate.  The loan would be made to XXX, LLC, with a personal guarantee by XXX.

Property

The subject property is a 5 bedroom, 5 bath, single family residence with 4,321 square feet of living space, including a finished basement.  The property sits on a 10,013 sf lot, and was built in 1998.  More detailed specs on the property can be viewed at XXX.  Updated interior and exterior photos are pending and will be provided in the full loan packet.

In May of 2011, we performed an inspection of the property and comps that were provided by the borrower.  That report has been provided as a separate attachment.

Personal Financials

XXX has provided a signed 1003 stating a monthly income of $20,000 and a net worth of $796,000

Credit

XXX has a mid credit score of 581, and has provided a detailed explanation (attached) as to the circumstances that brought his credit score to be so low.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Fix and flip big

August 21st, 2013

Clay Sparkman

This is interesting. I had wondered why we have not seen as many REO type fix and flip property loans as I had expected. I was informed by an individual quite recently that they had read an article about two very large entities that were going to the banks and buying all of the REO properties in blocks–thus leaving little if nothing for the small investors.

This article, with an eye on California, gives and additional perspective on that issue.

Does anyone out there have additional perspective which they would be willing to share?

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

We may be done wandering through the forest

June 27th, 2013

Clay Sparkman

I got this upbeat article as a special alert on my smart phone this week. It seems that finally the real estate market it pulling the rest of the economy forward, instead of the other way around. I would say that it’s official. Hallelujah!

Housing, regional factory data show economy’s stamina
http://us.news-republic.com/Web/ArticleWeb.aspx?regionid=1&articleid=10246360

On the other hand, a little later on the same day, I received this downbeat article on my cell phone as a special alert.

Stocks extend slide as China adds to worries
http://us.news-republic.com/Web/ArticleWeb.aspx?regionid=1&articleid=10251079

What is the take away? I get two things of substance right away: (1) Congratulations to all of you out there who work and/or invest in the real estate market. Things are really beginning to look up (after falling from a cliff, getting up, assessing our injuries, and then shuffling, wounded and aimless, through the forest—only occasionally to glimpse something that might be a road or a home, but ultimately to find that it was simply an illusion), and (2) I don’t advise people on what sectors they should be putting their money into, nor in what proportions, but I suspect that the trends indicated by these two hard hitting articles (all in the same day, no less) might just might persuade some people to move a portion of their investment portfolio from the stock market to the real estate market–either in the form of direct real estate holdings, as trust deeds secured by real estate, or otherwise perhaps as a share in a real estate pool or a REIT.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Auto-private-money-fractional-lending

June 13th, 2013

Clay Sparkman

This is an interesting blog post.

http://www.mymoneyblog.com/realty-mogul-review.html

It tells about a new site where you can go to make $5k private money fractional loans automatically, without the bother of actually dealing with a broker, borrower, or such. Apparently you don’t have to even bother making any decisions about the investment. That might be nice, except …!

Well I’m not going to offer any real opinions. I’d like to know what you all think about it. Does anyone out there want to weight in on private money lending of this sort, and how they feel about it?

Please do. It would be nice to hear some feedback.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Good news for modern real estate investors

May 30th, 2013

Clay Sparkman

Well, if this isn’t good news, I don’t know what is:

http://us.news-republic.com/Web/ArticleWeb.aspx?regionid=1&articleid=9562167

It appears that now is the time to be investing in real estate and real estate loans. We finally have a turn-around market that might actually be *real* and might actually be steady.

Let’s hope it keeps going this way. There are so many factors, but there is no reason to believe that this trend won’t hold into the immediate future.

if you have a different take on it, please comment.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Private money investors: Mind the gap

May 8th, 2013

Clay Sparkman

It is our opinion and the opinion of many others that banks, though they’ve bounced back in certain areas, have not picked up the slack when it comes to funding rehab, construction, and development loans.

I have been on about this before, so I won’t go into great detail here. I think that the following post makes the case pretty effectively.

2013: Think construction loans

Getting down to brass tacks, we feel that this is a great opportunity for those in the private money business. In particular, we at Fairfield see enormous opportunity, in that (a) this need exists in such a desperate way, and (b) we have been funding and servicing such loans for many years—so it is an easy pickup for our company and for the many brokers that we partner with.

If you aren’t already familiar with our programs in these areas, please consider educating yourself further. Feel free to e-mail me at clay@privatemoneysource.com with any questions that you may have, and/or we can setup a time for a phone call to go over all this.

With that in mind, I shall point you toward some prior posts that might help you get a handle on the particulars of our lending in these areas.

Here is our Rehab and construction loan FAQ.

This next article focuses more particularly on quick flips: 2013: The year of the quick flip.

Here is a post regarding our Draw process for rehab and construction loans.

And this post tells you how to go about Calculating LTVs for rehab, development, and construction loans.

I’ve always felt that people learn best by example. So with that in mind, here is an example of an actual loan that we placed.

And here

And here

And here

And here

Let me know if you have any questions, or if you think that you’d like to consider pursuing this particular type of lending opportunity.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Finding qualified commercial private money borrowers

April 22nd, 2013

Clay Sparkman

This item was originally posted on this site on 4/30/10. I had a sense that it might be relevant once again, and so I have rewritten it slightly and am posting here again. I hope you find it useful.

Most private money investors choose to work with brokers.  However it is a decision that each private money investor must make independently and with great care—to use or not to use a broker.

The essence of the matter I think is this.  If you want what amounts to more or less a full-time job (and some investors certainly do) then you may well decide to go it alone (without a broker), and essentially setup your own office geared toward managing the various aspects of investing in private money loans and hard money loans secured by trust deeds and real property (including promotion, underwriting, risk assessment, loan servicing, and workout/recovery).

If you don’t want a full-time job (or even a part-time one) and are interested primarily in hands-on investing (in my opinion there is no such thing as hands-off investing in this niche), then you will want to shop for and eventually select a qualified broker to “partner up” with.

This post will be primarily of use to the former type of investor–as the first step in the process of placing trust deed secured loans is finding quality borrowers that meet your criteria.  This is not an easy thing.  At Fairfield, we receive about 150 loan requests per month these days, and of those, we end up pursuing 6-8 in a typical month.  On average maybe five of those will survive our underwriting process, be presented to one or more of our investors, and ultimately be closed through escrow and thus actualized as an investment.

If you are faced with this challenge, a web based tool known as Lendicom.com may be of interest to you.  The site is geared toward commercial lending, and allows borrowers and brokers to sign up and submit specific loan proposals to lenders who have also signed up online.  The lenders may be institutional or they may be singular individual investors.

If you are a hard money lender looking directly for commercial loans to fund, you may sign up as a lender and create an account that allows you to specify detailed criteria regarding the specific types of loans that you would be interested in and your particular criteria.  Then from time to time borrower proposals that meet your criteria will be submitted to you.  You may choose to either decline or pursue these proposals.  If you choose to pursue a proposal, then you are given contact information in exchange for a small fee.  Ultimately if you place a loan which came to you through Lendicom, you pay 25 basis points to Lendicom (or a quarter of a point).  Otherwise you pay nothing for the use of this service.

In the interest of full disclosure, I am an officer and a part owner of the company that offers this site.  So consider me biased.

Still, I recommend that you check it out at the link below and see what you think.

www.lendicom.com

– Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Loans we are placing – example

April 5th, 2013

S. Clay Sparkman

Every now and then I like to present one of the loans that we have placed or are in the process of placing, so that blog readers can see (a) the types of loans that we are placing, and (b) how we feel that loans should be presented. Keep in mind that this is only the summary. We put this on top of all of the relevant documentation and send it via e-mail in an Adobe file. This particular loan we just closed.

Kristopher Gillmore

Fairfield Financial Services, Inc

16055 SW Walker Road, #247, Beaverton OR 97006

Phone (503) 319-7294 / Fax (503) 419-4219 / E-mail: gillmore@privatemoneysource.com

REAL ESTATE PROSPECTUS

SECURED LOAN

Purchase and rehab of property in Salem, OR

Loan Details

  1. Loan Amount: $107,500
  2. Term: 12 Months
  3. Interest Rate: 13%
  4. Monthly Payments: $1,764.58  Interest Only
  5. Security:  Deed of Trust in 1st Position security interest in real property located at 4369 Boulder Ave, Salem OR.
  6. Construction Holdback:  $22,000
  7. Interest Reserve:  $3,530 (3 months)
  8. Projected Value by Borrower’s Estimate based on CMA: $165,000
  9. Projected LTV by Borrower’s Estimate based on CMA:  65%

Loan Overview

Mr. xxx and Mr. yyy are the members of xxx, LLC, and will be personally guaranteeing this loan.  Mr. xxx is a licensed contractor and is the owner of his own construction company, yyy, LLC.  He is very experienced in rehabbing houses and will be doing the work himself.  His resume has been provided.  To summarize the relationship between Mr. xxx and Mr. yyy: Mr yyyis the numbers/financial guy with good credit/income and Mr. xxx is the contractor.

This is the first loan that we’ve done with Mr. xxx and Mr. yyy, but their ultimate goal is to become a solid repeat borrower with the opportunity for us to do more loans in the future.

The borrowers are purchasing this property for $88,400, and are anticipating $22,000 in repairs.  Essentially, the entire interior will be getting a face lift, with new paint, drywall (where required) flooring, appliances, with funds also allocated for the replacement of the roof and some landscaping.  The budget for repairs has been provided for your review.  They are putting approximately $16,000 down, which includes a 3 month interest reserve.

Property Info / Valuation

The property has 4 bedrooms, 2.5 baths, and is currently 1,900+ Square feet, counting the garage that was converted into living space.  The conversion was not permitted, and the work on that conversion was minimal (carpet on the concrete, no heat, etc…), so that space will be converted back to a garage.  After that space is converted back to a garage, the square footage should be approx. 1,600 + some storage space in the upstairs.  The house was built in 1970 and sits on a 6,565 sf lot with a fenced back yard.  Photos of the property have been provided.

The borrowers have provided a CMA with both sold comps and active listings.  Based on the avg. $/Square foot, the borrowers are estimating an ARV of approximately $165,000

This CMA has been provided for your review.

Income

A signed 1003 has been provided.  Mr. yyy is stating a monthly income of $8,125, and a net worth of $191,180.  Mr. xxx has stated an annual income of $60,000, but the details of his assets and liabilities are pending (and will be provided presently).

Credit

Mr. yyy has a mid-credit score of 679, with no accounts past due, and no accounts with any late payments.

Mr. xxx’s mid-credit score is 485.  He has reported that his credit is deteriorated because of medical expenses that he incurred in 2010.  He has not yet been able to catch up with those bills.

Note – Initially Mr. yyy was going to guarantee this loan alone, because he’s the only with decent financials.  However, I told them that it would be more beneficial to have a weak borrower on the hook as well.  Mr. xxx’s personal financials and credit are not good, but his additional personal guarantee certainly doesn’t hurt.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

How to read an appraisal

March 29th, 2013

Clay Sparkman

This article was originally published, on The Private Money Broker Blog. on 8/9/10. Some two and a half hears later, I feel it is worthy to be modified slightly and published again. Whatever you do in the real estate business, I highly recommend that you give this post a good read.

The most important thing that you must understand about any appraisal (or other real estate valuation instrument) is that it is only as good as its logic.  So that—in other words—you must never accept an appraisal’s conclusion regarding value without looking beyond the surface to understand the logic that leads to the conclusion and without making some reasonable determination as to the quality of the logical argumentation.

With that in mind, I offer you ten critical steps to follow when reading/analyzing (and thus attempting to assess the “goodness” of) an appraisal.

(1)    The very first thing you must ask as you analyze an appraisal is to what degree is the appraisal transparent?  In other words, how much of the logic leading to the value conclusion is on display for you the reader?  If the answer is none, the appraisal is useless.  Throw it away.  If the answer is some (in other words there are gaps in the logic) then you must either (a) once again, decide to toss the appraisal, (b) decide to accept some degree of uncertainty, (c) attempt to fill the gaps on your own, or (d) contact the appraiser and see if she can provide the missing logic.  (Sometimes the appraiser will have the information you need on file, but they just didn’t include it in their final report.)  Ideally the answer is none or very little, and the appraisal can be said to be highly transparent.  At any rate, you will need to be asking this question throughout your analysis.

(2)    The next thing you need to do is get a handle on what is being appraised.  Is it a home, a commercial building, a parcel of land?  What are the basic specifications?  Where is it located?  Is it urban or rural?  How desirable is the surrounding area?  Are there functional inadequacies?  If it is land, what horizontal infrastructure is in place or lacking and what does the current zoning allow?

(3)    I have never heard anyone else say this, but I stand by it (at least when valuing buildings and structures; for valuing land, not so much): one of the first things I do after getting a basic sense of the property is go straight to the photos.  (And by the way, make sure you have an original appraisal or color copies.  The photos can be quite useful, but not if they are blacked out by copying and faxing.)  I study the photos of the subject property and then I compare them to the photos of each of the various comps.  You will be surprised at how often you will begin to sniff some bad cheese at this point in the process (particularly when dealing with structures).  What you are looking for here is: (a) whether or not the comps are in the same general condition as the subject property, and (b) whether or not the comps are in the same general “class” as the subject property.  By class I am referring to the level of quality and distinction of the property.  If the answer to one or both of these is no, it is not necessarily game over, but you will now be looking even more closely at the adjustment matrix later on to see if the apparent differences are effectively accounted for to your satisfaction.

(4)    Next, you will want to check the effective date of the value given.  How current is the appraisal?  In a steady up economy we used to be comfortable using appraisals that were as much as 1-2 years old.  We would adjust the value to be in-line with changes in the market.  With the chaos of the past 5+ years, this method is not as effective and must be utilized with great care.  Generally speaking (though this would depend to a certain extent on the region) you would want your appraisal to be less than 6 months old.

(5)    Check carefully to see if there are any “subject to” items associated with the value.  Generally this will initially be indicated by checking a box that indicates the appraised value is subject to certain additions, improvements, or modifications as indicated later in the appraisal.  This of course is a critical item, so make sure you have read through the entire body of the appraisal so as not to miss any such “subject to” items or conditions.

(6)    Look to see if any extraordinary assumptions are made by the appraiser.  Here again, you will be forced to read through the entire body of the appraisal to be sure.  On more than a few occasions I have seen what looked to be a perfectly reasonable appraisal completely neutralized (or actually nullified) at the discovery of one or more extraordinary assumptions.  The problem with most extraordinary assumptions is that they are indeed extraordinary.  If I am evaluating a parcel of bare land zoned rural agricultural, and an extraordinary assumption in my appraisal states that “The zoning will be changed to allow multi-unit residential at 8 units per acre.” … well chances are, the gig is up.  Even if some serious local zoning change is in the works, what is the chance that you can count on it to come through and thus turn this “straw” property into gold?

(7)    Take an accounting of the methods utilized for valuing the subject property.  In my opinion, a market sales comparison approach is ALWAYS essential and should be the primary method—and the one given most weight—in valuing a property.  The only true value in a  market economy is the amount that others are willing to pay for it, and thus the attempt to estimate market value by looking at recent sales—though still at best a process of estimation—is the only method we have that goes to the heart of the matter.  Beyond that, it would be nice to have a cost approach and an income approach (where relevant) but these are, in my opinion, at best a good way to cross-check the market value derived by the comparison approach.

(8)    Another thing you need to take a close look at is the aging of the comps.  If all the comps were sold quite recently, then you are good in this department.  But if one or more of the comps are more than 6 months old, this may be a problem.  The next step would be to look at the comp matrix to see how much the appraiser adjusts the target value to factor comp aging.  If one or more of the comps are listings … well then, these aren’t really comps at all.  I have seen comp workups using nothing but listings.  This is totally unacceptable. Anyone can list a property for any price they want.  It would perhaps be reasonable to have 1-2 listings along with at least as many “true” comps, but even this is getting into squishy territory.  So here again, you would have to look at how the appraiser adjusted the subject value based on the “listing” comps.

(9)    You should spend the majority of your effort fussing over the comp matrix.  This is the matrix which compares various characteristics of the subject property with various characteristics of the comps and makes specific adjustments for each of the comps to arrive at adjusted values for the comps (effectively attempting to monetarily “convert” each of the comps into the subject property).  If you have: (a) many adjustments, (b) large adjustments (relative to the price of the property), and/or many seemingly subjective adjustments, then you may want to seriously question the integrity of the appraisal.  You will want to walk through each and every adjustment, and here again, you must look for transparency.  Does the appraiser explain the logic behind his adjustment decisions?  If not, you have a transparency problem.  At the end of the day, you must be comfortable with the adjustments and you must feel that they are objective, transparent, well thought out, and seemingly reasonable.  If not, you must either (a) discard the appraisal, (b) contact the appraiser for further explanation, and/or (c) revise one or  more adjustments and revise the final subject value accordingly.

(10) And finally you will want to be sure and take a look at other methods of valuation utilized (generally income and cost on commercial appraisals).  And then you will want to determine how the appraiser has gone about reconciling the different values arrived at utilizing different methods.  Sometimes a weighted value approach is used.  If so, how much weight is being given to the comp value approach relative to other methods utilized.  As you may have guessed by now, I generally like to see all or at least the vast majority of weight given to the comp analysis.  If the appraisal doesn’t explain the reconciliation, you have a transparency problem.  If the comp value approach is not given enough weight, you may want to fall back on the value arrived at by the comp value approach as your own final value.

And there you have it.  There is a great deal more that can be said about reading an appraisal, and certainly this list of ten items is far from exhaustive, but it does give you a few things that you will not want to overlook.  If anyone has their own favorite “crucial” steps, I would love to hear about them.  Please let me know and I will share them with the group.

Last word:  Don’t think that you don’t need to “read” an appraisal just because you are the loan broker or the borrower, thus relying on the work of the appraiser to be true and accurate given their credentials.  I often ask brokers and borrowers if they have read the appraisals they have submitted, and what their opinion was. If they haven’t read the appraisal or clearly haven’t put the effort in to attempt to understand and make sense of it … well that wouldn’t necessarily kill the deal, but to my mind it highlights a potentially serious credibility issue.  As a broker (and certainly as a professional investor borrower), you must read and understand the items that you are submitting.  Anything less will generally become apparent to the lender and will ultimately undermine your ability to do your job effectively.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

The infinte universe of private money

March 13th, 2013

Clay Sparkman

Our private money lending programs tend to be fairly rigid with regard to LTV requirements but quite forgiving with regard to other issues.   One of the nice things about private money is that it allows for creative problem solving.   I have put many transactions together, that initially didn’t appear to be doable, simply by seeking out a creative way to bridge the gap.

Let me give you an example.   Say that you have a client come to your office and they want to buy a commercial building in Seattle and they need financing.   The borrower is strong and the property is prime but the construction on the building is only 90% completed and there are no tenants yet (and thus no income), and in addition to all that there is no appraisal and the buyer doesn’t have the time to wait for a commercial appraiser as this is a distress sale situation.   So I would say that this guy might have a tough time getting bank financing, right? After some consideration, you decide that this is a good fit for private money.   You check with a private money outfit such as ours and find out that we will loan 65% LTV against the value of this property.   Now let’s say that the buyer has negotiated a purchase price of $800,000 for the property and he has $80,000 (10%) for the down payment.   At 65% it appears that he may need to bring $280,000 (plus costs) to the table to make this loan work, and so you are thinking that you’ve reached a dead end.

Well, that’s where the flexibility angle kicks in.   There are at least four ways that you can meet the equity requirements without the buyer bringing additional cash to the table.   Study these because if you are going to work with private money you should know them by heart.

Solution #1: The borrower may borrow based on the true value of the property.  If he can demonstrate that he is buying well, and that the true value is higher than the purchase price, then some private money lenders will be willing to base their LTV on the true value of the property.  In this case, if there is a strong case to be made that the property is actually worth 1.2MM, then a private money lender may be able to arrange to loan enough to cover most of the purchase of the property plus closing costs.  Depending on the overall “strength” of the borrower, he may be able to buy the property with a relatively minimal down payment.  Or he may choose to bring in his full down payment anyway and get a reduction in his interest rate due to the stronger LTV position.

Solution #2:  The borrower may borrow based on the projected value of the property. Say that he needs an additional $100,000 to complete the construction on the building, but that the building will be valued at $1.2M upon completion, then certain private money lenders would be willing to arrange a loan of up to $880,000 to cover both the purchase price and establish a construction fund.  The construction funds would then most likely be held in a trust fund and disbursed as the work is completed on the project.

Solution #3: The borrower may be able to persuade his seller to carry back a portion of the sales price as short-term debt. Particularly if the seller is in a distress situation, he may be willing to negotiate on this point.  So in our example, let’s say that the buyer is able to convince the seller to carry back $400,000 of the sales price in second position subordinate to a $500,000 loan arranged by say Fairfield.  In this case, we may be willing to move forward with a low down payment loan.  We would, for example, be willing to make a loan for $500,000, of which $100,000 would go into a construction account for improvements and something like $30,000 would go toward loan fees and closing-costs, and the buyer would only need to come in with the $30,000 needed to cover loan fees and closing costs.

Solution #4:  It may be the case that the borrower has additional real estate assets that he is willing to pledge as collateral to make up for the shortfall in down payment money. Private money lenders are almost always willing to consider additional collateral, to make a transaction come together.  Say the borrower has another commercial building, this one in Lincoln City, Oregon, and that it is worth 1.6M with $750,000 owed against it.  The lender would quite possibly be willing to make the loan, with the borrower bringing in $80,000 cash and the Lincoln City building as additional security for the transaction.  And if the borrower is concerned about tying the building up, because he has plans to sell it or refinance it in the future, then it should be possible to negotiate and write into the loan a specific release clause provision stating that we are willing to release the Lincoln City property as security in exchange for a principal reduction, for example in this case, of $200,000.

Keep in mind that these solutions can be brought to bear in combination, so that all four may come into play in order to bridge the gap for any particular loan scenario.  Private money is flexible and creative and for this reason often takes up where the other options leave off.  (In these moments, it tends to tap dance away from the competition.) I have often said that if the banks ever acquire imaginations, I will be out of business, but in fact I’m not worried about it because it isn’t going to happen.  The banks are not interested in creative problem solving because it requires too much special handling.  The banks prefer to batch process the plain vanilla loans–the kinds of loans where the whole story can be fit into a sequence of boxes–and then leave the loans which must be hand-built one by one to people like us.  So come join us for some loan building and some creative problem solving.  It is not only lucrative but it is fun.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Twnety-five questions you must ask (re-post)

February 22nd, 2013

Clay Sparkman

I originally published this article on this blog in September of 2009. It is as relevant ans useful, I believe, today as it was then.

I’m going to make a list today of twenty-five important questions that I believe an investor must ask prior to funding any private money loan transaction.  I’m not going to elaborate much on each particular item here, but will drill down on each of the individual items in future posts.  For the sake of simplifying this discussion to a reasonable level, I’d like to start with several assumptions: (1) we are only talking about loans secured by real property, (2) we are only talking about first position loans, and (3) we are not talking about land development or raw land loans.  (Each of these exceptions, if removed, would be good for another whole list of special questions; we’ll save those particular scenarios for future discussion.)

(1) What is the Loan to Value (LTV) ratio of the loan you are considering and how does that fit with your own risk limits regarding this particular loan and property type?

(2) If this is a value-added loan (construction, rehab, or development), what is the front-end LTV?  Font-end LTV refers to the LTV immediately after the close of escrow but prior to any construction/development or disbursement of construction holdback funds.  (I generally reference this as FLTV, and it is understood that LTV, for a project actually refers to the LTV upon completion of the construction/development and full disbursement of any/all hold-back funds.)

(3) How confident are you of the value?  The “L” part in LTV is easy.  It is the “V” part that can be quite difficult to accurately determine, and in fact it must be understood that any such determination (no matter how good) is only an estimate.

(4) What are the recent market trends for the area in which the property is located?  Given the real estate market of the past two years, this question is particularly relevant.

(5) How is the borrower’s credit?  What is the mid-score, what are the issues, if any, and what is the trend?

(6) If the loan is a refi: how is the borrower’s pay history on the existing loan?

(7) How much “skin” will the borrower have in the game at the close of escrow?  In other words, how much cash or additional collateral is the borrower bringing to the table?

(8) If this is a real estate development or investment loan or a loan to a business owner occupying his own property: what is the relevant experience and background of this borrower?

(9) What is the purpose of the loan and how will the funds be utilized?

(10) What is the term of the loan?

(11) Can the borrower afford to make payments OR does the loan scenario otherwise involve an adequate interest reserve?

(12) What is the borrower’s plan/exit strategy, and how likely is the borrower of success?

(13) What is the borrower’s net worth and how liquid are the borrower’s assets?

(14) If there are one or more structures on the property, will you be listed as loss payee on a hazard insurance policy at the close of escrow (or prior to the beginning of construction if new construction is being funded)?

(15) If there is a construction hold-back, who is administering this and do you trust them to do so effectively?

(16) Have you reviewed the operative preliminary title insurance policy and approved any liens that your title insurance policy will be listing as exceptions to your position?

(17) Is your loan compliant with all state and federal disclosure and usury laws?

(18) Will all taxes be paid current at closing?

(19) What is the likelihood that there are any serious hazardous waste issues associated with the property?

(20) What is the likelihood that there are any wetland issues associated with the property?

(21) If relevant: what is the status of all required permits, entitlements, or other government approvals?

(22) What is the likelihood of one or more construction labor/materials liens taking precedent over your lien position?

(23) Does the loan size/amount, location, type etc. allow you to obtain optimal diversification?

(24) What is your plan for servicing the loan?

(25) If the loan involves a fractional interest, how comfortable are you joining with the other lenders involved in the loan?

So that’s my list for now.  There is nothing special about the number twenty-five, and I may well have left off some very important items, so please provide feedback as to which items you agree with, which ones you don’t, and what other items you might feel absolutely must be on a list of this sort.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Rehab and construction loan FAQ

February 15th, 2013

Clay Sparkman

One of the most promising areas at the moment for real estate investors and brokers, by all indications, is REO, short sale, rehab, and quick flip properties.  The opportunity to buy distressed properties at a low price point is evident in many markets.  And yet it is difficult for most end-buyers (with a non-profit initiative) to take advantage of these opportunities, as they are not prepared to deal with the financing challenges or the rehab work involved when buying one of these properties.  Thus comes a wonderful opportunity for those real estate investors who can size up a market effectively, move to buy challenged properties at below value prices, rehab them quickly, and get them back onto  the market at a slightly below market price.

Another point in favor of this brand of real estate buying/investing:  Real estate investors who either (a) buy and sell quickly or (b) hold for the long haul are not as likely to get hurt by falling market values.  It is those who are planning to hold a property for 1-5 years that are in the most danger.

And as we know, what is good for the borrower in this business is generally good for the lender as well;  these types of loans may be some of the best that private money lenders can expect to see for the next year or two and thus the easiest to get funded.

With these thoughts in mind, it seems appropriate to duplicate here the Rehab and Construction loan FAQ that I publish on my company website.

We tend to receive an endless parade of questions from brokers, borrowers, and investors as to how to best structure these types of loans, so here is an example (representative I think) of how one organization goes about it.

REHAB AND CONSTRUCTION LOAN FAQ

What is your maximum LTV ratio for rehab and construction loans?

Well, it is important to talk about front-end and back-end LTV. Our maximum back-end LTV is generally 70% and our maximum front-end LTV is about the same (with a little more flexibility), though in the present market we try to keep that closer to 65%.

What do you mean by “back-end LTV”?

By back-end LTV, I mean the LTV at the completion of the project. For example: let’s say a borrower needs $90,000 for the acquisition of a property and $30,000 for construction funds and thus wishes to borrow $110,000 (he’s coming in with the rest at closing). If the completion value of the property is conservatively figured at $175,000 based on comps provided by the borrower, the back-end LTV will be 110/175 or 63%.

Okay, so then what is “front-end” LTV?

Front-end LTV is the LTV immediately upon the closing of escrow but prior to any construction. In the example above, it is a little tricky to talk about the current value of the property since it is a fixer (and fixers are tough to comp directly), but if we determine that the AS IS value of the property is $95,000 then the front-end LTV is 60/95 or 63%. Generally with rehab projects, if the back-end LTV is in-line then the front-end LTV will be in-line also. This is because with rehab projects, the profit is made primarily in the buy, and less so in the construction.

With construction loans, on the other hand, it is usually the other way around. The profit is made in the construction and generally not in the acquisition of the land. So with construction loans, we need to work a little harder to make sure that the front-end LTV is in order.

Do you require an appraisal?

For rehab projects, rarely ever do we ask for an appraisal. We know that professional investors must move quickly and that they are frequently the best source for data regarding the projected value of their project. If an investor tells me that he expects to sell a property for $200,000 upon completion, I say, “Show me how you have come to this conclusion.” A good set of comps is frequently an adequate substitution for an appraisal (though not always).

With construction projects, it is a little tougher sometimes to get a handle on the completed project, so on occasions, we will ask for an appraisal.

Are you able to loan 100% of hard costs?

Yes, and sometimes we are able to finance a portion (though not all) of the soft costs as well. Our very strong repeat borrowers are sometimes able to leverage 100% and are not required to bring any money into the project. It really depends on two factors: (1) How strong is the borrower? (2) How well is she buying? And (3) How much relevant experience does she have?

How does the construction money get disbursed?

From time to time, as a borrower completes the construction of a project, the borrower will submit a draw request to Fairfield Financial. Fairfield will review this request and, upon approval, release funds either directly to the subs/suppliers (if requested to do so) or to the borrower (if the borrower has already paid the subs/suppliers). Fairfield is responsible for ensuring that (a) the work is completed to an appropriate quality standard, (b) the project is on-budget (or if not on-budget, appropriate adjustments are made), and (c) that all subs and suppliers get paid for their work on the project. Borrowers are encouraged to make as many draw requests as they require, and if a request is complete, and deemed to be valid by FFS, we can generally disburse funds within 48 hours.

How much experience do you require from the borrower?

Well, it is nice to see a borrower come in with a little experience, but I have learned over the years that success in this business isn’t as much about experience as it is about common sense and the willingness and the ability to work tenaciously toward the completion of a project. So if you don’t have experience but you can show me that you have the drive, the discipline, and the common sense, we’ll give you a chance.

What sort of credit and financial stability do you require from the borrower?

We don’t have specific underwriting guidelines. As far as credit, I am not looking for a perfect credit score (though we do have quite a few borrowers with credit scores in the 700s). I am looking at a pattern of payment over time. If a person has had a few bumps in the road or even a BK, for example, along the way, this doesn’t bother me. What concerns me is the borrower who has consistently shown a disregard for debt obligations over a period of time. I probably won’t want to get into a project relationship with this person.

Regarding financial strength (net worth and income), my primary concern is seeing that the borrower has either enough income (stated) or enough cash or liquid assets (stated) to get through the project (even if setbacks occur). That means showing the capacity to make payments for the duration of the project (if an interest reserve account has not been set up) and it becomes necessary to weather a few bumps in the road if the project doesn’t go exactly as planned. Beyond that, we don’t expect our borrowers to have any great wealth. We know that they are in the process of attempting to build something, and sometimes that starts from practically nothing.

What is the term of your loan and how are the payments handled?

The term of the loan is generally one year, though if a project is expected to require longer, we can make a loan for two years or more. Payments are made monthly and are interest-only. If there is enough equity in a project, we can arrange to have some number of payments held in reserve and applied to the loan for the initial period of the project.

What are your rates?

For this sort of thing, rates generally range from 12-14%. The rate is determined by (a) the LTV, (b) the strength of the borrower, (c) the amount of leverage involved, (d) the merits of the overall project, and (e) the perceived volatility of the local market.

Does the borrower pay interest on the full amount of the loan or only on the funds that have been disbursed?

The borrower must pay interest on the full amount of the loan for the duration of the loan. The funds are being held in trust by Fairfield Financial on behalf of the borrower. As such, the funds are not available to the lender throughout the duration of the loan and thus the lender has committed these funds and cannot utilize them in any way or earn interest.

What fees are involved?

We charge a loan fee equal to 5% of the gross amount of the loan. We also charge a doc prep fee (which ranges from $675 to $2900, depending on the size of the loan), an account setup fee (which is $470 plus $1/$1000 of the loan amount), and a property inspection fee (which is typically in the $500-$1000 range, but may be more if the property is far from our central location in Portland, Oregon). There are no hidden junk fees.

Can the fees be paid from the proceeds of the loan?

Yes, if there is enough equity in the project. This is frequently the case.

Is there a pre-payment penalty?

Typically there is no pre-payment penalty.

What is the approval process?

There are basically four steps.

  1. The borrower (or a representative for the borrower) runs the project concept by us. If we like the project concept and feel that the numbers are acceptable, we proceed to the next step.
  2. If the project conceptually makes sense to us, we produce a quote, listing all of the relevant costs and other information for the requested loan.
  3. We review a complete loan packet. We ask that this be sent via overnight mail or delivered to the office (fax copy is not acceptable). An electronic packet is acceptable, provided that all items are in a single packet (either Word or Adobe). The packet should include the following items:
    1. 1003 for each borrower/personal guarantor
    2. Credit (tri-merge) for each borrower/personal guarantor (or permission to pull credit)
    3. Company financials if the borrower is an entity (2 years)
    4. A privacy notice signed by the borrower
    5. A purchase agreement (when property acquisition is involved)
    6. A preliminary title report
    7. A detailed line-item budget for all construction work to be done on the project
    8. Plans (for all construction loans, and for rehab loans that involve changes in the basic floor plan)
    9. Borrower’s estimate of the completion value of the project, and comps (or other value analysis) to support this estimate
    10. Photos of the subject property
    11. Borrower credentials
    12. A copy of contractor license, bond, and insurance (for all construction loans)
  4. If all this checks out, we ask the borrower for a deposit (generally somewhere between $500 and $2000). This should be in the form of a cashier’s check or money order. We provide a conditional loan commitment letter at this time.
  5. If the property checks out, we draw up the documents and close the loan through escrow.

Is the deposit check refundable?

If we close the loan through escrow, the deposit is applied as a credit to the loan fees. If we don’t close the loan because (a) the borrower does not or cannot perform or (b) the project upon inspection is significantly different than as represented, we keep the deposit to reimburse us for our costs. Otherwise, if Fairfield fails to perform for any reason, we return the deposit to the borrower.

How long does it take to put the loan together?

We generally ask for a minimum of two weeks from the time we review a project packet until closing.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Draw process for rehab and construction loans

February 6th, 2013

Clay Sparkman

We plan to do as many rehab and construction loans as we can this year. We see great potential in that area. Builders are under-building (by a substantial number of units, and going back 3+ years), and this is mostly because banks haven’t recovered to the point where they are comfortable doing construction style lending–and thus there aren’t many options for those looking to make money, through value added, in the real estate market.  Unless, that is: You consider private money.

We are frequently asked how our draw process works. I have included a copy of our Draw Request Submission Requirements document below.

One final note: If you’d like a sample copy of our Budget Matrix, please send me an e-mail requesting it. I tired to get it formatted correctly for this blog post, and it just didn’t want to go.

DRAW REQUEST SUBMISSION REQUIREMENTS

You are entering into a loan that contains a construction disbursement account.  As the project progresses, Fairfield Financial may disburse funds on work that is completed.  In order to request disbursements, a draw request must be submitted to our office.  There is a $150 Draw Processing Fee for every draw you submit.  You may submit as many draw requests as you wish.  Each time you wish to submit a draw request, please follow the requirements listed below:

Cover page / Instructions:

For each disbursement item:

  • Description of work completed
  • The disbursement category (allocated from budget)
  • Total amount of disbursement
  • Instructions for payment/reimbursement: to whom, how much, invoice numbers (if appropriate), and how to deliver payment (including address)
  • Final total of all items
  • Authorized signature

Photos:

Include photos (digital photos, or photos via mail) of all work that is complete.  For example, for flooring work, provide photos of the flooring in all rooms where it has been completed.  Please label each photo with a detailed description.

Updated Budget / Draw Record:

From the original budget that was approved when the loan closed, submit an ongoing budget and draw record that compares each budgeted amount to actual expenses, a draw history, and completion status.  Please use the following spreadsheet example.  Fairfield will provide a template (MS Excel or MS Word) upon request.

If expenditures do not meet budget expectations:

For every item that is either over or under budget, please provide an explanation and submit a proposal for a budget revision

Copies for Payment / Reimbursement:

  • If paying vender directly, a copy of the invoice
  • If reimbursement to you is needed, evidence of payment (a copy of the cancelled check, credit card receipt, or the invoice marked “paid” and signed by the vender)

Email, Fax, or Mail:

Please send your request one of three ways: e-mail, fax, or regular mail.

NOTE:  From the time that all required items have been received and deemed adequate, please allow up to 3 working days for draw request approvals and disbursement of funds.  Disbursements are only given when project item is completed (some exceptions include permits, etc.) For a copy of this document and examples, please visit our website at http://www.privatemoneysource.com.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Investing in real estate (either directly or indirectly) in 2013: three articles you should read

February 1st, 2013

Clay Sparkman

On occasion, I try to publish links to articles that are relevant, useful, and interesting. Here are three articles which give useful perspective on the matter of investing in real estate in 2012—each from a different perspective.

A money.cnn article on how to find real estate opportunities in 2013:

http://money.cnn.com/2012/12/01/real_estate/housing-outlook-2013.moneymag/index.html

Dailyresearchhunter.com on global real estate investing:

http://dailyresourcehunter.com/universal-language-moneymaking-real-estate/

An investopedia.com article on strategies for making money on residential property investments in today’s market:

http://www.investopedia.com/articles/mortgages-real-estate/09/residential-real-estate-invest.asp#axzz2JUEcrOsf

On another note, please let me know: (1) if you have any questions about private money that you would like answered (I will do my best to provide an answer, and (2) if you have any specific suggestions for a private money related topic that you would like to see addressed in an upcoming e-mail (sometimes I run out of ideas, so I can always use your help).

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

What to look for in 2013

January 24th, 2013

Clay Sparkman

I rather enjoyed the following article in the www.thefiscaltimes.com (quite an impressive publication at first blush), and thought it would be a good one to share.

“Ten Real Estate Trends to Watch in 2013″

http://www.thefiscaltimes.com/Articles/2012/12/06/10-Real-Estate-Trends-to-Watch-in-2013.aspx#page1

The article begins by noteing that “national home prices have been on the uptick for eight straight months,” and then goes on to identify ten areas to watch closely as probable determinants as to whether or not, and to what extent, this upward trend will continue.

A key word for me, coming away from this article is “construction.” Item #1 notes that “… construction of new homes and apartments needs to be between 1.25 and 1.5 million a year just to keep up with population growth. But since the housing crash, new construction has been at 500,000 units or fewer for 6 years running …”

Item #10 then goes on to note that there is an immense shortage of bank funding available for construction loans. “… only 22 percent of the country’s largest banks are making them …” Further, they point out that “many medium and small builders who rely on loans for regional and community banks aren’t getting the capital they need to launch projects.”

They don’t mention “private money” as an alternative source for such players. They rather seem to suggest the demise or consolidation of these smaller players. Yet, as a purveyor of such, private money is the first thing that comes to my mind. Light bulb! Solution at hand!

I expect that we’ll be doing more construction loans in 2013 than in recent past years. Please feel free to comment, and let me know what you think, with regard to that suggestion and the article in general.

- Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Where do you go to learn about private money lending?

January 16th, 2013

Clay Sparkman

I can’t tell you how many times I have been asked by prospective private money investors, “Where do I go to learn more about this? Where are the books? Where are the articles? where are the websites”

I have generally had to shrug my shoulders and say, “Uh …. you know, I really know.” I can’t tell you why, but very little has been formalized regarding the matter of private money basics (or the finer points for that matter).

Recently I was talking to a new prospective lender, and he told me about a book that he read. He said that it was very good at covering the basics of private money in simple language. This guy should know. He has spent a great deal of time researching the matter, and has been dead set on learning the workings of the private money realm.

With the caveat that I haven’t read this book, I offer this resource to you.

Private Mortgage Investing: How to Earn 12% or More on Your Savings, Investments, IRA Accounts and Personal Equity–A Complete Resource Guide with 100s of Hints, Tips and Secrets From the Experts Who Do It Every Day

http://www.amazon.com/Private-Mortgage-Investing-Investments-Secrets/dp/0910627622

If any of you read this book, or have read this book, and have any feedback–I would be delighted to receive it and share it with the blogregation (yes, I made that word up).

I hope this is of use to some of you.

– Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Private Money FAQ

January 9th, 2013

Clay Sparkman

I try to update and publish this FAQ every once in awhile, as it is a handy guide to better understanding the market for private money loans in general–and more particularly, how we operate here at FFS. It is written more with brokers and borrowers in mind, but the information here should be quite useful to most private money lenders as well.

Private money is often misunderstood. Many industry professionals know very little about it, and fallacies and misconceptions tend to dominate the collective wisdom. As you know, as a subscriber to this list, I have made it my mission to try to educate professionals regarding the realities of private money. In this capacity, I spend a lot of time answering questions about private money. I figured it was about time to prepare a FAQ on private money and share it with this group. So here you go.

-What is private money used for?

Private money is generally used as a bridge: a way to get from point A to point B. It is generally a short to medium term solution (1-6 years), and there is nearly always an exit strategy going in. It is used for all types of real estate secured financing: commercial retail, restaurants, hotels/motels, marinas, elder care facilities, industrial, agricultural, raw land, land development, construction, rehab, multi-family, single family homes, manufactured homes, and floating homes. For a list of our private money loan programs, click here.

-What are the interest rates?

Private money rates generally range from 10 to 15%. The rate is determined by looking at a combination of factors: (a) LTV ratio, (b) strength of borrower, (c) condition/desirability of property, (d) actual cash-in or real equity contributed by borrower. Typically our rates fall in the 12-13% range. A list of our loan guidelines may be found here.

-What fees are involved?

We charge a loan fee generally equal to 5% of the gross amount of the loan. We also charge a doc prep fee ($675 or more, depending on the size of the loan), a property inspection fee ($500 or more, depending on the location of the property), and a collection account setup fee ($470 or more, depending on the size of the loan). There are no hidden junk fees.

-Can the fees be paid from the proceeds of the loan?

Yes, if there is enough equity in the project. This is frequently the case.

-Is there a pre-payment penalty?

Most of our loans have no pre-payment penalty.

-Why would anyone pay those kinds of rates and fees for a loan?

There are many reasons why a borrower would choose to use private money over a cheaper institutional option. For example, professional real estate investors like to use private money when buying because they are able to make offers which are not constrained by long timelines and numerous rigid conditions. Often times speed is a very significant factor in completing a profitable transaction and in those cases it often makes sense to pay for a short-term private money option rather than loose the deal. Frequently the condition of a property won’t allow for the initial financing with conventional money, and in those cases private money may be used. Often the type of property is a factor: banks don’t like lending on raw land and lots, but private money lenders are more inclined to do so. Cash leverage is another factor. Fairfield Financial, for example, loans based on the true value of a property, not the purchase price, so sometimes we lend most of the acquisition cost for a property.. The structure of the deal may be a factor. Most private money lenders allow the buyer to establish their equity through the mechanism of a seller carry back; banks won’t do this. The list goes on and on.

-What is the most common use for private money?

Our most common loans are probably construction, rehab, and land development loans. We have an entire FAQ devoted to these loans at: http://www.privatemoneysource.com/articles/rehabfaq.php

-How fast can private money loans close?

We have been known to close loans in a matter of a few days, but more typically, you should figure on 10-15 business days. (Keep in mind that it is only possible for us to move quickly if the borrower, broker and other third parties are moving quickly as well.)

-is an appraisal required?

Some private money lenders require them. We don’t. Evidence of value is a critical part of the private money loan process. However, it is our opinion that a good set of comps is just as effective in establishing value as a good appraisal. Many of our borrowers are professional investors, and we feel that they are qualified to perform the value analysis. This allows us to streamline the process. However, it is important to note that putting together a god set of comps is hard work. See the following article on our website for a detailed description of how to prepare a proper value analysis: http://www.privatemoneysource.com/articles/comps.php

-As a mainstream mortgage broker, I don’t see much of this type of thing. Why should I be interested in private money?

To be perfectly frank, it is my belief that mainstream mortgage brokers are being slowly squeezed out of the industry. Lenders are ramping up their operations to better provide online loan sourcing directly to borrowers. We saw a similar thing in the travel industry. The travel agents that have survived, and even thrived, are the ones who effectively established niches within the industry. It is my belief that the same will ultimately be true for mortgage brokers. Plain vanilla loans can be easily processed in an assembly line fashion which easily translates to the world of the novice and a web browser. Niche lending, on the other hand, tends to be a hand-crafting of sorts, and cannot be easily automated. Look at private money. There are no absolute rules. Many factors must be considered in making a decision and frequently those factors are intangible. Ultimately a high degree of thought work and common sense is involved. Private money will always be a people process. So if you tell me, I am not interested in private money because I don’t do unusual loans, I say to you, you might want to reconsider.

-As a mortgage broker bringing you this transaction, how do I get paid?

It is simple. You bring us a borrower. We price the loan to you. (Think of yourself as a wholesale buyer.) You price the loan to your client, adding your fees as appropriate. You stay involved in the loan (or not) as you choose, and prior to closing, you submit a fee demand to escrow and receive a check directly from the title company. For more information on this topic, see: http://www.privatemoneysource.com/brokers.php

-Why do they call it hard money?

It is difficult to find an answer to this question. I’ve heard plenty of speculation. Some people say that it’s because the money is used for hard to do loans. Others say it is because the loans are hard to get or hard to pay. It is my belief that it is called hard money because traditionally it has been real money in the sense that it is not borrowed. Institutions loan borrowed money, and in this sense they loan soft money. However, I must point out that things have changed a bit over the years, and these days a good deal of hard money is in fact borrowed.

-How do I go about doing a private money loan with Fairfield Financial?

There are basically four steps.
(1) First, run the concept by us. The best way to get started is to provide us with a high level summary of the loan. You may e-mail a summary, or you may use our online submission engine, which will walk you through the process. It is quite simple to use. You will find that at: http://www.privatemoneysource.com/loanproposal.php

(2) If we like the project concept and feel that the numbers are acceptable, we provide you with a rough quote.(3) Once you approve the rough quote, we provide you with a list of items that we need to receive and review in packet form.

(4) We then review this loan packet. We ask that this be sent via overnight mail or send via e-email, as a single Adobe or Word attachment.

(5) If all this checks out, we ask the borrower for a deposit (average amount = $1,000). This should be in the form of a cashier’s check or money order. We provide a conditional loan commitment letter at this time.

(6) We send someone out to inspect the property.

(7) If the property checks out, we draw up the documents and close the loan through escrow.

-Is the deposit check refundable?

If we close the loan through escrow, the deposit is applied as a credit to the loan fees. If we don’t close the loan because (a) the borrower does not or cannot perform or (b) the project upon inspection is “significantly” different than as represented, we keep the deposit to reimburse us for our costs. Otherwise, if Fairfield fails to perform for any reason, we return the deposit to the borrower.

-What needs to be included in a private money loan package?

As I said, we provide a list specific to your loan scenario. However, if you wish to see a list of our general packaging guidelines, please see the following: http://www.privatemoneysource.com/packaging.php

– Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Good news for real estate markets: could this be the actual turn around we’ve been waiting for?

December 5th, 2012

Clay Sparkman

I posted this on my broker blog post recently. It is slightly dated, but the good news motors on. Let us celebrate the positives. (Yet, at the same time, let’s hope that we don’t go over a certain fiscal cliff, out of control and doing 90 mph. It will be interesting to see how that one plays out–or not–and what impact the solution–or non-solution–has on real estate markets in 2013. Any thoughts on that?)

During the past five years we’ve–most of us who make our money in the real estate market (in one way or another)–had a pretty rough time. Certainly, few of us ever anticipated that we were in for a slump of five+ years. And, of course, there have been the false-starts along the way (several)—real heart breakers.

But now, for the first time, I believe it is safe to say that there is solid evidence that a real turn around—however slow—is underway. And it seems that many of the big thinkers in RE markets would tend to agree. In that spirit, I thought we should celebrate a little. I wish to share (here) three articles that I found to be both compelling and encouraging.

Economists: Housing recovery finally here

CNNMoney, 10/3/12

http://money.cnn.com/2012/10/02/news/economy/housing-recovery-economists/index.html

Home Prices Rise Again, This Time on the Low End

The New York Times, 9/25/12

http://www.nytimes.com/2012/09/26/business/home-prices-climb-again.html?_r=0

Housing Market Recovery Hits New High in September

Forbes, 10/23/12

http://www.forbes.com/sites/trulia/2012/10/23/housing-market-recovery-hits-new-high-in-september/

– Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.