We’ve been getting quite a few calls from new investors lately who are interested in investing in trust deed secured loans. This makes a certain amount of sense to me, as a number of factors are lining up to enhance the attractiveness of this type of investing. The factors I have in mind include the following:

• The stock market is highly volatile.
• Treasury securities pay almost nothing and are only rated AA+ (by–as you know–one particular rating agency).
• Most investors wish to diversify beyond commodities markets such as gold and other hard metals.
• Trust deed secured loans are backed by actual collateral to facilitate recovery in the event of a default. Very few investments, if you think of it, actually have a backstop.
• There seems to be a growing sense among economists, various experts, and those who deal in real estate markets that real estate values are not likely to fall significantly during the next few years (though they may continue to decline in certain areas).
• As I noted in an earlier post, Miami markets are fast on the mend. What is happening there? (investors from all over the world have decided that property values are at a low and are swooping in to buy excess inventory, thus driving prices up. This may be the beginning of a potentially nationwide trend. Investors tend to be bearish by nature, so when they think a market has pretty much bottomed out, it is worth paying attention to this collective information.
• The point about the market more-or-less bottoming out seems to apply most particularly to commercial real estate.
• And of course, as an investor you have a buffer against a reasonable amount of depreciation in your collateral market. For example, if you lend on a certain property for one year at 65% LTV and if values in that market fall by 8% during that year, you’re most likely going to come out whole if you have to take back the property. (The markets for rentals appear to be strong.)

Let me know if you have any additional thoughts regarding pros and/or cons of investing in trust deed secured loans at this time.

On a related  note: this is a very specialized niche blog. Currently there are 123 subscribers, and I don’t have any way of knowing how many people read the blog through and RSS feed. (This compared with my private money for borrower/brokers post which has 1750 subscribers and an unknown number of RSS readers). I rarely every receive comments back from the readers of this blog–and don’t get me wrong; I understand this as I don’t often comment on the blogs that I myself read (I tend to silently enjoy them). Yet I sometimes lose steam as I begin to wonder if folks out there are actually reading this stuff.

I am going to do something now that I ordinarily only do with my wife: beg. If you are reading these posts (or at least a few posts here and there when you have the time), would you be so kind as to send a quick note back or post a message saying so (nothing fancy; just an “I read this blog” sort of thing)? I would appreciate it greatly, so please, please, oh please … <begging part>. There, that wasn’t so bad now was it.

The other thing that would be quite helpful is if readers would give me some indication of what they would like to see in future posts. With some 17 years in the business, I am capable of writing a decent post with regard to just about any aspect of the private money investing business, but I get to a point where I simply don’t know where to go next. This is your chance. Put in a request, and I’ll do my best to give you something worthwhile back. Deal?

– 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’ve been through nearly 3 ½ rough years in the real estate market—and projections seem to indicate that we will finally see clear up-turn in the second half of this year, but no one really knows for sure.  We have managed to survive this down-time (thus far) and continue doing loans even in the face of uncertainty to borrowers and investors.  Certainly our loan volume is down.  Less people are borrowing for projects at the moment (though we are starting to see some upturn there) and our investors are being more conservative given the level of uncertainty.  The key areas we look, I would say, even more carefully than we did before the crash are:  (1) LTV: we used to do a lot of stuff at 75%.  Now most of what we place is at 65% or less.  (2) Professionalism of the borrower: we want to see that the borrower is proceeding with caution, has done his/her homework, has backup strategies in place, and has a reasonable track record.  (3) Exit strategy: it is hard to be certain in this climate that an exit strategy will work, but we beat this to death to be as sure as we can that there is/are one or more ways to exit the loan.

Rigorously following these guidelines has served us well and has generally worked out well for our investors.  By way of example, here are four loans that we have closed (or are in the process of closing) recently.

Mini-condos for simple living on the Washington coast

1.     Loan Amount: $286,000

2.     Term: 1 year

3.     Interest Rate: 13%

4.     Monthly Payments: $1,895.83 Interest Only

5.     Construction Holdback Account: $265,000

6.     Security:  Deed of Trust in 1^st Position security interest in real property at xxxxxxxxxx

7.     Projected Value by Borrower Comps: $476,000

8.     As-is Value by Borrower Estimate $30,000

9.     As-Is Front End LTV Borrower Estimate:  70%

10.     Completion LTV by Borrower Comps:  62%

This loan is to provide funds to build four detached condos on the Washington Coast.  The borrowers, xxxxxxxxxx of xxxxx company requested a loan of $286,000 to provide funds for the construction and various loan costs and closing fees.  $265,000 of this was deposited into a construction holdback account.  The borrowers have $21,000 invested into the purchase and clearing of the lot so far, which is effectively being considered as their down payment or skin in the game.

This will be the 3^rd group of condos that the borrowers have built.  The first set of condos was built in the fall of 2009, and the borrowers report that they sold in approximately 2 months.  The 2^nd set was completed in the fall of 2010 (this is an existing construction loan with Fairfield), and at least one of those units has been sold for the full asking price.  The borrower reports that there has been a lot of activity and interest in the remaining units.

Partner xxxxx  is a realtor, and her husband is the contractor who will do the actual construction.  The borrower plans to exit this loan through the sale of these condos, and has requested that each condo be released with a principal reduction of $75,000.

The property is located on a cul-de-sac approximately 1,800 feet from the average high tide line, and two blocks from public beach access. These condos will be 480Sq/Ft with a full kitchen and bath, and made with eco-friendly materials.

Adult care facility in Washington

1.     Loan Amount: $270,000

2.     Term: 24 Months

3.     6 months minimum interest

4.     Interest Rate: 14%

5.     Monthly Payments: $3,150.00 Interest Only

6.     Security:  Deed of Trust in 1st Position security interest in real property at xxxxxxxxxx

7.     Value of Collateral by Appraisal:  $750,000

8.     LTV based on Appraisal:  36%

The borrower, xxxxx, inherited an adult care facility approximately 2 years ago.  She requested this loan to funds to pay the probate and costs incurred in the transferring of the estate.

The subject property is a 4402 SF 8 bedroom 3-bath home being used as an adult care facility.  There are several outbuildings being used as rentals to the borrower’s family.  Leases were provided.  The home sits on 5 acres, adjacent to a bare 5 acre parcel that is also being used as additional collateral.

Vacation rental in central Oregon

1.     Loan Amount: $120,000

2.     Term: 36 Months

3.     6 months minimum interest

4.     Interest Rate: 13%

5.     Monthly Payments: $1,300.00 Interest Only

6.     Security:  Deed of Trust in 1st Position security interest in real property at xxxxxxxxxx

7.     Value of Collateral by Borrower Comps:  $227,900

8.     LTV based on Collateral by Purchase Price:  53%

The borrower, xxxxx company had negotiated the purchase of this property for $150,000.  The seller was in financial distress and needed to sell quickly.  The borrower believed that this price was well under value (the list price was reduced to $199,500 on 12/8/10), and were requesting 10K for cosmetic improvements.  They put down 25k, and the seller is carried back another 25K to make the loan work.  The loan was personally guaranteed.

The subject property is a 1,618SF home that will be used as a vacation rental.  It is located in the xxxxx subdivision which has amenities such as a club house, swimming pool, excessive common grounds use, and paved bike paths.  The property has 3 bedrooms, 2 baths, fireplace, and wrap around deck.

Self-storage facility in northern Washington

1.     Loan Amount: $375,000

2.     Term: 36 Months

3.     6 months minimum interest

4.     Interest Rate: 12%

5.     Monthly Payments: $3,750.00 Interest Only

6.     Security:  Deed of Trust in 1st Position security interest in real property at xxxxxxxxxx

7.     Value of Collateral by Purchase Price:  $565,000

8.     LTV based on Collateral by Purchase Price:  66%

The borrower, xxxxx, is an experienced owner and operator of self-storage facilities.  He had the subject property under contract for $565,000, and was seeking a loan of $375,000.  There was approximately $20,000 in credits that the seller agreed to provide, and the borrower stepped up with a down payment of approximately $200,000.

The borrower plans to live on site and manage the property which will greatly reduce his personal living expenses as well as eliminate the wages that are currently being paid to an on-site manager.  In addition, he plans to install a self-service Kiosk that would allow easier access for new tenants to sign up 24/7.  He also plans to improve the signage, making the property more visible.  Finally, he will offer a $1 first month move in special and change the name of the property from xxxxxxxxxx to yyyyyyyyyy.  He believes that this name change will improve the search engine rankings and ultimately increase occupancy.  Through these changes the borrower believes that he can increase his occupancy from the current 50% to 80% in the first year.

The borrower plans to exit this loan by refinancing with and SBA loan.  More info regarding the feasibility of this exit strategy is described below.

The subject property is consists of 2 lots with a combined 2 acres and 22,923SF of rentable space over 7 buildings.  In addition, there is a small 2br 1ba manufacture home on the property.  The property was reported to be in excellent condition, and located in a prime spot in northern Washington.  There are several self-storage facilities in this area, which are reported to have low vacancy rates.

The current occupancy rate is at 50%, which the borrower attributes to the current “absentee owner”.  As far as he can tell, there isn’t much for marketing activity and no incentive for the on-site manager to increase their workload by working to increase the occupancy.

– Clay (sparkman@lendicom.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.

One of my long term objectives with this blog is to eventually walk with you through all of the private money loan processes and procedures, from the moment of conception until death (death of course not being a bad thing in my chosen metaphor, but simply meaning loan payoff, workout, or foreclosure).

This post deals specifically with the loan packet submission process (not quite conception, but in the early infancy stages you might say).  When working with either brokers or borrowers, it is very important to be specific regarding precisely what items are needed in order to properly review the loan in detail.  Presumably at this point, you will have reviewed the loan in concept, via a verbal interview or some form of written summary or submission and would like to take the next step and review a detailed paper (or electronic) packet.

It is also important at this point to very clear with brokers or borrowers regarding how and where and in what form to submit the packet, and if you require a deposit, as we generally do, this would be the time to ask for it.

And so, these are the guidelines used by my company, Fairfield Financial.  We have developed these over the years and they are pretty good, but keep in mind that these are only guidelines and that each situation is unique and may require additional underwriting items that are not mentioned here.   Also keep in mind that there is an element of style or expectation involved here, specific to the individual lender.  Our goal is to attempt to obtain all information that might have more than a negligible impact on the decision process.  You want to be thorough, but you don’t want (I think) to ask for every possible imaginable item.  (That would make you too much like a bank now, wouldn’t it?)

When submitting a loan proposal, please include:

• Residential loan application (1003) or equivalent (MUST BE SIGNED BY BORROWER)
• Signed and completed Fairfield Disclosure Forms
• Current tri-merge credit report (if loan is submitted by broker; if borrower submits directly, Fairfield will pull report)
• Trio of subject property (or other type of detailed spec summary)
• A good comp set, appraisal, or some other objective and transparent case for value
• Photo(s) (if not included in an appraisal)
• Cover sheet describing/summarizing parameters of loan
• Preliminary Title Report(s) for all properties
• Payment history on all loans encumbering the subject property (or properties)
• Payoff quote on present loan(s)

If borrowing entity is corporation

• Company financials (income statement and balance sheet)

If purchase

• Valid executed earnest money agreement (contract to purchase)

If credit history is rough

• Explanation of circumstances
• Supporting documentation to show status of resolved items

If present loan is in default

• Explanation of circumstances

If raw land or builder ready lots

• Supporting documentation (government correspondence/code) to address development plan and demonstrate likelihood of completing development according to plan
• Copy of zoning documentation and explanation of possible land uses
• Description and status of utilities and access to the lots
• May want signed affidavit from Borrower regarding completion status of lot(s)

If floating home

• Copy of registration
• Recent float survey
• Copy of lease (if slip is leased) or owners certificate (if slip is owned)

If leased land

• Copy of lease on land (or usage permit)

If 2nd or subordinate position loan

• Copies of notes and Deeds of Trust for all superior loans
• Payment histories and statements for all superior loans
• Payoff statements for all superior liens

If construction/rehab loan

• Summary of project
• Builder credentials
• Copy of contractor’s License, bond and insurance
• Detailed line item budget
• Supporting documentation to backup detailed line item bids/estimates
• Plans (if floor plan is new or changing)
• Copies of permits already obtained

If Income Property

• Copies of all leases and rental agreements pertaining to the property.

Our Guidelines:

Region:

Alaska, California, Colorado, Florida, Idaho, Georgia, Montana, Nevada, New York, Oklahoma, Oregon, Texas, Washington, and Wyoming

Loan Amounts:

$50,000 minimum, no maximum

Interest Rates:

10 – 15% on firsts

Term of Loans:

1 – 5 years

Amortization:

Interest only

Broker Fee:

Typically 5%

Other Fees:

Document preparation: $675 to $2,900; Collection account set up: $470 plus $1 for each $1000 of the loan amount; Property inspection: generally $250 to $1000

Pre-pay Penalties:

None

– 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.

Sure, we each have “teams” of lawyers, Realtors, title agencies, finance people, insurance agents, and contractors working with us, but don’t kid yourself – real estate investing is largely an individual sport.  Many investors have neither receptionists to greet them when they show up to work nor water coolers around which to shoot the bull with co-workers.  Besides the lack of regular camaraderie, we don’t get a lot of feedback from others in how we’re doing at our jobs, either.  Whereas W-2 employees get performance reviews, we just get rent checks and mortgage statements.  I frequently feel like no one else understands what I’m going through, so first, let me express my appreciation for all the encouragement I received from my peers, the other players in this life-sized game of Monopoly, on my earlier article, “Grumblings of a Slum Lord in the Post-Bust Environment.”  I pride myself on my logical and critical thinking, as I’m sure do many of you, which is certainly the source of much of my frustration in the face of illogical and reactionary lending policies.  When I wrote my earlier article, it was just a way to get those frustrations off my chest, but it’s been reassuring to know that others can understand and appreciate my pain, and even share some of my perspectives.  It helps me know I’m not crazy.

Thank you also for the compliments on the clarity of my writing and how it explained challenging concepts in everyday layman’s terms.  I’m thrilled that the article was so well-received and that my peers found it entertaining, if not helpful.  I often debate with people who don’t appear to understand the workings of a “market,” and one of my goals in writing the article was to help enlighten them.  Many of them believe that rents would skyrocket without rent controls or that wages would plummet without a minimum wage, whereas you are much more likely to agree that artificial controls worsen the very problems they’re created to solve.

But that’s enough gushing and philosophizing; let’s jump into the epilogue to my earlier rant. …

Congratulations are in order!  …for me!  We finally closed on that six-unit apartment building we were in contract to purchase as a short sale.  (It only took ten months to bring that deal to the closing table!)  We have some minor repairs and maintenance to perform there, and one vacancy yet to fill, but the hard part is finished – any decent managing company could handle the ongoing responsibilities … and we’re giving some thought to formalizing our management company.  When we close on our next building, I’ll have enough “equivalent experience” to permit me to become a NY-licensed real estate broker without having to apprentice as a salesperson, and then we can hire a salesperson to be our in-house property manager.  If we join the association, we’ll even be able to list our own rentals in MLS to save on commissions.

Getting the word out about our borrowing gripes, both through my earlier article and by crying on the shoulders of anyone who would listen, we actually found leads for a few reasonable lenders that may want to work with us.  We also stumbled into an introduction to a private lending consortium that might want equity stakes in our future deals.  Consequently, we’re moving forward on the seven-unit building we mentioned in the last article.  We conducted our inspection last week and my “team” is hashing out the contract terms at this very moment.  I’m much more confident that we’ll actually be able to get financing … but I’m still insisting on a financing contingency, just in case.

The bank that initially denied our application to refinance our two-family house rather than make a counteroffer has surprisingly reconsidered their position.  I’m shocked.  One day I got a denial letter and my application fee refunded, the next day I got phone calls asking for the application fee back, and the next day I got a letter with a counteroffer.  Apparently their left hand doesn’t know what their right hand is doing.  These are also the guys who wouldn’t give me a straight answer as to whether I was employed (70% LTV limit) or self-employed (50% LTV limit), and *surprise*, I’m apparently employed!  I promptly accepted their commitment and hired a title company.  There are a few final due diligence items we have to provide, and we’re hoping to close in 2-3 weeks.  Incidentally, I haven’t sent back the application fee, and they seem to have forgotten about it.  (I hope they’re not reading this…)  Depending on how everything turns out, I may even give them a shot at financing the seven-unit building, too.  …but I still wouldn’t want to own shares of their corporation.

My own bank continues to baffle me.  After accepting that commitment from another bank to refinance the two-family house we own outright, I went back to the lending officer at my bank who didn’t want us using his HELOC as a down payment for a new loan.  I told him we’d use this cashout as the down payment for our next loan, but he still wouldn’t do it, arguing that we’d still be financing the new building entirely with debt, and that his underwriters weren’t comfortable with that.  I can see his point (if I really squint and crane my neck), and the crazy thing is that after debating with him, I honestly believe he can see my point, too.  Our total property value is greater than our total debt, so overall we have a reasonable LTV ratio.  However, since we own several properties, you could juggle the numbers to argue that any one individual property is 100% financed.  Logically, if you want to assign that much of our debt to the one property, it only makes the other properties look proportionally better, but if you then myopically only consider the one property that you’ve made appear over-leveraged by unfairly assigning debt to it, you end up with his underwriters’ concerns.

It’s not just the lenders who are as sharp as marbles, either.  The two side-by-side three-family buildings we wanted seem to have fallen through.  I thought we would have been considered for sainthood for our offer to this seller; he accepted it without a moment’s hesitation.  We wanted both buildings and were willing to pay cash.  He had four different loans that were going to need short sale approval and only two of the six units were rented.  Most people wouldn’t have touched it.  We paid for the inspection and there were no big surprises in the report.  We were all ready to negotiate contracts, but the seller’s attorney advised his client not to accept *any* contract changes we requested … and wouldn’t return my attorney’s calls.  Many of the changes we requested were just boilerplate minutia that we would have been happy to negotiate or concede, but there were a few deal-breakers that we just couldn’t waive.  For one, the two buildings share a common furnace, gas meter, superintendent, and fenced back yard, even though they were two lots.  We didn’t want to end up owning just one of the buildings under any circumstance – both or neither.  We needed each contract to be contingent on the other, and we couldn’t get their attorney to even discuss it with our attorney.  In hindsight, I think there are better deals out there anyway – in fact, my broker keeps sending them to me.

So, that’s it, then – you’re all caught up on our exploits and adventures.  We’re still looking at new opportunities and still trying to streamline and improve operations on our existing ones.  I’ll contact those new leads I got to lenders and mortgage brokers until I find some that want to make loans.  (Hopefully this means the pendulum has started swinging back to center.)  I’ll still consider other options, like private borrowing from friends, relatives, and associates, paying them more on their loans than their banks would pay them for savings.  I’ll negotiate with sellers to try to get them to hold notes on the buildings I buy from them.  I’ll keep my eyes and ears open for other opportunities to finance my investments, and I’ll try to keep my mind open to new ideas.  If anyone reading this is or knows of any banks, brokers, or private lenders who want to work with investors buying multi-family commercial-sized buildings, please contact me!  I don’t want to publish my email address here, but you can find it at http://MaverickStructures.com.

Brian Blum is the founder and operating manager of Maverick Structures LLC, a real estate investment, rental, and management company.  He owns, rents, and manages several pieces of investment real estate, and is always on the lookout for good opportunities, reasonable lenders, and rational partners.  Brian also founded, owns, and operates Maverick Solutions IT, Inc, a technology consultancy and support provider, serving mostly schools, NFPs, and SO/HOs in the New York Metro Area.

I have always believed—and history seems to bear this out—that when the status quo becomes problematic, new opportunities present themselves.   Certainly the real estate economy of the past three years has proved problematic, and so as private money investors we are called upon to seek out those borrowers/investors who have encountered and successfully engaged those new hidden opportunities to create wealth in difficult times.

I would like to present here, by way of example, one real estate investor in particular who has done precisely that.   Mr. X saw opportunity in a Las Vegas real estate market turned upside down.   He assembled a crack team and began buying REO properties at heavily discounted prices from banks.   He used private money, along with his own funds, to buy, rehab, and either quick-flip or hold (depending on the particular circumstances) single family residences and multi-unit properties in the city.

He came to us to help fund his projects, and we have been thrilled to see him perform impeccably on loan after loan, grow his wealth position, and persistently decrease his leverage position (at a time when many real estate investors are doing just the opposite).

Our private money lenders are coming to us and asking for the chance to do more loans for Mr. X.   We just finished closing another 4-plex rehab loan for him and are now in the process of placing a very attractive 10-plex acquisition and rehab opportunity.   By way of illustration, I have provided the prospectus below.

Kristopher Gillmore

Fairfield Financial Services, Inc

3327 SE 50th St, Portland, OR 9706

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

REAL ESTATE PROSPECTUS

SECURED LOAN

Purchase and Rehab of 10-plex in Las Vegas, Nevada

Loan Details

1. Loan Amount: $210,000
2. Term: 2 yr
3. Interest Rate: 13%
4. Monthly Payments: $2,275.33 Interest Only
5. Security:  Deed of Trust in 1st Position security interest in real property in Las Vegas, NV 89102
6. Value by Borrower Estimate / Comps is $350,000
7. LTV by Borrower Estimate / Comps is 60%

Loan Overview

A loan for the purchase and rehab of this property has been requested by Mr. X’s company, xxx, LLC.   Mr. X is requesting $98,200 for the rehab of this property, and will be making a down payment of approximately $16,000.   Mr. X will personally guarantee this loan.

Mr. X is experienced flipping homes and multi-family homes in Las Vegas, and has rehabbed well over 200 properties in this area.   He currently holds 65 properties in his inventory.  38 of these homes are free and clear and all but 2 of his properties are rented and producing income.  Mr. X reports that these properties are for sale or pending renters.

Mr. X has successfully completed four loans with Fairfield over this past two years.  In each of these loans the construction was completed and the properties were listed in under a month.  Both houses were sold and the loans paid in full well before the loans matured and Mr. X has never been late with a payment.  In addition, Mr. X currently has five active loans through Fairfield.  These five loans are on 4-plexes that he is holding as rentals, and like the first four loans.  Each of these rehabs was completed and rented in approximately one month.  Each property has a positive cash flow and Mr. X has never been late with a payment.  To exit this loan, Mr. X will seek conventional financing once renters are in place.  He anticipates that it will take around a year to get this financing in place.

Property

The subject property is 5,500 SF and has 10 units.  There are eight 1 bedroom and 1 bath units, and two 2 bedroom, 2 bath units.  The 10-plex was built in 1956 and sits on a .15 acre lot.

Based on other rental properties that Mr. X owns in this area, he anticipates that property will rent for $4,300 / month total ($400 / 1-bed and $550 / 2-bed).  Mr. X aggressively markets his rentals which are all newly renovated and priced lower than his competitors.

The building is structurally sound, but is in need of cosmetic repairs.  Mr. X has agreed to make all of the repairs to this property out of pocked ($98,200), and will submit one final draw for reimbursement once this property has been completed.

This property is in a prime location, within walking distance from the Las Vegas strip.  It is located approximately ½ mile from the Stratosphere hotel and casino, in close proximity to some high end developments like Allure Towers, Soho Lofts, and Newport Lofts.

Valuation

Comps by Borrower

To determine the completion Value, Mr. X’s partner and realtor, Mr. Y, has provided some recent comps for multi-unit properties.  Based on the price per unit of these comps, location, and expected rents, Mr. X estimates a conservative value of at least $350,000 for this property.

In July 2010, a property inspection was performed for a 4-plex in a similar neighborhood (829 Held Road).  It was suggested by our inspector that a conservative value for this property would be $180,000.  Because these are both multi-unit income properties, the approach used to calculate this value should be similar.  Based on the inspectors estimate of value for this 4-plex, Mr. X’s estimate of $350,000 for a 10-plex seems reasonable.

Income

We were provided with a signed 1003 for Mr. X, which states a monthly income of $30,000.  In addition, he states a net rental income (not including taxes and insurance) of $72,180, and a net worth of $7,258,000.   A copy is provided here for your review

Credit

Mr. X has a mid credit score 575.  His credit score has dropped substantially due to late payments on a Mercedes for which his ex-wife is responsible.  Mr. X said that his name should not be on that anymore and he will look into it.

Market Analysis

There is ample information available for residential market conditions.  By utilizing sites like zillow.com and altosresearch.com, we can see that the residential market has been in decline for the past 2 years.  Altos research.com provides graphs of the average price, price/SF, days on market, and the number of homes on the market.  These graphs are provided for your review.

Most notably, the graph showing the number of homes on the market (and recent reports of a 2^nd wave of foreclosures) suggests that increased foreclosures continue to force people out of their homes.  The number of homes on the market has increased by approximately 10% over the past 6 months.

Mr. X states that this downturn in the residential real estate market has been one of the keys to his success.  Mr. X stopped flipping houses approximately one year ago, and started buying rentals.  In this market he’s able to purchase these properties below market value and rehab them quickly, so that they cash flow with hard money rates with minimal vacancy.  The fact that these rentals are newly renovated and competitively priced in a market where more people are renting, has allowed Mr. X to make a lot of money over this past year.

Now that’s some kind of lemonade!

– 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.

There has been quite a bit of talk in 2009 about the possibility of a meltdown in the market for commercial real estate.  I came across some statistics recently that were quite astounding in support of the idea that a wave of commercial defaults is coming.  It is estimated, apparently, that there is currently 3 trillion in commercial real estate debt outstanding in the US.  According to this particular source (which I’m sorry to say I don’t recall), 1.3 trillion of that debt will come due within the next four years.  As we all know, there doesn’t appear to be much in the way of new commercial funding available for those current loan holders (or their potential buyers), so the above statistics—on the face of it–would tend to be worrisome.

Still, 4 years is a long way out.  I personally suspect that we will get a much better feel for what is likely to occur over the long haul by looking at what happens in 2010.  But I am not a prognosticator.  You’d think that with a degree in economics, I might have the ability–or at least the inclination–to analyze and predict long-term economic trends.  But I am not that kind of guy.  I am more of a “sure it works in practice, but does in work in theory” kind of guy.  I like the type of economics where you look at what happened and then play with the numbers and try to figure out why it happened that way.  Those familiar with Freakonomics and SuperFreakonomics by Levitt and Dubner will know what I am talking about.

I recall my first day in a big lecture hall at University of Oregon attending Macroeconomics 101.  I was a fresh faced kid eager to learn and ready to believe just about anything.  When the professor said something like this:  “Okay the fundamental assumption that we will make as economists is that people are rational and that they will behave in a rational manner,” it sounded fine to me at the time—perfectly reasonable.  I hadn’t been around long enough to believe otherwise.  It was only with the passing of years, after graduating from the university and going to work in the real world, that I began to question that assumption.  And ultimately I concluded that it was downright ridiculous.  My entire economics education was based on one fundamental and ridiculous idea. It would be as though we had utilized a chicken bone as the foundation for building a skyscraper.  (Needless to say, I was not happy when considering the amount of money I had spent obtaining this degree.)

A very good read which speaks to the matter is Predictably Irrational, by Dan Ariely.  The bad news, if you wish to draw conclusions from this book, is indeed that individuals often engage in irrational behavior.  However, the good news and the saving grace–I should think–if you are trying to understand human behavior in the aggregate, is that we are as it turns out quite predictable in our irrational behavior.

Where was I then?  Oh yes … my fundamental point is that I would rather not go too far down the road of attempting to predict the economic (or any other) future.  I will only go so far as to say that I’d rather it not happen.  But it is worth pointing out that a downturn such as that discussed may not be all bad for those who invest and traffic in private money loans.  If banks aren’t lending as 1.3 trillion in loans come due and with private money lenders as the primary option, the pickings would be quite impressive indeed for those who choose to keep investing.

So what do others have to say?  As per usual, there are a wide range of opinions.  And they tend to be somewhat polarized.  I myself tend to think that the doomsday people somewhat undermine themselves by being so certain and unrelenting, but at the same time, I am suspicious of anyone who says that things are looking good.  I figure the later must work the national association of realtors or some such thing.

I guess we’ll each have to decide for ourselves, and so here is a sampling of web content regarding the matter.

From the Dallas Morning News

http://www.dallasnews.com/sharedcontent/dws/bus/columnists/chall/stories/DN-Hallcolumn_09bus.ART.State.Edition1.3cf46e6.html

From the Business Insider

http://www.businessinsider.com/michael-panzner-commercial-real-estate-2009-11

From the National Real Estate Investor

http://nreionline.com/property/retail/foreclosure_in_doubt/

From the Real Estate Channel

http://www.realestatechannel.com/us-markets/commercial-real-estate-1/national-association-of-realtors-lawrence-yun-nar-commercial-real-estate-index-commercial-real-estate-trends-2009-office-space-lease-office-space-sale-investment-1273.php

From the Urban Land Institute

http://www.uli.org/ResearchAndPublications/EmergingTrends/Americas.aspx

Okay, there is plenty more where that came from, but I won’t burden you with it here; if you wish to read it, you’ll have no trouble finding it.  I would be very interested, however, in hearing the views of those who follow this site.  We are still quite small in number, but we have enough folks to fill a good sized classroom now, so by all means, raise your hand and be heard.  Please: prognosticate.

– Clay (clay@privatemoneysource.com)