(Note: I posted the following on my broker blog recently. It is oriented to toward brokers, but at the same time, I think it would be quite useful to those trying to get a handle on investing in private money loans and trying to better understand the process.)

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 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 over the past years. 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 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. (I would guess as much as 50%.)

-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 for a list of our general packaging guidelines, please see the following: http://www.privatemoneysource.com/packaging.php

– 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.

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.

As you all know, sometimes we have to be creative to get loans done in this market. One of the most critical aspects of any loan (as you well know) is the Loan to Value ratio, and there are often options for reducing the LTV to make the deal more attractive.

For purchases, the seller carry back is a great strategy. We all know that it’s a buyer’s market, so a motivated seller is going to have to really entice those buyers. In some instances, the seller will simply accept that the market demands a lower price. However, under the right circumstances, the seller could be willing to carry back some portion of the purchase price as a note in 2nd position. This clearly opens up a lot more opportunities for making a loan investment work.

Sometimes if a deal is close, but just a little high on the LTV, we will look at carrying back our fee or a portion of our fee (and any broker fees as well).  With riskier development loans, it can make a big difference to the lender if that LTV is a few points lower. By carrying fees in this manner, it gives the lender additional security if the deal goes bad. Certainly, if the broker is (or brokers are) confident in the project, and has the ability to hold off on those fees, it can sometimes make the difference between a go and a no-go.

Another option is to cross collateralize an additional property. If the borrower is able, putting up an additional property can potentially lower the LTV. At the very least, it will add security to the loan, and show the lender an increased level of commitment by putting more skin in the game.

These options don’t all work all the time and sometimes none of them work, but they do provide some nice tools for converting a marginal investment into a desirable one.

– 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.

Okay, I don’t know about you, but whenever I read news about some new development in the real estate market, my first instinct is to say, “What does this mean to me?”  Hey I’m not proud of it, but that’s just how I’m wired.

This past two weeks we read that:

(1)  GMAC and JPMorgan Chase are being challenged with regard to the legitimacy of their batch judicial foreclosures, and are in the process of reevaluating their foreclosures for possible irregularities.

(2)  Old Republic National Title said this week that it would not issue policies on GMAC foreclosures until further notice.

(3)  Bank of America, the country’s largest mortgage lender (by assets), went a step further, saying on Friday that they would freeze all their judicial foreclosure actions pending a review for irregularities.

(4)  Richard Blumenthal, the Connecticut attorney general, asked judges in his state to put a halt to all foreclosures for 60 days so the “situation” can be further evaluated.

(5)  California’s attorney general, Jerry Brown, said that Chase should stop any foreclosures in the state until it proved that it was following proper legal practice.

(6) Chase said that they have now frozen 56,000 foreclosure cases.

So as I scratch my head and try to make sense of all this, the question is floating in the ether: What does this mean to us?  And by us, I mean those of us who are involved, directly or indirectly, in investing in private money loans.

Here is what I have come up with thus far.

(1) We are very happy that we are not title companies.  They are in a tough spot.  If they insure polices for these properties, they may end up paying enormous amounts in claims at some point, and if they don’t insure these properties, they will be turning away a great deal of business, and revenues will take a serious hit.  (Fidelity National Financial shares fell more than 4% and FATCO shares fell on the order of 3%.)

(2)  I think this is primarily impacting judicial foreclosures, so those of us who lend more on the west coast and generally in non-judicial foreclosure states, may not have too much to worry about, as far as any direct impact may go.  (Though it is not clear to me what is up with Chase in California, California being a non-judicial foreclosure state.)

(3)  If you are a private money lender, you probably aren’t doing large batch foreclosures and so again the problem may have very little direct impact on you.  The issue with regard to the judicial foreclosures is primarily related to large batch foreclosure processes involving thousands of loans at a time.  Apparently the issue involved inappropriately filing for summary judgments across the board and “robo-signers” in which mid-level executives would sign thousands of affidavits per month attesting that they had personal knowledge of the facts of the case.

(4)  With regard to the economy, this may actually be a good thing.  I was talking to my dear friend and wise attorney Jeff Hill on Friday and he said that he felt that this may be a sign that, though it is going to be messy, things are beginning to come to a head.  I’ll take that idea one step further and suggest that this might actually serve as a sort of damper or shock absorber, slowing down the resolution process just enough to allow a more gentle transition to occur.  (Of course, you could see this either way.  Maybe it would be best to have it all come undone and be done with it—the sooner the better.  The corrections must eventually take place.)

(5)  I think this may open some real opportunities for those looking to buy short sale properties.  Banks are going to be screaming to get these properties off their books.  And of course that opens up opportunities for private money lenders looking for quality loans.

(6)  Certainly this is good for home owners who are in foreclosure or on the brink of foreclosure.  They may have gained 1-2 years in their homes.

(7)  And of course, as always, this will be good for the lawyers.  Any distressed homeowner who doesn’t go out and retain a defense lawyer immediately is probably missing the boat.

I guess I am being fairly optimistic here.  It is certainly going to be a messy situation and it is difficult to know how it is going to all play out.  It certainly won’t be good for the banks.  And yet do we really care anymore what is good for the banks?

I’d love to hear from some readers out there.  What unforeseen impacts do you anticipate or see coming about as a result of this fiasco?

– 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.

I’m a real estate investor.  I see opportunities in buildings – and in numbers, and I use those opportunities to create income and equity.  What I do benefits society, but I’m not going to lie to you – I am driven to do it for my own benefit, and society’s gain is a side effect.  Nonetheless, I can’t do it without society – I can’t charge more rent than the market will bear, else I won’t find tenants.

If I find a vacant building, foreclosed, neglected, and being sold off at a discount, I can buy that building, rehabilitate it, and offer it to society as additional housing options.  When I rent an apartment to a family, they have choices.  They could rent an apartment elsewhere, or they can rent mine.  If they choose to rent mine, it’s because it benefits them – it is the best choice being presented to them.  I have helped them by making that apartment one of the choices for them to consider, whereas it did no one any good by being vacant and uninhabitable.  To make that choice available to them requires an investment on my part; I have to see the opportunity.  I have to recognize that the building is being offered at a price that, after repairs, taxes, utilities, insurance, and legal costs, will earn me a profit.  I have to believe that the ratio of risk to reward makes that investment option a better choice for me than other investment opportunities; else I’d be better off choosing another investment opportunity.

If I’m too greedy, some other investor will snatch the buildings out from under me at a higher price, but if I’m too naive, I’ll pay more for a building than I have to, and my profit will be lower.  There’s something of a “survival of the fittest” element at play here, in that stupid investors tend to be out-performed by smarter investors, and that gives the smarter investors more of an opportunity to make more investments.  Even a smart investor, however, can’t possibly be a party to every deal in a geographic area, so there may be multiple investors in a given pond.

If I see a building that another investor has renovated, rented, and is offering for sale, I can alleviate him of his future risk by buying his building from him.  He might have to deal with slow-paying or even non-paying tenants, he might have to repair damages or ordinary wear-and-tear, or he might have to fight with his insurance company if his building is burned to the ground.  I undertake and relieve him of these risks, and in doing so, I create liquidity for him by redeeming his investment and a fair profit so he is encouraged and enabled to reinvest it elsewhere.  He can then buy and rehabilitate another neglected building, making it available to rent, and his motivation is that it will be a profitable endeavor for him, too, else he would make different investment choices.  When I buy it from him, although he has already done all the work to make it inhabitable and profitable, I am still undertaking risks, and I will be responsible for maintenance and management, so I still need to be compensated for my investment.  Consequently, before I will buy his building, I need to determine that the anticipated rent income will more than cover my expenses, and so much so that I will be rewarded for my investment more so than I would be rewarded in other investment choices at my disposal.  He wins, I win, and the tenants win … and the government taxes all parties to it.

Just as I can help another investor with his investment in a property, so, too, banks can help investors playing the property investment game.  Banks pay interest on deposits and charge interest on loans.  Nowadays there are many other ways for a bank to earn money, such as fees and various other investments, but the difference between the interest they charge and the interest they pay is one of their primary sources of income.  If a bank offers too low of an interest rate on savings, they won’t have money to lend, and if they charge too much interest, no one will want to borrow it.  On the other hand, if a bank pays too much interest on savings or charges too little on loans, they will not be as profitable as they could, and they will be out-performed by smarter banks.  Again, “survival of the fittest” comes into play.

Depositors are not, however, the only source of funds for bank loans.  The government also lends money to banks.  When the government lowers that interest rate, it compels banks to lower the rates they charge borrowers (in order to compete with other banks), and that makes borrowers borrow more money.  During the housing boom of the early 2000s, that was a major factor in the low interest rates banks were charging, which encouraged people to buy and refinance homes, and to take out new mortgages.  When the government raises that interest rate, (or when teaser rates expire in anticipation of that rate going up,) banks raise the rates they charge their borrowers, and that is one of the reasons that so many people can’t afford their mortgages today.

But there’s more to it than that.  There are limits to how much the government will lend banks, which is a function of how many funds they have on deposit.  When a bank lends money for a mortgage, they move towards that limit of how much they can borrow, so instead of keeping that loan on their own books and servicing it, taking perhaps 30 years to recoup their money, another government-related firm, Fannie Mae or Freddie Mac, buys those loans from them, replenishing the bank’s pool of funds for lending.  Without Fannie Mae and Freddie Mac, banks would run out of liquidity themselves and be unable to continue lending money to new borrowers.  Fannie and Freddie were chartered by Congress to buy loans, bundle them together into “mortgage-backed securities” and resell them to investors.

Fannie and Freddie set guidelines of what terms and debt-to-equity ratios were considered “conforming” loans, but as the market heated up, there was little verification of conformity, and ultimately, loans were made to sub-prime borrowers based on “stated income” or “no documentation,” rather than “full documentation” with “income verification.”  As long as the banks could unload these hot potatoes to Fannie and Freddie, they didn’t care, and as long as Fannie and Freddie could package and resell them to unsuspecting investors, they didn’t care.  Ratings agencies, such as Moody’s and D&B continued to give these mortgage-backed securities high credit ratings, encouraging pension and retirement funds to invest trillions in them, precipitating a disaster for hundreds of millions of average inexperienced investors who simply relied upon their fund managers to make decisions that they hoped would be in their best interests.

When interest rates went up and people started defaulting on their mortgages, the poison had already spread to millions of Americans and even to foreign investors.  Fannie and Freddie, who were chartered and funded by Congress, might have been fine if they had followed their mandates, but while the getting was good, they started drinking their own Kool-Aid; they started stockpiling mortgage-backed securities, investing the money that Congress gave them to perform their job – our tax money – in these poison investments.  When the ratings finally dropped, they couldn’t unload the loans to investors, so they couldn’t replenish their funds, and couldn’t buy more mortgages from banks.  Loan “conformance” guidelines got tougher and banks couldn’t unload their hot potatoes.  This meant that they had no replenishment of funds with which to make new loans.  Without loans, investors and homeowners couldn’t buy properties, and if you’ve ever studied the most basic tenets of economic theory, the principal of “supply and demand” promises that when demand decreases, prices will decrease, too.  Homeowners were now “under water.”  Not only couldn’t they afford the increased interest payments, but their home values had dropped, too, leaving many of them owing more than their homes were worth.

If you could buy a home for $200,000, or continue paying your $300,000 mortgage for a comparable home that was only worth $200,000, what would you do?  Many of them started walking away from their homes and their obligations.  Banks had to foreclose on them, but banks don’t want to be in the real estate management business, so rather than maintain and rent them, banks sell them.  Returning for a moment to basic economic theory, increases in supply also depress prices, so the foreclosure auctions further pushed the economy downward.  Banks were recouping only a fraction of their investments, making it harder still for them to make new loans.

There were a number of other factors contributing to the current economic downturn.  I haven’t even touched on how the crisis affected business loans, and consequently business development.  We can draw a clear line to connect the dots between businesses failing, stock market declines, unemployment, the credit crunch, reduced consumer spending, and a lower GDP.  That, plus increasing gas prices, tax-funded bailouts of banks and auto manufacturers that were “too big to fail,” the soaring costs of our “war on terror” and military actions in Iraq and Afghanistan, and the ballooning of government (most obviously demonstrated by the behemoth Department of Homeland Security and it’s prodigal child, the Transportation Safety Administration), have devalued our currency against other nations.  We could also discuss how inconsistent tax assessment laws and decreasing home values have created a barrage of tax grievances and court cases which have wreaked havoc with many municipalities’ budgets, creating more layoffs, reductions in municipal services (closing fire houses, reducing garbage pickups, consolidating schools, etc)  It’s really something of a “perfect storm” of financial catastrophe.

But that’s enough background – let’s get back to the story about me….  The pendulum has swung back too far; banks have become overly cautious.  They were encouraged by our government to make too many bad loans, got screwed, and now they’re reluctant to make even good loans.  As a real estate investor, that’s a problem for me.

I have three different investment properties in “the funnel” right now, and I can’t afford to close on all of them without help – one or possibly even two, but certainly not all three.  One is a six-family building for which we were waiting for the seller’s bank to approve a short sale; we’ve already lined up financing, and we’re hopefully moving forward with that one.  One is a seven-family building for which our bank just told us they’re not going to be able to lend us more money.  The last is two side-by-side three-family buildings, mostly vacant, which we may be able to buy without direct financing if we can get other ducks in a row.  Let me use these last two investments to highlight why I think the banks have gone too conservative.

If you had $1,000 in a savings account and $1,000 in credit card debt, the math is pretty simple: you have a net worth of $0.  However, if you were earning 1% on your savings and were paying 21% interest on your credit card, at the end of the year, you’d earn $10 but owe $210, so you’d end up with a net worth of negative $200.  From a purely-mathematical perspective, you’d be better off paying down the debt with the savings to maintain your net worth rather than lose ground every year in interest.  The guy who pays it down is clearly the better one at math, and the guy who doesn’t will get himself into worse and worse financial condition every year, probably never understanding why.  Overly-simplified, that’s our problem with the seven-family building.  We had some cash and a line of credit, and we used the cash to pay down the line of credit until we were ready to buy the building.  Now that we’re ready, our bank doesn’t want us to use that line of credit as a down payment for the property that we’re going to purchase with the loan they were otherwise prepared to give us.  Had we held onto the cash and not paid their line of credit down, they’d have no problem with us using that cash as a down payment, even though the end result would be the same debt, but we’d be paying interest on the line of credit in the interim.  Silly?  I think so.  If the property upon which we have the line of credit was a good investment and was sufficient collateral for the line of credit, and if the property we’re trying to buy is a good investment and is of sufficient collateral for the new mortgage, what’s the problem?  They’d apparently prefer to lend money to the guy who is worse at math.  I like my strategy better, but they seem to think they know something that I don’t.  I wish they’d clue me in as to what it is…

To fund the two three-family buildings, we’d be happy to get a direct loan, but after all the problems we’ve had with the new lending guidelines, we’ve instead tried to use equity we have on another property.  We own another small building outright and tried to get a loan against it.  They asked us what we thought it was worth, and we took an intentionally-over-inflated guess, figuring that if we guessed low, they’d never give us more money but if we guessed high, we could always borrow less.  Expectedly, the appraisal came back low, but rather than make a counter-offer, they declined our application.  I asked if we could be reconsidered at a lower amount, and they said they won’t consider another loan application on the same property until six months have passed.  What kind of stupidity is that?  To me, it should be quite simple: we have an asset that we now agree is worth $X, and we’d like to use it as collateral against a loan; the only thing left to decide should be how much debt-to-equity ratio the bank can approve, but instead, they’re just saying “No.”  I got a free appraisal (at their expense) and a refund of my application fee, and now I have to apply for a loan elsewhere.  Does that sound like good business to you?  Would you like to own shares of that bank?  I’m glad I don’t.

I didn’t want to muddy this article up with too many tangents, but there’s another thing that’s bothering me, so while I’m on a rant, let me get this one out, too.  That second bank has different debt-to-equity guidelines for people who are employed (higher) versus people who are self-employed (lower).  I asked which category I was, and I couldn’t get a straight answer.  I have several sources of income: I am employed and paid on a W-2 by a corporation.  I happen to also own that corporation, so when the corporation makes money, I get distributions on a K-1 as a shareholder.  I also earn money on my real estate investments, as reported on a Schedule E, and I have various other securities and instruments upon which I earn interest and dividends on 1099s that I report on a Schedule B.  If I sell stocks profitably, I earn capital gains, also on 1099s, which I report on a Schedule D.  If you’re going to jump to the conclusion that I am self-employed because I own the corporation for which I work, let me point out that lots of IBM and Walmart employees own shares of the corporations for which they work, but you wouldn’t think of them as self-employed.  How do you consider the people who have full-time jobs but also have side businesses DJ-ing at parties or taking photos at weddings?  Are they not, in that capacity, self-employed?  You would argue that those endeavors are but a small component of their income, and that the bulk comes from their regular jobs.  If so, then the bulk of my revenue comes not from my self-employed salary (if you insist on calling it that), but from my investments, so my self-employment revenue is also just a small component of my income.  As hard as I tried, I couldn’t get them to tell me how I’d be considered, so I’d never know how much debt-to-equity ratio to request, and since they don’t always counter-offer, and won’t let me reapply for six months, they’re basically telling me to take my business elsewhere.

There’s just one last thing along this vein that’s bothering me.  My corporation employs one other full-time W-2 employee besides myself.  He’s not a part-owner, so he’s clearly not self-employed.  He’d thus, be eligible for their higher debt-to-equity ratio loan.  If business gets bad, which one of us do you think is going to be fired first?  They’ll lend him more money despite the fact that his income is both lower and less secure!  Madness, I tell you.  I really wouldn’t want to own shares of that bank!

So what’s a real estate investor to do?  I’ll keep plugging away, trying more banks and mortgage brokers until I find some that want to make loans.  I’ll 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 residential multi-family buildings through limited liability companies, please contact me!  I don’t want to publish my email address here, but you can find it at http://MaverickStructures.com.  For one, I can’t wait for the pendulum to start swinging back towards center again.

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.

We are always looking for the sweet spot these days in the real estate market.  And by sweet spot, I mean that realm of  investments that are on balance less risky and more likely to turn a profit in what is otherwise a jaded real estate market.

I have gone on a bit in my blogs about REO properties, foreclosures, rehabs and quick flips–and I remain convinced that this is a sweet spot.  Investors are making some real money in this area in today’s market.

I haven’t talked much, however, about multifamily property, and it would be a shame not to, for that is another clear sweet spot in the current market.

See the following article at CoStar Group for plenty of evidence:

Investor Hunger for Apt. Properties Still Sharp in Second-Half 2010

As real estate lenders, of course, we look for the real estate investors who are working the sweet spots successfully.  We want to lend money to people who are making money and have figured out the market (or at least are figuring it out).  If the investors succeed then we succeed and it is as simple as that.

– 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.

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 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 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 300 loan requests per month these days and of those we end up pursuing maybe ten in a typical month.  On average maybe six 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.  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.

I am frequently asked by private money investors:  “… so how do we get started investing in private money loans?”  You know, there is no simple answer to this question.  I tell them that it is kind of like dating.  If we are going to do this as an investor/broker team, then they need to get to know me and how I work and I need to get to know them and how they work.  We both need to develop a degree of trust, which generally requires the passage of time and developing a sense of familiarity.  And frequently the investor (if they are not immensely experienced) needs to learn more about how private money lending works—from A to Z and back again: they need to know everything they can possibly know in order to make good choices and feel comfortable with this type of investing.

Generally this process takes some combination of phone calls, e-mails, and from time to time, a personal meeting.  It has always been my opinion that we are seeking compatibility in two areas:  (1) we are attempting to determine if we are functionally compatible.  That is, we would like to assess whether or not we offer a good fit in terms of our specific needs and, at the same time, what we can offer to one another, and (2) we are attempting to assess our stylistic compatibility.  In other words, we are attempting to determine whether we have similar values and whether we tend to function well together as a team.

I encourage “new” investors not to rush the process of getting to know me and getting to know how this type of investing works.  They are invited to ask as many questions of me as they like or need in order to reach a point of comfort, and to do so for as long as they need to.

Potential investors can learn quite a bit about private money by studying our web site and following my blogs.  And certainly, the web site is a place where they can get to know us better as an organization.

We have strong convictions with regard to the nature and integrity of the investor-broker relationship. Our basic principals may be summarized as follows:

1. We believe that fixed return instruments (Deeds of Trust and contracts) secured by real property are an excellent investment alternative.  They combine a high degree of safety and predictability with the larger returns usually associated with equity style investments.  However, as is true with all investing, it is important for the investor to move forward with a clear mind and open eyes.
2. We believe that it is our job to attempt to discover and provide to our investors all the relevant information pertaining to a particular investment offering.
3. We will NEVER pressure our investors. Our job is to provide information and provide assistance with the analysis, but not to otherwise influence the investor’s decision-making process.
4. We will not abandon our investors after a particular loan is closed. For the full life cycle of the loan, we will be available to assist our investors with the process.
5. We are not interested in one-time loans from investors, but rather in building ongoing investor relationships. We do not require an exclusive relationship with our investors, but DO ask that they engage in a relationship of mutual respect, and ask for–as well as offer–the benefit of clear and honest communication.

In addition, investors are encouraged to know and understand the following with regard to what we offer:

• We broker loans secured by beneficial interest positions in deeds of trust.  We do not pool funds.  With each investment, our investors directly hold a beneficial interest position in real estate.
• We perform rigorous screening of all loans, and present investors with a detailed packet of information designed to assist the investor in making a solid decision on whether or not to invest in a particular loan.
• The interest rates on our loans range from 11% to 15%.  This is paid straight through to the investors.  (We generally do not receive a portion of the interest for brokering or servicing the loan.)
• The investor does not pay a loan servicing fee.  (This fee is paid by the borrower.)
• We provide turnkey servicing of investor loans that we place.  We mail out payment coupons, receive and mail or direct-deposit borrower payments and perform a full range of collection accounting services, including payoff quotations, verification of mortgage and mortgage history reporting, and 1098/1099 reporting.
• If a payment is late or any other default situation occurs, we contact the borrower directly and report to the investor regarding the results of our communication.
• If a workout is required to get a non-performing loan back on track, we attempt to assist in the discovery and negotiation and documentation associated with the process.
• In the event of a potential lapse of insurance coverage, we are prepared to force place insurance using our provider, to protect the investor collateral.
• If legal action is required due to a default situation, we provide advice and guidance to our lenders and assist in leading them through the legal process—if they wish—using our legal representatives.

Ultimately serious investors will be invited to speak to one or more of my existing investors—so as to hear from those who have already been down this path with Fairfield.

Also, I have a series of questions that I always make sure to ask before I make a decision to begin working with an investor.  These include the following (at a minimum).

1. What state do you reside in?
2. We currently broker loans on real property secured by transactions in 14 states.  Would you be willing to consider trust deed investments in a variety of regions?
3. Do you want to inspect each property yourself or are you okay generally with utilizing our inspection?
4. How much money are you looking into putting into trust deeds at this point?
5. What would your optimal investment amount be per loan?  What would your maximum loan amount be?
6. How much experience do you have investing in deeds of trust?
7. Are you an accredited investor?  (Generally speaking this means that you make $200k or more per year OR otherwise have a net worth in excess of 1M.)
8. Will you consider taking a fractional share of a beneficial interest?  This means that you are a partial lender on a loan.  You take a direct position on the loan, but only a percentage share and a handful of other individuals share a position on the loan with you.)
9. What is your target rate of return?
10. Do you charge any fees or points?
11. Are you okay with having us (or in certain cases our attorney) draw the documents?
12. How fast can you generally move to make a decision on a loan?
13. Do you have any types of real estate secured loans that you particularly prefer (with regard to property types)?
14. Do you have any types of real estate secured loans that you will not do?
15. What is your own personal maximum LTV?
16. Our minimum investment into a loan is $50,000 is that acceptable to you?

Finally we reach a point where all the questions have been asked and we need to make a decision about working together.  It may take two weeks to get to this point or it may take 6 months.  Sometimes it takes a year or longer.  Remember, we are dating.  We are getting to know each other.  And we are both seeking a long-term relationship.  So we want to get to know each other well.

Once we decide that we are pretty sure we like the way things are going, we roll up our sleeves and begin working together.  At the end of the day, this is what it really takes to get to know each other and to get to know the private money investing process.  This starts with me bringing fully vetted and live loan packets to the investor, one at a time, as I finish vetting those that may be a good fit for that particular investor.  The investor is able to examine these packets in detail, ask questions relevant to the decision process, and request additional vetting or discovery if she feels such is needed.

An investor is encouraged to always say “no” if they are not comfortable with a particular offering.  But at the same time, they are expected to be timely in their response and to examine the offerings carefully and with rigor.  At the very least this is a superb learning process and in most cases, it leads to our first loan together.  And I have found that once we have done the first loan together, the rest are a whole bunch easier, and we are likely to do many more in the years to come.

– 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 national economy is in a state of confusion and the local economy is in a state of confusion. So what does this mean for the market for investing in trust deed based loans?

Well of course nobody really knows–and this is just my take on it–but here goes:  First of all, let’s talk briefly about investment choices.  With so much uncertainty in alternative investment vehicles, maybe trust deed secured loans are a pretty good place to put your money.  After all, you will have real security backing up your value, and that can’t be said about most investments.  And you certainly have the opportunity to receive a nice double digit return on your investment, and that being so even if you opt for the best and most potentially safe such investments.

The key thing to keep in mind is that real estate markets are uncertain and potentially volatile.  And thus you need to be particularly rigorous in making loan selections.  I would say that the most important keys are: (1) Make sure you know as much as possible about the recent price history of the particular market you are considering.  This will most likely allow you to better gage the potential future volatility of the market.  (2) Keep the loans either short or long.  1-2 years for quick-turn projects, and maybe 5 years to those borrowers looking for and able to afford the long hold.  The danger zone in my opinion tends to be in between.  (3) Make sure that your borrower has a solid exit strategy (no exit strategy is foolproof given the seemingly scare nature of bank financing, but some strategies look a whole lot better than others).  And (4) Keep your LTV a little lower than usual so as to better absorb potential market depreciation during the life of your loan.  We still have clients who lend 75% LTV on very solid transactions, but these days most investors feel better at or around 65%.

With regard to demand, the following is relevant once again: Markets are uncertain and potentially volatile.  How does this apply to the market for borrowers of private money? To answer this question, we have to look at who borrows private money. I would say with complete confidence that easily 80% of all of the loans that we do (Fairfield Financial) are to those who buy, sell, renovate, and construct real property with the intention of earning a profit.

The relevant point here is that most real estate investors are likely to be avoiding the long-term hold and attempting to make the good buy and turn properties for a quick profit. This is a market where properties are going back to the banks at a frightening rate, and where this spells bad news for home owners who over-borrowed, this means opportunity for the quick-strike investor. The bottom line of all this is what? Again, it’s hard to say, but I think it would be fair to conclude that if you are a private money investor (like most of you on this list), you might want to look particularly for: (1) those borrowers looking to buy and sell property on a dime to make a profit (many times you can justify lending up to 100% of fix up money and repair money to these borrowers when they are buying well), or (2) borrowers that have a longer hold scenario (closer to 5 years) that fall between the cracks of the more conventional lenders, generally already own the property,  and might bear a 10-12% holding rate to bridge the gap for several years. The idea is that this type of borrower can afford private money sized payments over the longer haul and will utilize this option to get to from point A to point B.  And point B–I might add–is a place that we’d all like to believe is a better place, a place where life is predictable once again and property values are something we can hang our hat on.

– 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.

I realized early on that one of my greatest challenges in the private money lending business was to educate brokers, borrowers, and ultimately lenders regarding private money lending–what it is and when and how and when it should be used.  So many people know so little about it, and those who think they know quite often embrace vastly inaccurate ideas and misunderstandings.

It is quite amusing to watch people’s eyes glaze over when they ask me what I do at a cocktail party.  Usually that conversation doesn’t last very long.    People who aren’t interest are very uninterested.  However, people who are interested–and they are certainly the minority, this is a niche area after all–are immensely interested and seem to be insatiable.  I often have to terminate conversations with potential borrowers, brokers, and investors after an hour or so and suggest that we get back to it and cover the material over a series of one or more future conversations.

Moving on, I decided that it was one of my missions in life to educate agents and potential users of private money.  16 years later, I don’t know how much progress I have made, but I keep on trying.  Certainly that is what this blog is about.

I thought it might be informative to duplicate here the FAQ that I publish on my company website.  Keep in mind that it is directed primarily toward brokers and borrowers, though much of the information will be of interest to investors and potential investors.  And also note that it is about private money mostly, but does discuss the topic from a Fairfield-centric point of view.

At any rate, I hope you get something out of it.

Private money FAQ

Private money is often misunderstood. Many industry professionals know very little about it, and fallacies and misconceptions tend to dominate the collective wisdom.

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 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 generally charge a loan fee equal to 5% of the gross amount of the loan. We also charge a doc prep fee ($500 or more, depending on the size of the loan), a property inspection fee ($650 or more, depending on the location of the property), and a collection account setup fee which is based 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?

We generally don’t have a pre-payment fee but occasionally we have a 3-6 month minimum interest clause minimum interest clause for our loans. For instance, it means that if a borrower repays a loan in 3 months or more, there is no penalty. If the borrower repays the loan, for example in 2 months, then the borrower will have to pay an extra month’s interest out of escrow at closing.

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 time lines 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 100% of the total 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: see the Rehab and Construction Loan FAQ.

We have been known to close loans in a matter of a week, but more typically, you should figure on 2-3 weeks. (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 this article on our website for a detailed description of how to prepare a proper value analysis.

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 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 over the past years. 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 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, Click Here.

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. (I would guess as much as 50%.)

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. You may call and discuss the loan with us, or you may e-mail a summary, or you may use our online loan submission engine, which will walk you through the process. If we like the project concept and feel that the numbers are acceptable, we proceed to the next step.
2. 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).
3. If all this checks out, we ask the borrower for a deposit (generally $1,000 to $3,000). This should be in the form of a cashier’s check or money order. If requested, we provide a conditional loan commitment letter at this time.
4. 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) facts or parameters of the loan are 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 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 (this may require an on-site inspection which will incur a fee specified in the Loan Agreement), (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.

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

A private money loan packet is generally fairly straightforward. For a list of our packaging guidelines, please Click Here

– Clay (clay@privatemoneysource.com)

Okay, first the ten mistakes you should never make:

(1)    Never close a loan without title insurance.

(2)    Never close a loan on property that has valuable structures without a valid hazard insurance policy in effect listing you or your entity as loss payee.

(3)    Never close a loan leaving property taxes unpaid (unless you are fully aware of the amount of unpaid property taxes and have knowingly agreed to allow some amount to remain unpaid for a certain specified period of time).

(4)    Never lend on land which may have wetland issues without seeing a wetland study or speaking with a relevant government official, and understanding the potential impact of possible mitigation requirements.

(5)    Never lend on property for which labor and/or materials have been provided within 90 days prior to closing without either (a) having an extended ALTA policy of title insurance with no exception for labor and materials liens (difficult to get), or (b) having received a signed affidavit from the borrower which lists all providers used (along with contact info and the amount of any outstanding debt), and contacting all labor and materials providers on the list to make sure that none is preparing to file labor or materials liens.

(6)    Never close a loan secured by property which appears to show (by inspection, general observation, public record, or known history) a reasonable possibility of being contaminated by any form of hazardous waste, unless you have seen a current level I or level II environmental study showing the property to be clean.  And in any event, always require borrowers to sign a hazardous waste indemnity agreement.

(7)    On a construction, rehab, or development loan: never disburse funds for work that has not been completed (unless as a deposit to a company that has been carefully checked out and is considered to be highly credible) and never disburse funds directly to the borrower unless as reimbursement for work that has already been completed and paid for, and which is documented accordingly.

(8)    On a construction, rehab, or development loan: whenever advancing funds to a labor, service, or material provider, never advance such sums without first requiring the provider or entity to sign a form acknowledging that the money is an advance and that the advance was provided by the lender or otherwise a third party, and that any refund must go back to the lender or third party and never back to the borrower directly.

(9)     Never close a loan without reviewing every single exception allowed on title in positions superior to your own.

(10) Never close a raw land loan without first understanding precisely what is allowed by the applicable zoning and without speaking to appropriate government authorities to be sure that there are no known problems which may obstruct or deter any reasonable plans to develop the property.

Okay, now for the ten things that you really absolutely must never ever do:

(1)    You must never close a loan at a title company known as Joe’s First National Title located in a former burrito cart at the corner of 3^rd and Main in Springfield.

(2)    You must never lend money on a property if you happen to catch your loan broker or borrower walking the property with a Geiger counter.

(3)    You must never lend money on a property in a country (or region) presided over by anyone named Hugo Chavez, Fidel (or Ramón) Castro, Kim Jong-Il, Jim Jones, Iddi Amin, Papa Doc, Baby Doc, or well … any Doc for that matter.

(4)    You must never make a loan secured by documents which are written in iambic pentameter verse.  Just back out the door, turn, and run as fast as you can.

(5)    You must never lend money to a non-human primate—except possibly a rhesus monkey (and then only if the monkey is a natural born US citizen).

(6)    You must never lend money on a property if when you ask about inspecting the property, the broker intones, “You can’t get there from here.”

(7)    You must never lend money on a property if the appraisal states that the property’s highest and best use is “ancient burial ground.”

(8)    Four words: tar pit never ever!

(9)    You must never make a loan where your trust deed will be in the thirty-seventh position.  Ah, ah, ah … don’t even think about it.  (I don’t care how good the CLTV is.)

(10) You must never lend on property which straddles the international dateline.  It is quite simply too confusing.

Okay, so hopefully it was clear to many of you that the first set of items was meant to be serious and that the second set was intended to make you laugh.  If not, don’t worry about it.  These are really all things that you shouldn’t do—funny or not.

Now, I am good at telling people what not to do, so if anyone asks, I’ll gladly crank out another ten not-to-do items (the serious ones that is) or if you would like for me to expand on any particular item on the first list, I will give that a shot as well.  Any comment would be good actually.  Hecklers are particularly welcome.  (So far, we have been a little light on conversation, so I still get excited about the daily spam that trickles in.  And yet not one to be easily discouraged, I take your silence as a kind of mesmerized reverence.  What else could it be?  Yes, that’s it.  Very good.  Now: at ease my good readers … at ease.)

– Clay (clay@privatemoneysource.com)

First off, I’d like to point you to a list of 37 private money investment tips posted by Brad Evans of Brad Evans Real Estate Loans.  This list has been circulating on the net for quite a few years now.  It is one of the more thoughtful comprehensive items that I have come across and so I thought I would share it with you.  Though I agree with a lot of what Brad has to say, I don’t agree with all of it.  I will utilize a future post to give my own input/comments on each of the points given on Brad’s list.

http://www.bradevans.com/37pointchecklist.html

For today’s post, I spent some time looking at You-tube videos that came up under a search of “private money lending”.  To the negative, as with content in general regarding private money investing, I didn’t (yet) find a whole lot of substance in these videos for the most part.  However, to the plus side, I have to say that I really had a good time with this.  There is some very interesting and entertaining stuff out there.  And I find it quite useful to see what people are saying about private money: how it works and how to obtain it in particular.  When I have more time I’m going to go much deeper as I just really scratched the surface.

At any rate, here is a representative cross section of what I found out there in cyber-video-landia.

On making massive montly income

Our narrator is a representative of http://www.askaexpertwholesaler.com/.  I went to the homepage but didn’t actually enter because you have to enter your e-mail address (and I wasn’t so inclined), but the entry page compels with the question, “Who Else Wants to Discover the Astonishing Secrets of How to Make Massive Monthly Income with Real Estate in 2008 By Asking an Expert Wholesaler”

This is one in a series of “quick tips” to real estate investors on how to find private money lenders

http://www.youtube.com/watch?v=0-frYFdYJw4

My comment: It’s hard to argue with “run your mouth.”

The discovery of iced coffee

Patrick Riddle of http://www.privatemoneyblueprint.com on “How to Convert Wannabe REIs into Private Money Lenders.”

http://www.youtube.com/watch?v=B2VfCnCgibM

My comment: I love this guy.  He has a bunch of videos out there and I wanted to watch every one of them.  He definitely has a certain charisma that keeps you watching.  Will his plan work?  Maybe one time in ten thousand, I suspect.  Most of the people who attend those meetings haven’t made their fortune yet—and don’t really have cash to invest.  And hey, that is just a tough road to go down anyway.  I don’t try to sell anyone on trust deed investing, but if I did, it certainly wouldn’t be the inexperienced, uneducated, and uninitiated.  There is too much to know before you can be ready for this kind of investing.  At any rate, I’m glad Patrick discovered iced coffee.

How to avoid talking to investors about the things you need to talk to investors about

Here is another one from Patrick Riddle at http://www.privatemoneyblueprint.com called “How to explain the “Worst Case Scenario” to a Private Money Lending Prospect.”

http://www.youtube.com/watch?v=Ps0Cv6QSC18

My comment: Okay, this one somewhat disturbs me.  It might be more appropriately titled, “How to avoid talking to investors about the things you need to talk to investors about.”  I do like his description of the workout process.  Basically:  You are a lender and then you become an owner and we all live happily ever after.  I guess he didn’t want to muck up the conversation with tedious details like how to choose between a judicial foreclosure and a non-judicial foreclosure, what happens if the borrower contests a judicial foreclosure, the potential impact of a bankruptcy, taking back a property that is distressed or an unfinished project, the potential impact of market changes and/or a protracted foreclosure process on your equity position, how to go about marketing the property, and how to obtain and collect on a deficiency judgment, if need be in order to fully recover.

Would you like to vacation in paradise?

This is Cash Money Quick’s (http://www.CashMoneyQuick.com) video ad for a “New FREE Ebook – How to Find MILLIONS in Private Money.”

http://www.youtube.com/watch?v=Sua7AqOzgCA

My comment: Well I haven’t read the e-book, but the guy comes off nice enough and I like the palm tree in the background, suggestive of … long tropical vacations perhaps?

On drawing legal documents like a real attorney

Dmitry Mikhaylov (http://www.komelot.com) putting on a boot-camp, Attorney at Low, on how to prepare private money lenders documents.  “Find out from attorney what documents you will need to get Private money lenders money for your real estate needs.”

http://www.youtube.com/watch?v=MBFcGD7LSbI

My comment: I like the “Attorney at Low” part.  There might be just a little bit more to the document process, but you get the general idea.

On self-directed IRAs

Self-Directed IRA’s are explained by Trent Dalrymple, Director of Investor Relations at Metro Mortgage Investments LLC, a private mortgage lender in Huntington Woods, Michigan. More info at www.metro-mi.com

http://www.youtube.com/watch?v=jrdBlOU7nZA

My comment: This one I actually thought was quite good.  I have no wise-guy remarks.

Am I still in the real estate lending section?

This is an ad, for what I’m not sure but I enjoyed it.  The YouTube text states:  “Get private money, cash loans from lenders. Private individuals have money to give away today. Online. Instant cash now. Bad Credit ok. Lenders MUST give away cash now. Hurry. Money for real estat…”

http://www.youtube.com/watch?v=WIAUVgMRUnE

My comment: Va va voom!

Subliminal advertising

This is another ad:  “EASY LOAN TO BUY FORECLOSURES Hard Money can be a quick way to fund everything from residential property, to industrial facilities to new home construction.”

http://www.youtube.com/watch?v=rjsMc3ExY2M

My comment: Did you notice the subtly placed images of cash and money–almost subliminal.  You might want to play it back again in slow motion.

And thus concludes your private money through the looking glass tour for today.  I sincerely hope that I have not come off as too terribly condescending.  (In general, these videos can’t be easy to do.)  I only wish that I could find better resources out there—text, video, and otherwise—that could be helpful to all of us in this complex realm of trust deed and private money investing.  And so the search goes on.  Please do share whatever you may have, whatever you may know, and whatever you may find.

– Clay (clay@privatemoneysource.com)

I finished Part II with a brief mention of something I quite like about the trust deed system: that is, the option (generally available) to foreclose judicially.

Before moving on, I’d like to offer you a crude little decision tree which may guide investors in making the decision whether to foreclose a given trust deed judicially or non-judicially.

First, do you have an option to foreclose this particular trust deed non-judicially?  If the answer is no, then foreclose judicially.  If the answer is yes, continue.

Do you believe, with a high degree of confidence and having done sufficient research, that you are likely to fully recover by taking back the property at auction and then selling it?  If the answer is yes, then foreclose non-judicially. If the answer is no, then continue.

Do you believe, again with a relatively high degree of confidence and having done adequate research, that the borrower/personal guarantor has sufficient income and/or assets that you would stand a pretty fair chance of recovering on a deficiency judgment?  If the answer is yes, then foreclose judicially.  If the answer is no, then foreclose non-judicially.

Now moving on:  Today I will focus on a few website based tools that I have found to be useful in the business.

Let’s start locally (Portland, Oregon) and then expand out from there.  A really nice little site if you are doing business in the Portland area is:

www.Portlandmaps.com

The City of Portland provides PortlandMaps.com as a new way of easily accessing public data regarding properties and property areas.  A wide variety of data is available for the Portland Metropolitan Area, including the following:

• Assessor/Tax Lot Information
• Aerial Photography
• Building Footprints
• Building Permits
• Census
• Crime Data
• Elevation
• Parks
• Mass Transit
• Natural Hazard
• Schools
• Urban Growth Boundary
• Underground Storage Tanks
• Water/Sewer
• Zip Code
• Zoning Maps

Fortunately most states offer all kinds of helpful data on-line now.  For instance, this handy site offered by the state of Oregon gives you access to a wide range of licenses, permits, and registrations.

www.licenseinfo.oregon.gov/index.cfm

Of particular interest to me is this site which allows me to lookup a mortgage broker’s license:

www.licenseinfo.oregon.gov/?fuseaction=link_class&class_list=1732,14592,26398&class_name=Mortgage%20lenders&LinkType=P

It is also frequently useful to lookup the license status of a given contractor, which you may do in Oregon at:

www.licenseinfo.oregon.gov/?fuseaction=link_class&class_list=13833,13830,13831,1536,1551,1683,1537,1555,1556,1713,1677,1666,1665,13829,13828,1739,14724,26481,1674&class_name=Construction%20contractors&LinkType=P

I’m sure that just about everyone in this business already knows about Zillow:

www.zillow.com

Zillow is a great little comp tool, easy to use, with a vast national database, and free.  It does not offer the range of options available with most professional comp tools, but then they are expensive.  I can remember when we first signed up to MetroScan at Fairfield.  The price was very substantial and the software was localized to the machine, so that you could only use it at one workstation at one site without paying even more, and updates were given monthly via mailed CD-ROMs.  We also had very limited regional access and had to pay for access by county (that is if a particular county were available at all).  We’ve come a long way.

Also, I hear good things about the Zillow blog, though I haven’t had time to properly check it out for myself:

www.zillow.com/blog

I know I don’t need to tell anyone about Google Earth.  When I was first introduced to this site, I just about fell off my chair!  I still can’t quite believe that such a powerful far reaching tool exists, at my fingertips and for free.

http://earth.google.com

And it just keeps getting better.  The Street View layer of Google Earth is incredible.  It allows you to do drive by inspections from your home office or living room.  Of course it is not really as good a an actual drive by, but it certainly allows you to get a feel for a property and its neighborhood.

Now, if you want to look at real estate trend data for a given area—something I would think you would want to do these days before making just about any loan—this site is terrific:

www.altosresearch.com/altos/Home.page

The Scotsman Guide has long been regarded as the “bible” of the commercial and residential loan industry, offering detailed categorical listings of various active lenders and loan sources.  Their online site is here:

www.clender.com

And Lendicom may be of interest to you.  This 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.  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 loans that you would be interested in.  In the interest of full disclosure, I am an officer and a part owner of the company that offers this site.  Maybe that’s why I like it so much.

www.lendicom.com

So that’s a lot to like, wouldn’t you agree?  It is hard to imagine that just ten years ago, none of this existed.  And there is so much more.  Please write in and tell us about other tools that you know of and websites of interest.

End of Part III

– Clay (clay@privatemoneysource.com)

In Part I, I began a discussion of my gripes and likes regarding the private money lending business and various industry related matters, items, and issues.  I allowed myself to amble a bit far afield and concluded by mentioning a book about the legal profession which I personally found to be informing and entertaining.  I’d like to indulge myself a bit more on this topic of books at least marginally related to private money investing.

An author who I particularly enjoyed this past year is Michael Lewis.  Moneyball: The Art of Winning an Unfair Game is one of the most interesting and influential books that I have read in a very long time.  This book on the face of it is about baseball, but in fact it is about so much more.  The book is really about exploiting pockets of inefficiency that inevitably exist in markets (for various curious reasons), and I frequently find myself applying lessons learned in this book to the way I think about other aspects of business and life in general.  There is most definitely an element of applicability to private money lending and trust deed based lending.  If you have read it, please comment and tell us if you don’t feel the same.  (A hat tip: to Charles Duck who gave this book to me and told me to read it some good three years ago;  I’m only sorry that I waited so long.)

Another Michael Lewis book that became extremely relevant with the recent collapse of large financial firms on Wall Street (though written many years before and published in 1989) is Liar’s Poker: Rising through the Wreckage on Wall Street.  This book chronicles the author’s years as a bond trader for Salomon Brothers.  The inside look is riveting and terrifying at the same time, and may help explain how things could have gone so terribly wrong during the recent fall from grace.  And I must mention Home Game, Lewis’s book about the business of parenting.  As the father of a 4 year old boy, this book worked for me (though I warn you it is quite different from his other books, doesn’t have much to do with business and investing, and you may not enjoy it if you don’t have children of your own).

As one who brokers and services private money loans, a thing that I particularly like is quite simple:  I like it when the loan payments come in on time each month as per the contractual agreement and without any prodding from my office.  Fortunately this happens quite frequently and it makes my life and the life of those who work for me so much easier.  It also opens up the possibility for an extended ongoing relationship with the borrower.  Most of our borrowers tend to need private money loans on an ongoing basis; they use them to drive a series of ongoing professional projects.  And this is another thing I quite like in the business: ongoing, long-term professional relationships with borrowers, brokers, and investors.  Things get so much easier when you know who you are dealing with.

I do not like it so much when borrowers become “bad boys,” having to be prompted and prodded each month to send in their payments, and consistently push the envelope, going beyond the boundaries of their agreement.  This provides a certain level of strain, both physical and emotional within my organization and with certain of my investors.  I will say, though, that I have had cases where the borrower paid just a few days past the grace period each and every month, almost like clock-work, and certain lenders really liked it, as they knew that the payment was coming and that it would be accompanied by a substantial late fee and default interest payment as well.  This type of situation tends to push the yield up, so that a 13% loan may ultimately yield 15-16% to the investor over the life of the loan.

I do like it when borrowers who are having problems actively communicate and behave in a proactive and professional manner—seeking to work with the investors in an attempt to navigate through their financial problems and with the intention of ultimately making good on the overall commitment.  I have found that investors tend to be quite reasonable in working with borrowers who are reasonable–so that quite often a successful “work out” is possible.  In these situations there is ultimate satisfaction for all parties as everyone tends to benefit.

I don’t like it when borrowers who are struggling put their heads in the sand and go into hiding.  Once communication stops, there is no chance for a work out, and the only choice is to foreclose, go to auction, take back the property (if a higher bidder doesn’t take it at auction), and then go about the business of marketing the property.  This can still have a good ending and probably does as often as not, but the work involved is immense, and most loan servicers and investors would rather not go there.  Fortunately, though this certainly happens, it doesn’t happen frequently (though a bit more frequently than usual during the difficulties of the past two year period).

I do like the fact that investors generally have an option, in these situations to either foreclose judicially or non-judicially.  The non-judicial option is faster, easier, and more predictable, but the judicial option allows a the investor to obtain a deficiency judgment should the property fail to fully compensate the debt—and thus gives the investor an opportunity to recover any remaining obligation by chasing borrower income and assets.

In Part III, I will be highlighting some web based resources that I find to be particularly useful, enjoyable, and impressive.  If you have any sites that you feel enable you to make better moves and decisions as you invest in trust deeds, please send me a note, and I will most likely include your information in Part III of this post.

– Clay (clay@privatemoneysource.com)

End of part II

I thought it would be kind of fun, and hopefully informative, to write a piece about my likes and gripes regarding the business of private money lending.  In other words, these are the things that tend to kick start my emotions and get me going.  There is a bit of free association going on here, as I allow one idea to lead to another and so on, allowing my emotions to carry the narrative–so these likes and gripes are in no particular order.  This is the first part in a multi-part series.

The trust deed system (particularly as it works in Oregon, Washington, and California) is a thing of great beauty!  It provides for order and procedure, eliminating subjectivity (except for in the event of a judicial foreclosure), nicely balancing the interests of the borrower/owner and those of all the lien holders involved with regard to a particular piece of real estate.  Most of the professional investors I know enjoy and appreciate the trust deed system and have a lot more good than bad to say about it.

Associated with this is another wonderful thing they call title insurance.  Title companies are the only businesses I know that provide insurance against the possibility of their own error.  Knowing title companies as I do, I’m betting against them.  I will take title insurance every time AND THUS I shall be able to sleep at night.

Which brings me to the escrow service role of the title company:  This is a very tough job, high stress, with many people simultaneously placing multiple demands, and the need to consistently walk a tightrope avoiding costly problems and errors.  I most certainly wouldn’t want to do it.  And apparently most title people don’t either.  Most title companies do a poor job of training and preparing their people and setting a high standard, and thus unfortunately, most escrow services offered by title companies stink.  Fortunately there are exceptions.  Unfortunately, we often don’t have any control over where a particular closing is going to take place.

Now don’t even get me started on loan brokers.  I have often heard that 10% of realtors do 90% of the sales—and I suspect that the numbers are even more extreme with regard to loan brokers.  A good loan broker is worth her weight in gold—and there are some good ones out there—but there are … oh so many sadly disappointing loan brokers.  Still, we need loan brokers so we soldier on.  I figure our loans at Fairfield are about 50%/50%, with half coming to us through loan brokers and the rest coming directly from the borrowers.  The problems in my experience are not so much with honesty (though this certainly can be a problem from time to time), but with matters of basic business professionalism in general and with the specific knowledge of the business in particular.  Of course, it is a big step for many loan brokers to move into the realm of private money and commercial lending, but my company works hard to provide assistance, education, and support; we spend extraordinary amounts of time working to educate brokers.  At the end of the day, only a few seem to stick.  I think the problem in this field is one of barriers to entry; just about anyone can take a little test (and I mean little) and become a loan broker and that is probably not a good thing.

Okay, now that you’ve got me going:  I am downright angry at banks for not lending money on real estate secured loans any more.  “Come on banks, lend money!  That’s what you do for a living isn’t it?”  We in the private money sector need banks.  We lend money to help generally strong borrowers get from point A to point B, and point B is frequently a bank loan (or a buyer who needs a bank loan in order to be a buyer).  This needs to change.  There are plenty of good safe loans for banks out there that don’t require the banks to disregard every rule of good lending (as they did with many sub-prime loans leading up the collapse in fall of 2007).  It reminds me of something Mark Twain said (and I’m paraphrasing).  He said that if a cat sits on a hot burner it will never sit on a hot burner again.  But then it won’t sit on a cold burner again either.

I love my attorney.  It took me years to find a guy like this.  Everything that you have ever heard that can be bad about attorneys: the opposite is true about my guy.  He is honest, pragmatic, honorable, and fair.  He knows his limitations—and will be the first to tell you when he comes up against them–but at the same time has a vast breadth of knowledge regarding real estate matters and business in general.  And he doesn’t start a clock every time he picks up the phone or answers an e-mail.  Believe it or not, he actually seems to charge for “real work:” research and document preparation and such.  (And on top of all that, he’s the kind of guy you’d want to have a beer with.)  If you want me to put you in contact with him, I will.

And speaking of lawyers, I have to say that I really enjoyed Happy Hour is for Amateurs, by Philadelphia Lawyer.  If you are offended by explicit talk of sex, drugs, and binge drinking, you may want to give it a miss.  But beyond the raucous tales, this book takes you right into the bowels of the enormous billing machine that is “the law firm in America.”  This book takes what we thought we already knew and knocks us right upside the head with it.  It turns out we knew nothing at all.

End of part I

– Clay (clay@privatemoneysource.com)

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)

As I continue my search for resources that might be useful to those who invest in real estate secured loans, I become increasingly convinced that our particular niche field is somewhat of an intellectual/informational wasteland.  Every time I stumble upon an article or site that looks like it might be of interest, it turns out to be a blatant plug for some specific product or company.  And the stuff that isn’t blatantly biased, quite often seems to be hack work, badly lacking in quality and perspective.  It would be as though I were searching for articles and blogs on gourmet food only to find that all of them had been written by employees of McDonald’s, Burger King, and Taco Bell.  (Hopefully I won’t get sued for this.  I did not mean to disparage the great corporate food powers in any way, shape, or form.)  My real point is: if I see one more article entitled “Hard Money Made EZ” or if I see “hard money” refereed to as “hard $$$” one more time, I’m outa here.

Moving on, I turned up a few items of interest in my lap around the internet this morning.  The following article is quite dated, but still might be of interest for those looking to expand geographically (and into a very large target market).

http://www.danwei.org/front_page_of_the_day/private_money_lending_business.php

I also stumbled onto this site/book by Paul Wells who claims to hold the secrets of private money.  I hope indeed he does, as we could use a good text book in this field.  I have asked him for a review copy, and if he is obliged to comply with my request, I will make a point to read/review it here.

http://www.paulwellsauthor.com/mortgageinvesting.html

I couldn’t help but be amused by this post by Leonard Rosen in August of 2007.

“America’s hard money expert shares his views on real estate investing. There are many different types of investing strategies that are available to the novice and sophisticated investor.

However, I do not know a safer investment strategy coupled with a higher rate of return than real estate. Unlike the equity markets, real estate has proven to be a safe haven for many investors. Over the past 40 years, real estate has risen in value in literally every major market in the United States.”

Oh well.  The full text is here:

http://www.americanchronicle.com/articles/view/35089

And here is another book on the topic, specific to California (but that is a pretty good starting point for talking about the basics of private money lending nationwide), and with five of five stars on five reviews.  I can’t figure out how to ask for a free review copy, so if anyone knows the book please weigh in here.

http://www.amazon.com/Smart-Trust-Deed-Investment-California/dp/0934581010

About.com defines private money pretty much the same way as most outsiders do:

http://www.answers.com/topic/hard-money-loan

At least they hedge the “last resort” part with the “short-term bridge” bit.  However, I am beside myself with how many people who should know better claim–I see this over and over again–that the borrower (credit/income/net worth and such) is irrelevant to the private money lending process.  Why would anyone make a private money loan and disregard readily available information about the financial status of the borrower?  It is beyond me.

Please oh please … if you know where the goodies are hiding out there, please share them with the rest of us.  That after all is what this blog is all about: sharing quality information and resources with like-minded folks who care about private money investing.  (Oh yes:  and promoting me and my company; but NOT BLATANTLY MIND YOU … good lord no … not blatantly.)

– Clay (clay@privatemoneysource.com)

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