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.

Back in January, in my post entitled, “Won’t somebody please call a plumber … the banks are clogged,” I addressed what I consider to be the essential question regarding what it will take to get the real estate economy on track and moving in the right direction assertively and with confidence again.

And now, nearly six months later, my final paragraph seems quite equally relevant.

“And so even though a lot of good things are happening with our economy as of late, real estate prices will not correct until lending institutions provide adequate funding once again to owners and buyers—and the economy as a whole will remain at least partially broken until this occurs.”

There used to be a lot of talk about getting toxic assets off the books and getting banks to lend again, but I hardly ever come across serious discussions of this issue in the financial press these days.  It is as thought government officials and journalists and such have decided that this question is just too difficult to answer and thus should just be ignored.  Like a stray dog, maybe if we don’t make eye contact it will just go away.

I used to think that the banks would have to begin lending again as soon as they cleaned up their books a bit.  After all, if a bank doesn’t lend, what then does it do, and wouldn’t it go out of business?  Well it turns out that, “no” it is not necessarily so.  From what I can tell (and this is not a terribly informed position mind you), many of the banks and bank-like entities have taken to investing in various commodity style investments.  They have effectively become investment houses, and are doing quite well, thank you.

So I pose the question to my dear readers, as I honestly don’t have a clue: what will it take to get banks to start lending again—and I’m talking about loans across the spectrum (residential, commercial, development and construction)?  If you have a position on this matter, please share it with the group.  Or if you have access to an informed article that seems to reasonably address the question, won’t you please pass it along?

I’m sure we’d all like to know.

– Clay (clay@privatemoneysource.com)

One of my dear good readers sent the following e-mail in response to my last post, Home strippers coming to a neighborhood near you.

“Good topic Clay.  Now forgetting about us private lenders, the conventional lenders continue to be their own worst enemies.  They persist in bringing the properties to the city hall steps at 40% over market.  When no one buys the property, they have it inspected and insured, pay the utilities, and pay a realtor to sell it for them at a discount.  On top of all that they may face the problem that your article addressed.

Pricing it to sell on the steps would solve their problems.

In early December, I looked at this piece of bank owned junk in St Helens, Oregon.  It was rough around the edges but the bones were good.  It was a typical Ranch style, 2-bath, 3-bed, 1400 sq ft, nice large lot, fenced, but no garage.  The bank had it listed for $198,000, but they had started out at $139,000 a couple of months earlier.  I called the agent and asked them if they had a misprint on the price (as there are nice, newer homes with garages going for $165k max).   The agent said no, it wasn’t a misprint; the lender had called him when it was at $139,000 and told him to boost the price to $198,000.  What is that about?

Until the banks get their head out, their balance sheets are going to continue to worsen.

Regards, Alan”

Well I can hardly say that it is the first time that I have heard of or seen this type of thing with the banks.  One does get the distinct feeling that these institutions are somehow unmotivated to remove the toxic assets from their books.

And it is even worse than all that.  As if they needed additional help at slowing down the corrective process:  The federal and state governments, with all of their efforts to keep owners in homes which they cannot afford, are seriously compounding the problem.  It could take an extra year or two to get many of these bad loans off the books due to the various federal and state requirements being imposed upon the banks.  (And that assumes the banks are motivated.)  The following NYT article does a nice job of discussing the matter.

http://www.nytimes.com/2010/01/02/business/economy/02modify.html

And so even though a lot of good things are happening with our economy as of late, real estate prices will not correct until lending institutions provide adequate funding once again to owners and buyers—and the economy as a whole will remain at least partially broken until this occurs.

And so I say:  “Won’t somebody please call a plumber … the banks are clogged.”

– Clay (clay@privatemoneysource.com)

Okay, so I was told that if I wanted to get more people to read my posts, I need to utilize attention grabbing headlines.  (How am I doing so far?)  Now I’d like to see a show of hands, and please be honest here, as this is purely for scientific purposes and the results will remain strictly private:  Was it the headline that caused you to click on the link to this blog-post (if so raise your hand) or was it merely your overwhelming and insatiable lust for all things private-money-lending related?  Uh huh … right okay … hey I believe you.

At any rate, I figured that this recent New York Times article would be of interest to any active private money and trust deed investors.

http://www.nytimes.com/2009/12/23/business/economy/23stripped.html

Fortunately, we haven’t seen too much of this sort of thing yet in our dealings at Fairfield.  But then we haven’t had to foreclose on loans in Arizona or Nevada and only have one in foreclosure in Florida and that particular loan is a land loan.  We’ve had a little trouble here and there, but nothing big.  Greg Brown—a favorite musician of mine—used to talk about how folk musicians were different from rock musicians.  He said that when folk musicians went on the road, there idea of trashing a hotel room was leaving the TV unplugged.  I am happy to say that most of our borrowers thus far have been more the folk-musician-type.  Let’s hope it stays that way.  We wouldn’t want home strippers coming to a neighborhood near you.

– 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)

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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