(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.

As I have mentioned in at least one previous posting (Ten Crucial Steps in Reading an Appraisal), I am not so concerned about the bottom line value on an appraisal or property valuation as I am about the particular logic that lead to the creation of that value.  If the instrument is transparent and the logic is clear and sensible, then chances are that the final valuation is an acceptable number that you can work with.

Most of the loans that we are involved with at Fairfield Financial are what I call “professional loans.”  That is: they are to developers, builders, rehabbers, or other types of real estate investors pursuing an asset or project for monetary gain.  When dealing with such professional borrowers it is not only reasonable to ask the borrowers how they came up with a particular value figure (or figures) for their particular property or project, but it would probably be quite unreasonable not to.  If anyone should have taken a hard and honest look at value and be in a position to demonstrate and defend that figure, it is the professional borrower.

And yet, when asking these folks–over the years—for a good comp based analysis of value, we have quite often found that we don’t initially get a presentation that we deem acceptable.  To that end we prepared a short article explaining our expectations with regard to the valuation process and presentation and posted that on our website.

I think this is one of the most read and most useful articles on our website, and so I thought it would be worthwhile to publish it here.  And so I give you, “The Quest for a Good Set of Comps:”

A professional appraisal can be a helpful tool, but appraisals are by no means foolproof, and a well-prepared set of comps is often superior and entirely sufficient for our purposes. Since appraisals are expensive and time-consuming, it is often well worth an investor’s time and effort to do their own value work. But although a good set of comps is often sufficient for our purposes, it is difficult for borrowers and brokers alike to understand exactly what we need from them in the process of determining the value of a subject property. This is unfortunate, since this evaluation is perhaps the most important part of the entire process of assembling a loan with Fairfield, and the borrower or broker often has an integral role to play in this evaluation. As an equity lender, our loans are only as secure as our determination of the value of the property against which we are lending, and consequently it is essential that we are confident of this determination. In point of fact, the confidence we require is nothing more than what any borrower should require and from himself or herself going into a project.

The following rules and their explanations describe what we need from those investment professionals who choose to take advantage of this alternate approach to the valuation of their subject property. Let’s consider what we mean by “a good set of comps”:

Rule Number 1: Computer-generated listings are starting point, not an ending point

Very often we tell a borrower or a broker that we need an “objective measure of value” or a “good set of comps”, and in response are sent, for example, five or six comparable sales generated by the online search program of a public database containing sales histories. We have access to these programs also, and will most probably have already looked at these, or similar, listings. These sorts of listings are the beginning of the process, not the end, and by themselves they will almost never be sufficient. Don’t send these to us alone and expect that they will suffice.

Rule Number 2: Be skeptical

What we need from you is more involved than simply typing search criteria into a listing service, although this is indeed where the process usually starts. Once you have obtained a group of comparable sales listings with which to begin, take a hard look at them. From what you can see in the listings, are they really similar to your subject property in type, size, age, location and condition? If all of them aren’t similar in all these aspects, do some of them illustrate value factors that the others don’t? For example, all your comps are more than a mile away from your subject property, except for one, which although newer and larger than your subject property, is next door. The value of your location may be best indicated by this one property, although the building itself is not all that similar. It is important not to accept that a property is comparable just because a program or real estate agent tells you so.

Rule Number 3: There are more things in heaven and earth than are dreamt of in the MLS’s philosophy

Now, once you have selected your five or six most representative comps, grab a notebook and a camera and go find them. As you drive, ride or walk past each one, stop, look at the neighborhood, notice the condition. Are there differences between the listing you were given and the reality you are seeing? Are there things not included in the listing which are important factors in the value of the property? Is there a grist mill next door or a condemned meth lab across the street? Write it down in your notebook. Take a picture or two.

Rule 4: Think like an appraiser

Borrowers are often a bit daunted at the prospect of putting on the appraiser’s hat and analyzing the information they have gathered. “I’m not an appraiser,” they say, “I’m not trained for this.” We’re not asking you to be an appraiser; all we’re asking from you is to think through the information you’ve gathered, apply a little common sense, and to make your best case for value. When we look at your analysis, we may find corrections that need to be made, we may disagree with your logic in places, but if you’ve done your work, chances are your value is close.

Let’s take an example to illustrate what’s involved in this analysis: Our subject property is a 3000 sq. ft. SFR built in 2001. Let’s say it’s across the street from a nice park, with a school nearby. One of the comps we’ve looked at is a 2800 sq. ft. house built in 2000, about 1/4 mile from the subject property. It sold two months ago for $179,000. Our notes from when we looked at the house say that it is essentially in the same neighborhood as our subject, and is also a newer house with generally the same quality of construction. The two properties are quite comparable, even without any adjustments; but we can probably refine the value a bit more by taking the small differences into account. First, our subject property has a superior location, being across the street from the park. Depending on the neighborhood, we might determine that this location increases the value of the property by $5000. We add this figure to the sales price of the comparable property, to arrive at an adjusted value of $184,000. Next, we need to make a small adjustment for the size: dividing our adjusted value by the comparable property’s 2800 square feet, we arrive at a per square foot value of $65.71. Multiplying this value by our subject property’s 3000 square feet, we get a final adjusted value of $197,130.

Now, in your own case, your subject property might be a bowling alley, a piece of raw land, or an office building, and so your considerations might be very different. But in all these cases, the general process will still apply. There may be more research involved in finding out what individual differences are worth, but the overall approach described above can always be applied.

Rule Number 5: Presentation isn’t everything, but it helps

Now that you have gathered all the information you’ll need, and done all the necessary analysis, you are ready to assemble your “good set of comps.” This set should include:

1. Your comparable sales analysis
2. A map of the area indicating the location of the subject property and the comparable sales
3. A photo and essential information for each comparable property, including the address, specs, sale date, sale price, and distance from the subject property.

Your comparable sales analysis should be a concise summary of all your reasoning in adjusting the values of the subject properties, with one paragraph or section for each property, stating what was different, how you adjusted for these differences, and why. At the end of each paragraph you will indicate an adjusted value; and at the end of the analysis you will summarize your conclusions, and give your final estimated value for your subject property. The documentation for each comparable sale (Number 3) gives us a frame of reference in which to read the analysis for that property.

When you haven’t done it before, this may seem like a lot of work. But again, anyone making an investment in a piece of real property should be at least this confident of the value of their investment, whether or not he or she is looking for a loan. And it is often well worth the work.

– Clay (clay@privatemoneysource.com)

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

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

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

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

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

(4)    Next, you will want to check the effective date of the value given.  How current is the appraisal?  In a steady up economy we used to be comfortable using appraisals that were as much as 1-2 years old.  We would adjust the value to be in-line with changes in the market.  With the chaos of the past (nearly) 3 years, this is much more difficult.  Generally speaking (though this would depend to a certain extent on regional are) you would want your appraisal to be less than 6 months old.

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

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

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

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

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

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

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

– 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 runway was drenched in sunlight as our plane touched down that morning at LAX.  It was a golden balmy day.  We grabbed our bags and headed for the rental car kiosks.  I don’t recall how it happened exactly, but the fellow at the counter said something like, “I can make you a real good deal on a sporty little convertible.  Do you want it?”  We looked at each other and shrugged, “Why not, let’s have some fun.”

It was a business trip, me traveling as a private money loan broker and accompanied by Alan, a stalwart friend and investor of many years.  Over the past two weeks we had been carefully picking our way through a loan file for a request to loan money on a bare land parcel in the Malibu hills.  This was not a normal loan for us.  At this point, we had not expanded our regional boundaries much beyond Oregon and Washington.  California would have seemed strange to us, but Malibu was like another planet.  Still, this was in the glory days of the California Empire, back when money ran free in the streets, and we were having a hard time finding good reasons not to like the loan, so we finally decided it was time to go have a look for ourselves.

We hopped into the little red convertible—top down, ready to go.  I don’t recall who navigated and who drove, but eventually we found ourselves cruising south along the coast and really enjoying the ride, the sunshine, and the beautiful sparking blue sea.  “I’m sure we must be quite a sight,” said Alan, “two pasty white Oregonians on the California coast riding high in a bright red convertible.”  Some SP 40 and a couple of old baseball hats would have been useful, but we were in a hurry to get to our meeting and couldn’t stop to shop.

Our designated meeting spot was just off highway 101 near a small Realtors office at a cross-road leading into the Malibu hills.  We pulled up a few minutes late and found two cars and three people waiting.  The loan broker who had been the point man on the project was there.  He was standing and talking to two other guys.  We were introduced to our borrower.  He was quite young (maybe mid-twenties), well dressed with a pony tail and friendly enough but a bit on the slick side (at least by Oregon hick standards, that is).  His sports car—an Audi TT—was a real sports car, unlike our little domestic model.  The other fellow (quite young himself) was introduced by the borrower.  The introduction was a bit vague and came out sort of mumbled; somewhere in there, we thought we heard the word “appraiser.”  We noticed quickly that he and the borrower appeared to be quite friendly with one other—a couple of old pals maybe.

After exchanging pleasantries, we all hopped into our respective vehicles and fell in line behind the TT.  The kid was working the peddle hard and seemed to be making a point as we wound our way around hairpin turns on this high windy gravel road; we struggled to keep up with the spray of gravel.  Somehow we eventually managed to arrive alive and intact at the subject property, and everyone got out and stomped around in the dirt for awhile.

The circumstances were pretty simple.  The kid’s father owned the property and was holding it as part of the kid’s inheritance.  The kid planned to use the free and clear property as collateral for a loan that he would utilize to pay for tuition (or some such thing).  There were no immediate plans for development, but we were told that the property was fully accredited, meaning it was fully qualified as a buildable parcel for one residence.  (Of course this is no small thing; in the hills of Malibu, CA the ecosystem of these hills has been seriously stressed due to over-building and becoming accredited for a new structure is no easy task.)

So after some walking and pointing and a series of questions and explanations, I lead into my most pressing concern.  It had occurred to me on the flight down that there was a potentially serious error with the appraisal.  This error (assuming it was an error in this case) is a surprisingly frequent error in appraisals; I have seen it many times over the years.  Let’s call it the Fallacy of Infinite Scalability.  In order to demonstrate the Fallacy of Infinite Scalability, I’ll use an example.  Let’s say that our subject property is a five acre parcel and that we are looking at a comp which is a one acre parcel.  Assuming that the one acre parcel qualifies as a buildable parcel by virtue of size (say it was grandfathered in when the zoning was changed to 5 acre minimum size per site) and that the five acre parcel cannot be subdivided further (due to the change in zoning), then we cannot compare these properties acre for acre.  If the one acre comp parcel sold for $800,000, then we would not be correct to say that the five acre parcel, all other things being equal, is worth $4,000,000.  That would be the Fallacy of Infinite Scalability.  Instead we must determine the base price of one home site–in this case the first acre–and then determine the incremental value of each additional (incremental) acre.  So for example, we might determine that the one acre parcel is worth $800,000 and that each incremental acre is worth $50,000, giving us a total of $1,000,000.

However, by my interpretation of the appraisal and in the absence of further information, the appraiser had committed this error in determining the value of our subject property.  So I asked of the third fellow, “Are you the appraiser?”  “Uh … well no, I’m not the appraiser,” he muttered, “I’m his assistant.”  This seemed odd.  I couldn’t recall a time that an appraiser’s assistant had ever been sent to a site review.  At any rate, I went ahead and asked him about the appraisal and in particular whether or not the Fallacy of Infinite Scalability was at work here.  He scratched his head a bit, looked kind of confused, rocked back and forth with his hands in his pockets, and indicated that he really didn’t know the answer to my question.  “Okay, I’m going to have to speak to the appraiser,” I said.  At which point the assistant most adamantly explained that the actual appraiser did not like to talk to clients and could not be talked to (or something to that effect).

I countered that without a reasonable explanation for the apparent Fallacy of Infinite Scalability error I could not proceed and that I really needed to speak to the appraiser.  There was much commotion and back and forth between the kid and the assistant, until finally the assistant said that he would call the appraiser and see if he would speak to me.  Eventually he managed to get a signal and contacted the appraiser who apparently agreed to have me put on the line.  I took the phone and proceeded to ask about the appraisal and to what extent the Fallacy of Infinite Scalability applied.  The appraiser sounded frail and confused and was barely audible.  I walked him as carefully as I could back through the question a second time, much as I did for you the reader above, but he still didn’t answer.  It became clear that he simply could not respond to my question.

Well … at this point I glanced at my watch and I looked over at Alan. He looked back and said, “You know what?  We’ve got a flight to make.  We’ve gotta get back to Oregon.”  “That’s right,” I said.  “We’ll call you all once we’ve had a chance to talk this over,” and away we went.  And as we drove back up the coast the horror stories played out in our minds:  an appraiser held captive in his own home, tied to a chair, perhaps drugged into submission, or just a very old man gone senile and his son taking over his work, his license … and maybe his signature.  There were many possible interpretations, and we tended to favor the most hideous.

I learned a long time ago that a loan not done for the right reasons is a successful loan and so I put this one in the win column (and so did Alan, I believe).  On the flight back that evening we looked down at the sea and felt grateful for our pleasant journey, for the tragedy narrowly averted, and just to be on our way back to Portland in time for dinner, whole, intact, and more or less unscathed by the experience.  Of course, there was the small matter of our bright red sunburned heads which were—surprisingly–beginning to approximate the color of that cute little California sports car which we had just left behind.

– Clay (clay@privatemoneysource.com)