Fairfield Financial Services, Inc. - Private Money Loans, Lending & Borrowing

The Private Money Investor

Rehab and construction loan FAQ

February 15th, 2013

Clay Sparkman

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

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

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

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

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

REHAB AND CONSTRUCTION LOAN FAQ

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

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

What do you mean by “back-end LTV”?

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

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

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

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

Do you require an appraisal?

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

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

Are you able to loan 100% of hard costs?

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

How does the construction money get disbursed?

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

How much experience do you require from the borrower?

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

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

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

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

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

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

What are your rates?

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

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

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

What fees are involved?

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

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

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

Is there a pre-payment penalty?

Typically there is no pre-payment penalty.

What is the approval process?

There are basically four steps.

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

Is the deposit check refundable?

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

How long does it take to put the loan together?

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

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

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

Draw process for rehab and construction loans

February 6th, 2013

Clay Sparkman

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

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

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

DRAW REQUEST SUBMISSION REQUIREMENTS

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

Cover page / Instructions:

For each disbursement item:

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

Photos:

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

Updated Budget / Draw Record:

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

If expenditures do not meet budget expectations:

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

Copies for Payment / Reimbursement:

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

Email, Fax, or Mail:

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

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

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

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

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

February 1st, 2013

Clay Sparkman

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

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

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

Dailyresearchhunter.com on global real estate investing:

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

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

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

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

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

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

What to look for in 2013

January 24th, 2013

Clay Sparkman

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

“Ten Real Estate Trends to Watch in 2013″

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

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

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

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

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

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

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

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

Where do you go to learn about private money lending?

January 16th, 2013

Clay Sparkman

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

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

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

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

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

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

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

I hope this is of use to some of you.

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

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

Private Money FAQ

January 9th, 2013

Clay Sparkman

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

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

-What is private money used for?

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

-What are the interest rates?

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

-What fees are involved?

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

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

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

-Is there a pre-payment penalty?

Most of our loans have no pre-payment penalty.

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

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

-What is the most common use for private money?

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

-How fast can private money loans close?

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

-is an appraisal required?

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

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

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

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

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

-Why do they call it hard money?

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

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

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

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

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

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

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

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

-Is the deposit check refundable?

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

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

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

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

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

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

December 5th, 2012

Clay Sparkman

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

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

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

Economists: Housing recovery finally here

CNNMoney, 10/3/12

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

Home Prices Rise Again, This Time on the Low End

The New York Times, 9/25/12

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

Housing Market Recovery Hits New High in September

Forbes, 10/23/12

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

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

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


The quest for quality private money loans

October 5th, 2012

Clay Sparkman

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 150-200 loan requests per month these days and of those we end up pursuing maybe ten in a typical month.  On average maybe five of those will survive our underwriting process, be presented to one or more of our investors, and ultimately be closed through escrow and thus actualized as an investment.

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

If you are a hard money lender looking directly for commercial loans to fund, you may sign up as a lender and create an account that allows you to specify detailed criteria regarding the specific types of loans that you would be interested in and your particular criteria.  Then from time to time borrower proposals that meet your criteria will be submitted to you.  You may choose to either decline or pursue these proposals. The proposals are quite detailed. If you choose to pursue one, then you pay $30 to receive the contact info for the broker or borrower presenting the loan. And 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, there is no additional cost.

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.


Sample loan prospectus

October 2nd, 2012

Clay Sparkman

I’m not sure how many of you have made loans with us before, so I thought I would post a prospectus for a loan that we placed recently. The prospectus which is shown here is the high level presentation, or executive summary of the loan.  Having read the prospectus you should have a pretty good idea what the loan/borrower/project is all about and what this loan looks like as a potential investment.

When an investor wishes to fully evaluate a loan investment, we send a full package in Adobe Acrobat format (generally between 50 and 200 pages) password protected, and with backup documentation to support and inform the investor in detail regarding the known relevant particulars of the proposed loan.

Kristopher Gillmore

Fairfield Financial Services, Inc

16055 SW Walker Road, #247, Beaverton OR 97006

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

REAL ESTATE PROSPECTUS

SECURED LOAN

Cash out refi of property in Pacific City, OR

Loan Details

  1. Loan Amount: $320,000
  2. Term: 36 Months
  3. Interest Rate: 12%
  4. Monthly Payments: $3,200.00  Interest Only
  5. Security:  Deed of Trust in 1st Position security interest in real property at xxx, Pacific City, OR
  6. Value by Borrower CMA:  $637,175
  7. LTV based on Borrower CMA:  50%

Loan Overview

xxx, LLC purchased the subject property in 2006 for $780,000.  Currently, they owe approx. $150,000 on the property, and they are looking for cash out refi of $320,000 to provide funds for a subdivision project in the San Diego area.

Since the purchase of the property in 2006, the following improvements (xxx – managing member of yyy, LLC) have been made:

“We newly painted the entire interior and applied oil based preservative on the exterior shingle siding.  We widened the concrete driveway 3′ and perimeter house walkways 1′.  We installed new granite kitchen counters and all new appliances.  We installed all new custom blinds throughout the house, as well as new light fixtures in the dining area.  We installed new carpet throughout the house.  We installed a new Master Bath shower with custom tile & glass block from Germany, and a new shower head.  Finally, we installed a comprehensive security system.  The total cost was $45,000+/-.”

Currently, the property is only used as a 2nd / vacation home by the borrower.  It is not being rented out, although the borrower believes that it could be rented out for a min. of $300/night or $36,000/year (based on occupancy 1/3 of the year) as a vacation rental.

To exit this loan, the borrower has stated 2 options.  For the first option, the loan would be paid back from the proceeds of the sub development project, which xxx believes will come to fruition in the next 12-18 months.  The other option would be through the sale of this property, or another property that he owns.

Property / Valuation

The property is a 4 bedroom, 3 bath home of 2,317sf.  It sits on .11 acres, and is reported by the borrower to be the best location in Shorepine village, at the base of the beach ramp with no houses between it and the ocean.

To estimate the value of this property, a CMA has been provided by xxx.  It should be noted that the comps used in the CMA are all active listings.  A search on Zillow.com http://www.zillow.com/homes/comps/62823756_zpid/ was performed showing all the sales of public record in this area, although there is a tremendous difference in the $/SF of these sold properties.  There are not many sold houses with a comparable location with regard to an open view of the beach.  There is however on sale on record a few doors down for $171,000, which is just under $100/sf.  Compared to the other sales and active listings in the neighborhood, this number seems abnormally low.

Income

A signed 1003 has been provided by xxx, stating a monthly income of $13,500.  He states total assets of $3,349,175 and a net worth of $2,918,143.

Credit

A recent credit report has been provided showing scores of 678, 698, and 728.  There is 1 30 day late payment reported on a Shell Citibank card that occurred over 2 years ago, but otherwise his credit history is perfect.

– 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 can climb; I just don’t want to fall again

August 23rd, 2012

Clay Sparkman

I like what I’m seeing in the New York Times lately regarding real estate recovery. The following article was in yesterdays paper:

Here

It seems that they are convinced that recovery of the real estate markets is underway–though they also suggest that it is likely to be slow.

I’m fine with that. I can whether the climb back up the cliff-side, but another fall … I wouldn’t like to go through that again.

All in all, I’d say the news (based on this source and others) is about as good as it has been at any point during the past five years. I’ll take it!

– 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.

Too good not to share

July 2nd, 2012

Clay Sparkman

I figured this was too good not to share. After all, when The New York Times speaks …

http://www.nytimes.com/2012/06/28/business/economy/new-indications-housing-recovery-is-under-way.html

I’ll try to get back to posting more frequently. I’ve been a bit at a loss as to what to post lately. If anyone has anything they’d like to know more about, please let me know.

– 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.

Another good piece of data for real estate markets in the PNW

February 3rd, 2012

Clay Sparkman

This from a recent article in The Puget Sound Business Journal:

“Sales of larger apartment buildings in King County are on the upswing, setting a record average price per square foot in 2011, according to data supplied by Dupre + Scott Apartment Advisors Inc.

Investors last year paid an average price of $136,509 per unit for apartment complexes with 20 or more units in King County, Dupre + Scott data show. That’s the highest price paid in more than a decade, topping the average price of $135,371 per unit set in 2007.

That record price is especially surprising considering sales are still well below their 2005 peak …”

Good news for Pacific Northwest real estate markets continues to mount. Let’s hope it (the market) continues to follow the recent indicators.

– 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.

Everything you wanted to know about private money but were afraid to ask

January 12th, 2012

Clay Sparkman

(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.

A few useful and interesting resources for private money professionals

November 9th, 2011

Clay Sparkman

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

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

ALTOSResearch offers this wonderful site, offering “real-time real estate data.” I haven’t fully researched the treasures on this site, but have been quite impressed by their market specific data (just click on the “Take me to the data” tab off the main page.” It is free to use at a basic level and offers a very useful set of analytics giving you invaluable data on the current state of various real estate markets. The section for Portland looks like this. It actually offers some promise for the future of this market as we move into 2012.

I came across an interesting article at CNNMoney: Housing markets: Best recovery bets. This article begins, “Home prices are poised to fall in most markets this year, but 2012 will bring a rebound. Here are the 10 large metro areas that will record the largest price gains.” Thus more hope for 2012.

I am particularly excited to see that Tacoma, Washington is #1 on the list and that Seattle is #6. Since Oregon and Washington tend to move together, I think this bodes quite well for the chances of recovery in the Pacific Northwest—our core region.

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

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

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

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

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

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

Here’s to a good finish to 2011 and a better year in 2012!

– 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.

Better times are coming in real estate markets and here’s why

October 29th, 2011

This Guest post by Jeff Lindikoff

I hope you are enjoying the beautiful fall weather. It is certainly my favorite time of the year and good things are on the horizon for Real Estate Investors.

We have been saying for most of this year that with an election year coming up, the government will make a move to stabilize the housing market and reduce the fear that has been driven by the looming number of nationwide foreclosures. The stock market was not up nearly 400 points today just because Europe has found a solution for their financial crisis, there was good news domestically about the US economy as well.

The sale of new homes in September surpassed experts estimates due to low interest rates, low prices, as well as pent up demand for new homes. However, contracts to buy existing homes fell in September according to the National Association of Realtors, and the culprit is confidence. What’s weighing on confidence are still-falling home prices, and what’s pushing those home prices down are foreclosures.

Today, on CNBC.Com, in an article from Realty Check, it was stated: The Obama Administration is pushing a potential plan to auction off foreclosed properties in bulk to investors, specifically the quarter of a million properties currently on the books of Fannie Mae, Freddie Mac, and the FHA. “As demand for single family rental properties rises, so too do potential investor returns.

According to an administration source: ” There is a hope that we ‘ll be able to do a pilot in the near future, perhaps by the end of 2011 or early 2012.”

“Many investors are out there raising billions of dollars to buy these properties,” says Jaret Seiberg of MF Global. “It’s a great idea, and it’s one of the few things that we’ve heard in several years now that can really help housing in a meaningful way. The idea is not just to reduce supply but to reduce the fear that there ’s going to be this massive flood of foreclosed homes into many markets, and that fear of this foreclosure inventory that’s really keeping prices down,” adds Sieberg.

“The beginning of the of the rentership society is upon us,” says analysts at Morgan Stanley. “Single family rental total returns offer lower volatility and outsized returns Vs. other major asset classes, even when accounting for the housing bubble and subsequent declines.”

This is not surprising news to us as we have been saying for months that the federal agencies will sell off their foreclosures in bulk to investors as the demand for rents are way up. We are already seeing a large number of international investors in the US housing market as they see the prices of our homes to be a steal. When the current administration announces a plan to reduce foreclosures as well as offering incentives such as tax breaks and low interest loans for investors, which will be soon to take advantage of the election year, investors will be coming back to the market and prices will stabilize.

Now is a great time to take advantage of the discounted prices on Investment Real Estate. We are working with fantastic asset managers in Kansas City, Indianapolis, and very soon Memphis. Please visit our website at www.realestateio.com for updates.

Please feel free to call me anytime at 541-537-2042 to discuss Real Estate investing. We have been in this arena for over 20 years and have wonderful contacts all over the United States bringing us fantastic cash flowing properties.

Jeff Lindikoff, Total Property Solutions, LLC, j.lindikoff@gmail.com, 541-537-2042, www.realestateio.com

– 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.

A private money loan prospectus – Hood Canal, Washington

October 21st, 2011

Clay Sparkman

From time to time, I post a prospectus for a loan that we are currently in the process of placing. This serves three purposes: (1) It gives readers a window into the kinds of loans that we are placing, (2) It provides an example of how are loans are initially presented, and (3) It gives investors the opportunity to inquire about the investment if they are interested in doing so.

The prospectus, which is shown here, is the high-level presentation, or executive summary, of the loan.  Having read the prospectus you should have a pretty good idea what the loan/borrower/project is all about and what this loan looks like as a potential investment.

When an investor wishes to fully evaluate a loan investment, we send a full packet in Adobe Acrobat format (generally between 50 and 200 pages) password protected, and with all backup documentation to support and inform the investor in detail regarding the known relevant particulars of the loan.

Please note that this prospectus has been redacted (name and address info) since it is being broadly distributed. If a particular investors is interested in evaluating a loan, then of course the presentation is not redacted.

If you are interested in discussing private money loans in general or this one in particular, you may contact me at sparkman@lendicom.com or Kris Gillmore, who is coordinating this loan, at 503-319-7294, or gillmore@privatemoneysource.com.

Kristopher Gillmore

Fairfield Financial Services, Inc

3327 SE 50th St, Portland, OR 9706

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

REAL ESTATE PROSPECTUS

SECURED LOAN

Cash out refi of SFR in Tahuya, WA

Loan Details

  1. Loan Amount: $200,000
  2. Term: 36 Months
  3. 6 months minimum interest
  4. Interest Rate: 13%
  5. Monthly Payments: $2,166.67  Interest Only
  6. Security:  Deed of Trust in 1st Position security interest in real property at XXXXXXXXXX, Tahuya, WA 98588
  7. Current Value by Appraisal:  $390,000
  8. LTV based on Appraisal:  51%

Loan Overview

Mr. xxx is the owner and president of a software development company, YYY, Inc.  Beginning in 2002, both the company and Mr. XXX’s family experienced some setbacks which would ultimately put him behind on his payroll taxes.  Mr. XXX’s attorney is ready to file the taxes, but they are waiting for the funds before they file.  The estimated cost of the payroll taxes is $137,000 + interest.  A detailed letter of explanation has been provided.

In 2010, Mr. XXX’s mother in law passed away, leaving the free and clear (minus 2009-2011 property taxes) subject property to Mr. XXX and his wife Mrs. XXX.  The borrowers have requested this loan to pay the back payroll taxes.  The borrowers have a great emotional attachment to this house, so their intent is to keep this property as a vacation home and exit this loan with a conventional refi.  If the payments are too much to handle, they would then consider renting the property.  As a 3rd option, if they are unable to refi and/or find a suitable tenant they would sell the property to exit this loan.

Property

The Subject property is a 2 story 2,321sf house located on the Hood Canal in Tahuya, WA.  There are 3 bedrooms, 3 baths, and the house sits on a .15 acre lot.  Photos and more details of the property can be found in the appraisal that has been provided for your review.

Valuation

A recent appraisal with an inspection date of May 31, 2011 has been provided.  Four comps were used by the appraiser to value this property, leading to a suggested value of $390,000.  There is a large range in the date of these sales, and the appraiser does make adjustments to the price given the declining market.  A search of Zillow.com shows a number of houses (of reasonably comparable size) for sale in this area ranging from $310,000 to $795,000.  Given the decrease from original list prices on the higher priced homes on the appraisal, and the overall feel of the market right now, $390,000 seems to be a reasonably conservative estimate of value.

Income

Mr. XXX states a monthly income of $8,180 and Mrs. XXX states a monthly income of $5,000.  In addition, Mr. XXX sold a portion of his business and has been receiving monthly payments of $5,000.  There is a balloon due on May 1, 2012, in which Mr. XXX should receive approx. $100,000.  A copy of this note has been provided.   Mr. XXX and Mrs. XXX state a combined a net worth of $341,402.  A 1003 has been provided for your review.

Credit

A recent credit report has been provided showing scores of 655, 627, and 644 for Mr. XXX, and scores of 686, 698, and 705 for Mrs. XXX.  Please note – there are red flags on this report with regard to the SSN entered for Mrs. XXX.  When this credit report was pulled, 6124 was incorrectly entered as the last 4 digits of Mrs. XXX’s SSN, when it should have been 5124.

– 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.

A good time for private money investing (or so we think)

September 19th, 2011

Clay Sparkman

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.

The top ten red flags that you may not want to lend to a particular fix and flip borrower

August 30th, 2011

Clay Sparkman

There are some good things happening out there, but these last (nearly) four years now have been tough. There are plenty of negative signs in the economy as a whole, but I am actually somewhat bullish at this point about real estate markets in general and private money investing in particular. Still, these are tough times and will remain so for some time to come. If we didn’t laugh at these things … well, we’d need antidepressants (strong ones). So here in the name of a good laugh (if not a belly buster, at least a chuckle), I give you a new top ten list.

Drum roll please…

The top ten red flags that you may not want to lend to a particular fix and flip borrower:

10. Starts singing, “If I had me a Hammer,” during meeting at the property.

9. Adamantly certain that the property can be fixed in 2 months and sold in 2 more. Only needs 4 month term.

8. Hasn’t actually looked at the comps, but has a “cozy” feeling about them.

7. Borrower: “Give me $20k and I’ll turn this little 700 square foot shoe box into a friggin’ castle!”

6. Borrower: “It’s a Zen thing. Words and numbers miss the whole point.”

5. Borrower: “Where’s the check already. I thought this was private money.”

4. Calls himself Bevis the Flipping Machine, and refers to himself accordingly in the third person. “Bevis the Flipping Machine will have this place whipped together in the time it takes you to recite the Aztec calendar backward.”

3. Borrower: “Experience? No. But hey, I can handle a screwdriver as well as the next guy.”

2. Borrower: “No I don’t have a cash buffer per say, but I’ve got a stash of old comic books that are worth plenty … and highly liquid I might add.”

1. Borrower: “Yes, I realize there is no profit in this particular project, but I’m going to make it up in volume.”

– 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 goes Miami …?

July 30th, 2011

Sorry to be so long away from you. I guess the lazy days of summer have been calling. I would like to share an article that I read recently in the New York Times.

http://www.nytimes.com/2011/07/27/business/affluent-buyers-reviving-market-for-miami-homes.html?pagewanted=1&_r=1

It seems that the Miami market, one of the worst hit during the real estate turn down, is on the mend, and that is attributed to investment buyers who have stepped in and said with their dollars: This market has gone about as low as it is going to go. There are opportunities here. We are ready to buy and hold and make our money down the line.

This has provided the much needed buffer, almost like say those who speculate in commodities markets, to balance out the market and absorb the gap that would otherwise exist between supply and demand.

I’m curious: how many of you think this could be a trend for the entire nation? Is this the way that it will all get turned around, and is this the beginning of that turn around? Please comment.

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

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

There’s something about equity

May 19th, 2011

Clay Sparkman

With a double dip real estate depreciation nationwide becoming fact in April, and now with  the federal government threatening not to extend government backed financing options large (jumbo) residential loans, this market is hardly getting easier or more predictable.  So you might ask, “How do we get private money loans done in today’s real estate market?”

Well I can tell you this.  Equity comes at a premium.  A particular loan scenario may have certain flaws, but if the equity position is strong enough, we can generally place that investment with our investors and they will feel comfortable knowing that if they have to take the property back, they will be unlikely to lose principal or interest given the enormous amount of buffer involved.  And even better, if there is a large amount of equity it is very unlikely that the properties would ever come back at auction.  First of all, the borrower has a great deal at stake and thus is very likely to make loan payment a priority.  And secondly, even if the borrower gets into trouble, there is almost always one more loan or one more rescue option to come in and take you out the existing investment.

Here are a couple of examples, loans that we are currently packaging for placement.

Sample 1 – $200,000 loan on a Washington non-OO home which is free and clear.  The home is valued at $375,000 and the loan proceeds will be used to pay accumulated business taxes.

Sample 2 – $60,000 loan on an Oregon coast OO residential foreclosure bailout.  The home recently appraised at $162,500.

So you see the common theme: trouble coupled with large equity positions = good private money loan investment.  We’re seeing more and more of this kind of thing.

So remember the private money investor’s credo:  Never lend on a property that  you wouldn’t buy for the price of the loan AND any property that you would gladly buy for the price of the loan is a loan worth serious consideration.

– 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.

Squeezing loans into the box (by thinking outside the box)

March 17th, 2011

Clay Sparkman

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.

How to invest in private money loans when real estate markets are uncertain

March 1st, 2011

Clay Sparkman

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

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

Mini-condos for simple living on the Washington coast

1.     Loan Amount: $286,000

2.     Term: 1 year

3.     Interest Rate: 13%

4.     Monthly Payments: $1,895.83 Interest Only

5.     Construction Holdback Account: $265,000

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

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

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

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

10.     Completion LTV by Borrower Comps:  62%

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

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

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

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

Adult care facility in Washington

1.     Loan Amount: $270,000

2.     Term: 24 Months

3.     6 months minimum interest

4.     Interest Rate: 14%

5.     Monthly Payments: $3,150.00 Interest Only

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

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

8.     LTV based on Appraisal:  36%

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

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

Vacation rental in central Oregon

1.     Loan Amount: $120,000

2.     Term: 36 Months

3.     6 months minimum interest

4.     Interest Rate: 13%

5.     Monthly Payments: $1,300.00 Interest Only

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

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

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

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

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

Self-storage facility in northern Washington

1.     Loan Amount: $375,000

2.     Term: 36 Months

3.     6 months minimum interest

4.     Interest Rate: 12%

5.     Monthly Payments: $3,750.00 Interest Only

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

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

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

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

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

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

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

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

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

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

A private money loan prospectus

January 18th, 2011

Clay Sparkman

I’m not sure how many of you have made loans with us before, so I thought I would post a prospectus for a loan that we are currently in the process of placing.  The prospectus which is shown here is the high level presentation, or executive summary of the loan.  Having read the prospectus you should have a pretty good idea what the loan/borrower/project is all about and what this loan looks like as a potential investment.

When an investor wishes to fully evaluate a loan investment, we send a full package in Adobe Acrobat format (generally between 50 and 200 pages) password protected, and with backup documentation to support and inform the investor in detail regarding the known relevant particulars of the proposed loan.

If you are interested in discussing private money loans in general or this one in particular, you may contact me at sparkman@lendicom.com or Kris Gillmore, who is coordinating this loan, at 503-319-7294, or gillmore@privatemoneysource.com.

Kris Gillmore

Fairfield Financial Services, Inc

2727 NW Hoyt St, Portland, OR 97232

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

REAL ESTATE PROSPECTUS

SECURED LOAN

Construction funds for a single-family home in Portland, Oregon.

Loan Details

  1. Loan Amount: $355,000
  2. Term: 1 year
  3. Interest Rate:  13%
  4. Monthly Payment: $3,845.83
  5. Construction Holdback Account: $157,000
  6. Interest Reserve:  $11,574 (The borrower will make ½ the monthly payment out of pocket effectively making this a 6 month partial reserve)
  7. Security:  Deed of Trust in 1st Position security interest in real property located in Portland, Oregon
  8. Combined As-Is Value by Borrower / Realtor estimate:  $282,000
  9. Combined Front End LTV:  70%
  10. Combined Projected Value by Borrower / Realtor estimate:  $525,000
  11. Combined Projected LTV:  67%

Loan Overview

The proceeds of this loan will be used to pay off an existing hard money loan.  The construction funds will be used to build a single-family residence with a full daylight basement that can be rented as a separate apartment.

The borrowers acquired these two lots in 2006. Additionally, they also acquired the property behind these lots with a house in need of repair.  They rehabbed the house, which is now held as a rental, and put in a road to access lots 2 and 3.  After the acquisition of this property, the borrowers invested approximately $42,000 out of pocket into the lot development.  They report that this figure does not include their time and labor.  The two parcels being used as collateral have been fully developed and are prepped for vertical construction.  Once construction on lot 3 has been completed and sold, the borrowers intend to build another spec home on lot 2.  The borrower’s have carefully planned the development and construction of these three lots, and they’ve been successful in their execution of this plan so far.  The borrowers are not bringing in any cash to close this loan, but they do have approximately $100,000 in equity that they are pledging as collateral.

The borrowers plan to exit this loan with the sale of the property.  They believe that the basement apartment and view will make the property more attractive than other properties currently listed in this area.  As a contingency, if the property does not sell, the borrower intends to rent both units and seek a conventional mortgage.  Total income is projected at $2,250 per month if both units are rented.

Property

The property consists of two similar lots (lot 2 and lot 3), although construction will only occur initially on lot 3.  Lot 3 is 4,750sf, with sewer, water, power, phone, and cable on site.  This property has a partial view looking south east towards Milwaukie.  Photos of the lots have been provided

The proposed single family residence will be 2,680sf, with 4 bedrooms and 3.5 baths.  There will be a two car garage, and two fireplaces.  This home will also have central air, granite countertops, stainless steel appliances, and will include a finished live-in basement that can be rented as a separate unit.  Half of the basement walls will be exposed with windows, and will be more like a first floor than a traditional basement.

Valuation

As-Is Value

Based on recent comps provided by the borrowers, they estimate the value of lot 2 to be $132,000.  Lot 3 is approx. 2000sf smaller, and by the same comps the borrower estimates a bare land value of $115,000.  Considering the amount of work that has been done (excavation, footing, 6 months of engineering with the city, plans) the borrowers estimate a value of approximately $150,000.  This is a combined estimated value of $282,000.

Projected Value

Recent comps were provided by the borrower.  Based on these comps, the borrower and his realtor have decided to list the property for $410,000.  A property inspection was performed by our VP, who reports that $410,000 seems like a reasonably conservative estimate of value.

When combined with lot 2 as cross collateral, the combined projected value of this property is $525,000

Financial Status

Fairfield was provided with a signed 1003 for xxxx and yyyy.  They state a combined gross income of $12,300 per month (this is an average amount based on xxxx’s variable construction income) and a net worth of $208,595.  A copy is provided for your review.

Credit

xxxx has a mid-credit score of 528, while yyyy has a mid-credit score of 527.  xxxx’s income is variable, and he is currently having some cash flow issues.  xxxx reports that he is expecting payment from a large project, and has another lined up.  It should be noted that the borrowers have a perfect pay history with Fairfield over the past 2 years.

Experience

xxxx reports that he has 40 years of construction experience.  A resume of his work over the past 15 years is provided for your review.

<end of private money loan prospectus>

– 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.

An ireloquent post

January 11th, 2011

Clay Sparkman

A friend of mine likes to make up words.  He comes up with some pretty good ones.  A recent invention of his—ireloquent—strikes me as particularly utilitarian.  It is useful in those situations where someone is going on and on about something in the most eloquent way, but in fact has provided a response that is completely irrelevant to the matter at hand.  You know what I’m talking about and who—don’t you?

And thus for your reading pleasure today, I provide you with a completely ireloquent post:

If I haven’t posted so much lately (and I assure you that I haven’t), it is because I am on my annual pilgrimage to Chile.  I won’t say that my primary consideration in choosing a spouse was that she be from a beautiful country in the southern hemisphere where it is 80 degrees and sunny whenever it is cold and rainy in Oregon—and yet … well let’s say it worked out that way.

So each year when it gets really nasty in Oregon (December/January), we come down (our family of three, which includes my five year old son) to visit our beloved family here in Chile (who fuss over us constantly catering to our every need), and we bask in the golden goodness of Chile for 1-2 months before packing our things up again and schlepping our way back home up to Oregon.  I won’t go on and on about how nice it is to spend your Christmas eve sipping cocktails at poolside and all that, mostly because so far as I know all of my readers are from the northern hemisphere and I don’t want to make my readers cranky.  (Still … golden sun, light breeze, birds singing everywhere … NUFF SAID.)

Really I just wanted to share some thoughts about different perspectives on the New Year as we move into 2011.  2010 was tough for so many of us up north.  We struggled to hang on and waited for things to get better … and waited and waited.  But I must say that Chile had a 2010 that in some ways makes ours in the USA look like child’s play.

First of all, they elected a new president—Sebastian Pinera—the first president representing the conservative right since Pinochet stepped aside (well sort of; that is another story) to make room for Aylwin in 1990.  (When you think about it, that is a pretty good name for a presidential candidate.  It sounds quite a bit like “I’ll win.”)  Now this change was not necessarily a bad thing for Chile, but it was–at the very least–a stressful transition for a nation that had just spent the past 20 years recovering from the iron fisted reign of Augusto Pinochet.

Before the new president could even be sworn in, the country was devastated by a horrible earthquake and flooded by massive tsunami waves, leaving many dead, injured, homeless, and without basic food and supplies.

As bad as it was, it could have been a lot worse.  The various governmental and non-governmental agencies really stepped up to save lives and get basic infrastructure back in place quickly.

And then just when the country was beginning to pull itself back together somewhat from the earthquake, and as if that trauma hadn’t been enough for the nation to bear, a mining accident in the northern part of the country left 33 miners trapped underground, lost and waiting for rescue.  (Of course if you don’t know about that story, then it is likely that you were also living underground at the time.)

It took more than two weeks, but through a series of drillings the miners were located, and it was determined that they were all alive and in reasonable condition.  That was the good news.  The bad news was that rescuers estimated that the miners might not be back up top even in time for Christmas.  Need I say, that is a long time to hangout a half-mile below the surface of the earth even if you know the rescuers are on their way?

In September, Chile celebrated its bicentennial.  This was bitter-sweet, as you can imagine, as the entire nation (actually the entire world) was waiting, hoping, and praying for these 33 to men to get our alive.  Chile is very proud country, and I can tell you that during my 20 year love affair with this nation, I have never seen it so united as it was at that point in time.  The entire nation was breathing it seemed with one collective breath.

In some of the most stunning press coverage I have ever witnessed, after 69 days underground the first miner was pulled to the surface, and stepped out of the specially designed capsule into the arms of a nation.  My wife and my son and I were all watching on CNN at this moment, and my mother-in-law was on long-distance from Chile, and I am not ashamed to say that at that moment I sobbed like a baby.  Rather sooner than expected, every single miner and every single rescuer came out alive and well.  Amazing!  Pinera’s approval rating jumped some 20 points (and I say deservedly so).  Vivan los mineros, viva Chile!

What a year was 2010 for Chile!  We all celebrated on New Year’s Eve together and made many toasts for a better year for Chile in 2011.  Needless to say, I was horrified when a live report on CNN international on the afternoon of January 2nd, reported an earthquake registering 7.1 in the Temuco region of southern Chile.  How could this be—only just 2 days into the New Year?  As it turned out, it was a bit of a false alarm.  The quake was ultimately downgraded and seems to have done very little damage.

And so, what exactly is my point, you say?  My point is that this post has nothing to do with private money.  It is completely and utterly ireloquent.

Oh yes, and one last thing:  May we all avoid calamities in 2011 (great and small, north and south), and may we prosper immensely in our private money investments!  (Sorry, I couldn’t help myself.)

– 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.

A story of adaptation: or how to survive and succeed in a challenging real estate market

November 11th, 2010

The following is a guest post by Matthew Whitaker, Managing Member of Magnolia Partners, LLC and Golden Key, LLC.  I originally posted this article on my Broker Blog, but it occurred to me that it would be appropriate to post it here as well.   What I think a trust deed investor should take away from this is that even in this dreadfully stagnant real estate market, there are savvy people out there taking advantage of the conditions of the market, and thus there are excellent opportunities for those of us who lend as well.  Simply put: where there are clever investors there are smart lending opportunities.

In December of 2007 we were faced with a decision.  After three years of successfully flipping properties to low and moderate income buyers, we awoke one day with no buyers and no plan to find new ones.  Our dilemma was very simple, do we dissolve the company or do we create a new viable model that will work in this new economy?  If we decided to create a new model, what would that look like?

We had just begun to hit our groove in the spring and summer of 2007.  We had successfully flipped around 100 properties in the first 2 ½ years of business and we were working at about a 4 to 5 house pace per month.  We were making money and had been in the black for quite some time.  We considered ourselves “real estate investors” and thought we were pretty darn good at it.  So when we found ourselves faced with a flight or fight decision only a few short months later, it seemed surreal.  My partner, Karen, and I spent days talking about what a viable model was for the new economy.  We had heard of other local groups “selling to out of state investors.”  We decided to attempt to replicate a similar model, but with a focus on local investors.

For three months Karen and I worked on a plan and developed systems and processes that involved Golden Key (GK) (www.gkhouses.com) selling properties to investors that wanted to invest passively in real estate.  Our vision was that everyone recognized the opportunity, but very few people had the skills to do something about it.  We thought we would approach professionals (executives, doctors, lawyers) and pitch them on the idea of owning 10 – 15 properties instead of investing all their money in the stock market.  Locally, based on our expected average sales price, this involved them investing $100K to 150K individually.  Our responsibility in this plan involved acquiring the properties, rehabilitating them, leasing them, and then finally selling them to these new found investors.  We felt this model would eliminate most of their risk and objections.  Questions like, “What would it rent for?” and “How much will the rehabilitation cost?” became commonplace in our initial pitches.  What we decided was that we really needed to mold two businesses–an acquisition business (to find the deals) and a management business (to process the houses and manage them on a go-forward).  Our office quickly became a “mission control” of spreadsheets and flow charts.

In 2008 we had only moderate success with pitching this business.  We had very little trouble getting people to agree that there was an opportunity, but a whole lot of trouble getting them to write a check.  We were able to identify some investors, but continuing changes in the lending environment made it harder and harder to close the deals and made it more difficult for one person to purchase multiple properties.  This resulted in a time intensive process of dealing with lenders during the close and constantly finding new investors.

Because we became very frustrated with how slowly the business was progressing, we decided if we could pool the investors versus dealing with them individually, this would allow us to really deal with one “client” and speed up the process.  Since we didn’t know how to put together a fund, we approached a local investment bank, Founder’s Investment Banking (FIB) (www.foundersib.com) in late 2008.  We thought FIB to be a good fit since they had a real estate practice that had previous experience putting together real estate focused funds.  At the time, they were disinterested, but we did plant the idea.  We continued to approach other similar groups, but with very little success.  So we continued to sell to both local and out of state investors, one house at a time.

In the spring of last year (2009), FIB came back to us and said they would be interested in putting together a fund.  The fund’s investment thesis was to purchase the homes, already renovated with a tenant already paying rent, and then to hold the properties in a portfolio renting them, and as the market recovered begin selling them to homeowners, preferably the tenants.  What they saw was that the current market was allowing for a unique opportunity, and they could purchase these homes at similar returns to what they could expect from an apartment community; however, apartment communities will always sell using the same criteria (cap rate, cash flow, etc.) that they used when purchasing it.  In comparison, single family homes can be sold to a homeowner who purchases for much different reasons and thus will pay a premium for that home.

FIB also saw this as an opportunity to enter the single family management business.  They asked if, that in addition to putting together the fund, they could invest as a partner in both the acquisition business and the management business.  This fund would give both businesses a tremendous amount of horsepower, so settling on a sales price was a challenge.  After a series of meetings, over about three months, we finally agreed on a sales price for a portion of our business.

January 1st of this year the deal was completed and the fund was closed.  The fund has purchased around 35 properties to date.  It takes us about 75 days from the time we acquire the property until the time we are able to sell it to the fund.  The fund has provided us exactly what we expected.  We’ve been able to produce product with speed.  Our margins are about 70% of what they were in the past, but we expect to do significantly more deals under this new model.

Our story is one of reinventing ourselves for the new economy.  Our biggest challenge these days is finding something that is sustainable long past the opportunities the current economy is presenting.  We never want to find ourselves in the same position we were in three years ago.  Our management company has grown from 20 houses in 2007 to almost 300 today.  We believe that the challenging market will be an opportunity for quite some time; maybe not as BIG of an opportunity as it is today, but we believe the U.S. will feel this pain for the next four to five years.  Additionally, single family management will benefit from the slow recovery and continue to grow over that same time period.

We’ve learned quite a few lessons over the last three years which will probably be, as we look back, the greatest return on our adventure reinventing Golden Key.

Our first lesson is that very few people really understand real estate investing.  This is very dangerous in a business where we talk about leverage being able to multiply an investor’s returns and the same holds true for his losses.  Becoming intimate with the actual data is a very healthy process.  What are the real expenses?  What are the real revenues?  How might they change?

Secondly, we’ve learned that investing for value over investing based on speculation is a whole lot less sexy, but it sure pays the bills.  In the past we purchased properties based on what we “thought” we could sell them for.  Today we purchase properties based on what we KNOW they will sell for.  Rental value is a much more accurate measure of intrinsic value than a sales price.

Lastly, it is hard to both manage and invest–so no matter how emotional the month is, you have to examine your business as both the operator AND the investor.  Make sure it makes sense for both.

We continue to grow and learn daily and I hope that our story will add some value to what you are doing.

Matthew Whitaker is Managing Member of Magnolia Partners, LLC and Golden Key, LLC (www.gkhouses.com) in Birmingham, Alabama.  He has been investing in single family houses since 2004.  He has acquired over 150 houses personally and has a team that has the collected wisdom of acquiring over 400 houses.

Private loan packaging guidelines

October 31st, 2010

Clay Sparkman

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.

Less Grumbly – A Follow-up to ‘grumblings of a slum lord in the post-bust environment’

October 13th, 2010

This Guest post by Brian Blum, Operating Manager of Maverick Structures LLC,
is  a follow up to an earlier post

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

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

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

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

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

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

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

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

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

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

What does this mean to us?

October 3rd, 2010

Clay Sparkman

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.

Grumblings of a slum lord in the post-bust environment

September 24th, 2010

Guest post by Brian Blum, Operating Manager, Maverick Structures LLC

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.

The sweet spot

September 16th, 2010

Clay Sparkman

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.

A way to find qualified commercial borrowers – Lendicom.com

August 30th, 2010

Clay Sparkman

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.

Top ten loan offerings that you may choose not to review

August 16th, 2010

Clay Sparkman

We haven’t done one of these for awhile.  There is plenty to be serious about with regard to the economy, the real estate markets, and in particular, the market for trust deeds and private money loans.   There is plenty of uncertainty in these markets.  And yet, there are also some good things happening and I am beginning to see the emergence of some logical patterns (which favor those who deal in these markets).  At any rate, there is always room for a good chuckle.  So with that in mind, I give you the top ten loan offerings that you may choose not to review.

Drum roll please…

10. The loan packet is written in what appears to be ancient hieroglyphic on papyrus scrolls.

9. The loan broker informs you that in order to review the packet, you will need to find it in a rather elaborate scavenger hunt, and the first clue is …

8. The loan broker indicates that the entire loan packet has been adapted as a one-man solo performance art piece.  It will be appearing at the Museum of Modern Art in New York this fall.

7. When you ask the loan broker where you may get a copy of the packet, she tells you to place a tin foil hat on your head and wait for the electronic vibes to arrive.  “That could be right away or it could take many days.  You have to be at one with the universe.”

6. Mel Gibson is somehow involved in the broker chain.

5. Time is really of the essence.  You have precisely 1 hour and 19 minutes to review the packet.  Uh … that’s now 1 hour and 18 minutes.

4. You are instructed to go to the phone booth at 19th and Burnside and wait for a call.

3. “What do you want already?  Just frigging write the check …”

2. The borrower’s story is about to be made into a major network TV movie starring Bruce Dern.

1. You want to see a loan packet.  Fine.  There is an app for 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.

Getting started with private money – the dating thing

August 5th, 2010

Clay Sparkman

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.

When life gives you lemons …

July 18th, 2010

Clay Sparkman

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

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

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

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

Kristopher Gillmore

Fairfield Financial Services, Inc

3327 SE 50th St, Portland, OR 9706

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

REAL ESTATE PROSPECTUS

SECURED LOAN

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

Loan Details

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

Loan Overview

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

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

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

Property

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

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

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

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

Valuation

Comps by Borrower

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

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

Income

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

Credit

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

Market Analysis

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

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

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

Now that’s some kind of lemonade!

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

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

A brief unofficial analysis of the private money market for investors

July 13th, 2010

Clay Sparkman

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.

Why title Insurance

June 28th, 2010

Provided by Corinne Akerill, Escrow Officer at First American Title

When making a loan that is to be secured by an interest in real property, the following are a few questions that a title insurance company can answer.

  • Does the person who wants to borrow the money have an interest in the property being offered as collateral? Are they the vested owner or do they have a vendor’s interest in a contract of sale?
  • Are there taxes, city liens or judgments that would have priority over a new loan?
  • Are there existing loans secured by the property?
  • What is the legal description of the property?
  • Is there a pending foreclosure action against the property?
  • Is the person who wants to borrow the money involved in a bankruptcy?
  • What is the priority (or position) of the lender’s security for the loan?
  • These are the basics to know when lending money and taking real property as collateral. All of these facts are public records and any lender can research them at the courthouse. But why bother when a title insurance company not only gives you the answers, but insures them?

Title insurance is issued after a careful examination of copies of public records. In addition to matters shown by public records, other title problems may exist that cannot be disclosed in a search.

Some common hidden risks that can cause a loss of title or create an encumbrance on title are:

  • False impersonation of the true owner of the property
  • Forged deed, releases or wills
  • Undisclosed or missing heirs
  • Instruments executed under invalid or expired power of attorney
  • Mistakes in recording legal documents
  • Misinterpretations of wills
  • Deeds by persons of unsound mind
  • Deeds by minors
  • Liens for unpaid estate, inheritance, income or gifts taxes
  • Fraud

Always ask for a title insurance policy when loaning money secured by real property. Leave the research to the title insurance experts, backed up by a policy of title insurance to secure your position.

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

Question: what will it take to get the banks to lend?

June 14th, 2010

Clay Sparkman

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)

Those who shorted subprime

May 24th, 2010

Clay Sparkman

I just recently finished reading The Greatest Trade Ever, the 2009 book by Wall Street Journal reporter Gregory Zuckerman.  It is a terrific read.  I really enjoyed it.  It evolves primarily around John Paulson, and tells the story of how he managed to make billions of dollars for himself and his hedge fund investors by arranging a series of investment positions that bet against the rapidly expanding subprime positions in the market.  In particular it tells the story of how he worked with banks such as Goldman and Bear Sterns to construct and facilitate such trades.

Zuckerman doesn’t waste much time judging the ethical or legal aspect of such trades.  Rather, he tells a damned good story of how a few individuals predicted an event that others just couldn’t fathom, and then positioned themselves, against all prevailing notions, to ultimately reap enormous profits from their heart-felt predictions.

It is a story of the most profitable series of trades on Wall Street, and if one theme comes through loud and clear, it is that only an outsider (and somewhat of a misfit) such as Paulson (and a handful of others) could have managed to “think” so counter to the prevailing notions of the industry, and perhaps more importantly, would have dared to defy so many others in the industry to the point of personally and professionally marginalizing themselves in the process.

Paulson is not under indictment, but as we know, Goldman is being sued by the SEC in a high profile case specifically targeting the Paulson-backed synthetic CDOs.  I personally would have to say that I lean toward Warren Buffet’s position that overall Goldman is not really to blame here.  See the New York Times story, From Buffett, Thought-Out Support for Goldman, http://dealbook.blogs.nytimes.com/2010/05/04/from-buffett-thought-out-support-for-goldman/

According to Buffet, “I don’t care if John Paulson is shorting these bonds. I’m going to have no worries that he has superior knowledge,” he said, adding: “It’s our job to assess the credit.” The assets are the assets. The math either works or it doesn’t.”

His point being that it wasn’t important for Goldman to disclose to fat-cat institutional buyers that John Paulson was shorting the synthetic CDOs they were buying.  The buyers were professional investors, and should have looked deep inside the assets to see exactly what they were buying.  Paulson certainly did.

I am now nearly finished reading The Big Short by Michael Lewis, and I must say this book—like every Lewis book I have read–is fascinating and irresistible.  It deals with the same basic material as Zuckerman’s book but tells the story from various other points of view.  It is quite a bit more technical than Zuckerman’s book, and in this sense, is precisely what I was looking for.  Lewis has a talent for explaining complex things in simple ways, and this book goes a long way toward answering unanswered questions I had regarding “How did this all work?”

What I get out of Lewis that I didn’t get out of Zuckerman so much, is that it is the ratings agencies that are at ground-zero of the breakdown of the system.  It is hard to tell if they were really stupid or really crooked or both, but certainly there had to be a good dose of both at work here.  I don’t care how you package and re-package subprime loans into bonds.  It should have been clear that such bonds could never be packaged in such a way as to earn a triple-A rating (same as US Government debt), and yet this was happening (and so much more).  Yes, the sellers of bonds and CDOs were gaming the system, but nonetheless, the ratings agencies allowed themselves to be quite easily gamed.  You might say they were easy.

The real lesson of all this is that the sub-prime collapse could have been quite readily predicted—as it was so clearly by a small number of individuals—but that there was just too much money being made and perhaps more importantly, a deeply institutionalized thought process at work here that defied those involved to even consider notions counter to the norm.

And what is the lesson for the individual trust deed investor?  It is this I think: Don’t invest in trust deed style securities unless you know what you are doing.  You must be able to evaluate the quality of any given loan.  And most of all, never–I mean never ever–let anyone else tell you what is and is not an acceptable level of risk.  Ultimately that decision is yours and only yours to make.

– Clay (clay@privatemoneysource.com)

Don’t put all your egg baskets in one egg truck

April 27th, 2010

Clay Sparkman

Colloquialisms are funny things.  We use them pretty much every day in our speech and in our writing and yet most of us, I suspect, though we know the meanings of the expressions, frequently don’t know why the individual words have come to mean what they mean.  Take for example: “Don’t look a gift horse in the mouth.”  I must have been in my forties before I looked up one day, scratching my head, and mumbled to myself, “What the heck does that really mean?”  I remember asking my Dad, and having grown up on a farm he was able to explain to me without hesitation that it was a little like what tire kicking is to automobiles.  So there you go.  It all makes sense–if you know something about farms and horses, that is.  And while we’re on that topic, does anybody really do that: kick tires I mean?  I have purchased maybe ten cars in my life, and I’m pretty sure I never actually kicked the tires on any of them out on the showroom floor.  And still, it is a great image.  I wish I were that kind of guy who could pull it off.

So with regard to investing, the egg analogies are kind of funny.  First of all, there is “the nest egg,” which seems to refer to ones entire savings or investments.  It is singular however you will note.  You don’t have nest eggs.  You have a nest egg.  But given the fate of Humpty Dumpty and the fragility of eggs as such, we almost can’t bear the thought of our entire fortune being so fragile.  (And yet, if we don’t invest intelligently, maybe it is.)

And so of course to that end, we attempt to diversify our investments—and pretty much everyone is familiar with the expression, “Don’t put all your eggs in one basket,” which immediately makes sense as an analogy—that is until you stop to think about it.  Follow me here: if each egg represents a single investment, then perhaps each egg basket in the analogy represents an investment type or sector, and if you think about it, you still don’t have a secure investment strategy here.  Say you have ten baskets, each with a handful of eggs in them.  Are you going to keep those baskets stored all in one place, and how are you going to transport them?  Surely you must never put them all in the same egg truck!  I would like to propose thus a revised version of the expression.  Can we all get on board with “Don’t put all your egg baskets in one egg truck?”

So what is your point, you ask?  Well I do have one, and it is about diversification as it relates to trust deed investing.  Most investors—dare I say—view trust deed investing as a single egg truck, and put many of their egg baskets (but certainly not all) in their “trust deed” egg truck.  And this is where we need to get really specific about this whole issue of egg security.  Almost all the investors I have worked with over the years have been quite certain that they didn’t want to put all of their trust deed money into one single trust deed investment.  That is practically a given.  Typically, an investor with say, one million to invest in trust deeds will look to put that into somewhere in the range of 5-10 separate trust deed investments.  So we are all agreed that a dedicated “trust deed” egg truck is needed.

However, I would go a step further and suggest that if you are seriously involved in trust deed investing, you may want to deploy a small fleet of egg trucks just for trust deed investing.  And how does one do this?  Well, I used to think that this could be accomplished nicely by putting some into subdivision projects, some into home construction projects, and some in standing homes and commercial buildings.  But now I’m not so sure: when the real estate market for residential property tanked, residential subdivisions, residential construction, and finished homes all began to merge into one big thing.  Yes, they were all at different stages of the production process, but ultimately they all became one thing: residential homes.  And those homes all had to be sold or refinanced ultimately at the level of the individual homes.  (The residential river flows in one direction, and always comes to the same point where the river meets the sea.)  And in retrospect, commercial vs. residential didn’t provide as much real diversification as I would have hoped.  Though residential property was the first to fall, commercial seems to have more or less followed along (lemming-like) on its heels, and really not so far behind.  So: perhaps this type of versification was more like putting different types of egg baskets in the same “trust deed” egg truck (as opposed to deploying multiple “trust deed” egg trucks).

I would suggest that perhaps the best way to obtain effective diversification in trust deed investments is to invest in multiple geographic locals.  And in particular, I am thinking on a state by state basis.  For many investors, this goes against their fundamental instincts because they feel safer investing close to home, where they know something about values and where they can deal more effectively (they feel) with the property if they have to take it back.  Those are valid issues and such instincts should not be ignored, but it is important to weigh against them the fact that the massive depreciation in home prices which continues to occur nationwide, happened at widely varying times and to vastly different magnitudes in varying states across this nation.

So not to pick on anyone in particular, but If you think about it: when sub-prime hit the fan in 2007, if your only “trust deed” egg truck was a sixteen wheeler with “SoCal” printed in large letters on the sides, you and your egg baskets were in for a long, rough, treacherous ride down the mountain-side.

– Clay (clay@privatemoneysource.com)

Top ten clues that you should probably withdraw your loan request from a particular private money lender

April 6th, 2010

Clay Sparkman

I remember when I first came into this business 15 years ago, the general attitude toward private money–and private money lenders and brokers–was quite negative.  And to a certain extent, the reputation was not completely unearned.  It was an industry that seemed to harbor a small handful of crooks and a great many more just plain unprofessional “business people.”  And yet, what many people didn’t understand is that there were also honest, professional individuals and entities offering a legitimate, useful, and important product.

As time went by, the rap on private money lenders improved significantly, and it almost got to the point over the years where you might say that private money was a bit “sexy.”  Everyone wanted to have a piece of that market.  Most of the players these days are honest, in my opinion, and many are highly professional, but still I think I’d like to have a go at those still in the market who are either dishonest or unprofessional or both.  Some private money lenders quite simply don’t belong in the business.  If not dishonest, they are paranoid and distrustful of every borrower that comes to them, and as such, they tend to go too far in trying to protect their investment.  This TOP TEN LIST is dedicated to those folks.  (They know who they are.)

Drum roll please…

Top ten clues that you should probably withdraw your loan request from a particular private money lender:

10. One number and two words:  $25,000 non-refundable deposit.

9. The investor insists on moving in with you to “keep an eye on” his investment.

8. The investor insists on language in the loan agreement to the effect that: you will not eat junk food during the term of the loan, you will not engage in bar fights, you will certainly not smoke any sort of substance, and you will not jump out of airplanes or otherwise engage in so-called extreme sports.

7. The lender requires a lien against your pet corgi Noodles as additional collateral to secure the loan.

6. Lender keeps referring to your property as “my property.”

5. Rates are quoted by the day.

4. Lender keeps saying ka-ching at the end of every phone conversation.

3. The product on offer involves a one week term with a one week extension option.

2. The investor wants to become a co-signer on your checking account.

1. The investor requests a perpetual easement to ride his ATV on your property—and your lot is only 4,000 square feet.

– Clay (clay@privatemoneysource.com)