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.

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.

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 heed 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 encounter 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.

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

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

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

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

Kristopher Gillmore

Fairfield Financial Services, Inc

3327 SE 50th St, Portland, OR 9706

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

REAL ESTATE PROSPECTUS

SECURED LOAN

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

Loan Details

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

Loan Overview

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

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

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

Property

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

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

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

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

Valuation

Comps by Borrower

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

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

Income

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

Credit

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

Market Analysis

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

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

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

Now that’s some kind of lemonade!

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

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

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.

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)

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)

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)

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)

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)

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

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

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

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

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

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

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

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

Rule Number 2: Be skeptical

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

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

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

Rule 4: Think like an appraiser

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

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

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

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

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

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

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

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

– Clay (clay@privatemoneysource.com)

Grover W. Sparkman is the President of Fairfield Financial Services, a company that he founded with his wife, Louise Sparkman, and a business partner in 1964.  He has been involved in just about every imaginable aspect of private money lending and paper brokering for nearly half a century.  He also works as a licensed Realtor in Oregon and Washington, and previously worked for many years as a licensed appraiser (back when you still had to type appraisals).  As my mentor, he taught me how to be a private money professional.  And as my father, he taught me simply how to be.

Clay:  You started out as a Realtor and in fact you are still a Realtor.  When and how did you first get involved in trust deed investing?

Grover:  I had been working as a Real Estate salesman for Mayfair Realty, but since getting my Real Estate Broker’s License, I had always wanted to open an office of my own.  When an old time Real Estate broker named Henry English died in 1964, a partner and I, Milt Dalby, purchased the Real Estate business in Southeast Portland from the Henry English Estate.  In those days there were not many banks loaning money on real estate …

Clay:  That sounds like today.  Have we gone full circle do you suppose?

Grover:  Good point.  Perhaps we have.  At that time, the solution for sellers was to sell property on private land sales contracts …

Clay:  So maybe that is part of the answer.  Maybe we’ll see more of that once again.

Grover:  Indeed, we might.    The attitude then was one of, “why wait for the banks, let’s get going.”  Henry English had set up a collection department to collect the monthly payments on the contracts.  One day I received a call from an attorney saying one of the owners of a contract had died and he wondered if we could sell the contract to raise money to close the estate and pay the expenses.  He also explained that the 4 children that were heirs did not want to split the $400.00 per month coming in on the Contract; they all wanted the money immediately.

I started asking questions and discovered a new business–selling real estate contracts.  Back then we were called paper brokers.  Those were the days before computers and printing calculators, and I had to learn how to calculate interest yields on the unpaid balance on the contracts.  There were a set factor tables called the Elwood Tables that would give us the time value of the money and rate of yield so we could figure out what an investor could pay for a contract to get the interest he or she was looking for.  Interest rates being paid by the banks and savings and loans were very low and there were few safe places for investors to put their money to get a good monthly return.

Clay:  How has the private money business changed since you your early days in the business?

Grover:  The government began to get more involved with the residential mortgage business through programs like the Veteran’s loan program, HUD’s FHA programs, and private insurance programs protecting the banks against foreclosures.  This coupled with a growing economy caused more banks and Savings and Loan Companies to make more real estate secured loans, and in turn this caused private land sales contracts to dry up.

We still had the investors looking for a good return on relatively safe loans, so I started looking for ways I could meet their need and discovered Trust Deed financing of Real Estate loans.   Working with builders, people wanting to buy rental properties and business buildings, and developers creating subdivisions–I found people wanting to borrow, that could use their real estate as collateral for the loan, giving the lender a reason to support the borrower’s business plan and in turn receive a good return on their money.  If things didn’t work out, the property could be foreclosed and sold to recover the investment.

Clay:  Share with us, if you would, an experience as a private money broker/investor that you particularly enjoyed.

Grover:  Over the years many of my clients became personal friends and referred me to their family and friends.  I watched many of them become Snow Birds going to Arizona or California for the winter and coming back to Oregon in the spring.  There were a couple of investors that got involved in the Peace Corps and people to people programs and traveled around the world.

Clay:  And on the flip side, share with us an experience that you didn’t so much enjoy.

Grover:  On the flip side I found a lot of fraud creeping into the business.  People vastly overstating their ability to repay the loan and I found Appraisers that would give grossly inflated value to a property if they were being paid by a borrower or broker.  I found investors that were making loans to launder money from illegal activities.  There were also the investors that were only looking for loans they felt they would be able to foreclose and get property to resell at a profit.

Clay:  What is one of the funniest/strangest things that ever happened to you in the business?

Grover:  We received a proposal from another loan broker with an appraisal and pictures; they wanted a loan on two houses on one large lot.  When I went to inspect the property I couldn’t find the houses.  There had been a fire about three months before and the houses had been completely demolished and hauled away.   Another time a restaurant submitted a proposal for a remodeling loan, when I went to inspect the property they didn’t want me to go into the basement where the dining room had been.  There had been a flood that had filled the basement with muddy water.

Clay:  Would you dare to conjecture as to where the industry is going during the next few years?

Grover:  I was born just after the crash of 1929 and have seen several booms and busts in the real estate market.  I feel that there will always be a market where borrowers need money for their business plans and investors are looking to get a better than average return on their money on a relatively safe loan.  Real estate will always be good security for the loan, so long as both the borrower and the investor use good judgment and ensure that there is a proper plan for paying the loan off and that the values for the security are as accurate as possible.

Clay:  These are hard times for hard money lenders and hard money brokers.  Do you have any advice for those who are currently involved in private money investing?

Grover:  You have to like the business.  I like the real estate business because I like helping people solve their problems.  On the residential side I was helping people buy a house with the idea that they were going to make it a home and a place to raise a family.  On the commercial side of the business I always got a thrill out of watching a building grow into a business that became a part of the community.  As a loan broker, I was also helping people solve their problems of getting money to buy, develop and build while at the same time I was able to help investors get a good return on their money.

Being a broker is very much a people business; we sell one loan at a time, for a borrower with specific needs, to an investor with a desire to earn a better than average yield on the investment.  We don’t have anything to sell but our service.  I feel that it is our obligation to be as transparent and open with our clients–lenders, brokers, and borrowers–as possible.

Clay:  Would you agree with the supposition that (a) banks just aren’t lending and (b) our industry niche is being hurt by that since we are essentially a bridge and there must be a way to get on and off that bridge or people and businesses cannot cross it?

Grover:  Right now we are going through a cycle where the bigger banks are hurting the economy because they are loaning very little money on real estate.  Most of the loans we broker are for specific purposes that are generally short term, such as completing a remodel or putting up a building or developing a subdivision.  The exit strategy is to get a long term bank loan after the project is completed or sold.  If there is no money coming back into the pipeline, nothing happens and the economy suffers.

Clay:  I’ve noticed that through your many years in the business—in both good times and bad—you never seem to become bitter or discouraged.  What is your secret?

Grover:  Over the years I have seen a lot of changes:  computers and calculators and the internet, new rules and regulations, roller-coaster markets, and more frightened or suspicious people–but I remind myself that I love the business and its challenges.  I have found that most people are honest and well meaning.  My goal is to try to treat other people the way that I want to be treated in a business transaction.  Over 40 years ago I came up with our slogan:  “The Right Investment is Equal to a Lifetime of Toil.”  I believe that it is still true today.

– Clay (clay@privatemoneysource.com)

One of the most promising areas for at the moment for real estate investors, by all indications, is REO, rehab, and quick flip of 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.

With these thoughts in mind, it seemed appropriate to duplicate here the Rehab and Construction loan FAQ that I publish on my company website.  Keep in mind that it is directed primarily toward brokers and borrowers, though much of the information will be of interest to lenders and potential lenders as well.  And also note that it is about private money mostly, but does discuss the topic from a Fairfield-centric point of view.

At any rate, I tend to receive an endless parade of questions from lenders, brokers and borrowers 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 75% 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 70%.

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 $100,000 for the acquisition of a property and $20,000 for construction funds and thus wishes to borrow $120,000. If the completion value of the property is conservatively figured at $185,000 based on comps provided by the borrower, the back-end LTV will be 120/185 or 65%.

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 $135,000 then the front-end LTV is 100/135 or 74%. 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 in the buy, not 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 enough.

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 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? And (2) How well is he buying?

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 valid, 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, I’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 (a) make payments for the duration of the project (if an interest reserve account has not been set up) and (b) 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 11-14%. 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 (generally $500) and a collection account setup fee which is based on the size of the loan and averages about $120. 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 happens if there is money left in the construction account upon completion of the project?

Once the borrower has demonstrated that the project is 100% complete, we will disburse any remaining funds in the construction account to the borrower. Otherwise, these funds will be credited to the borrower at the closing of escrow.

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. 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). 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 (if available)
   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)
3. 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.
4. If the property checks out, we draw up the documents and close the loan through escrow.

Is the deposit check refundable?

If we close the loan through escrow, the deposit is applied as a credit to the loan fees. If we don’t close the loan because (a) the borrower does not or cannot perform or (b) 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.

—

Up next:  An interview with Grover Sparkman, founder and President of Fairfield Financial, with over 40 years of experience brokering notes/trust deeds/contracts and making private money loans.

– Clay (clay@privatemoneysource.com)

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

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

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

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

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

Private money FAQ

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

What is private money used for?

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

What are the interest rates?

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

What fees are involved?

We generally charge a loan fee equal to 5% of the gross amount of the loan. We also charge a doc prep fee ($500 or more, depending on the size of the loan), a property inspection fee ($650 or more, depending on the location of the property), and a collection account setup fee which is based on the size of the loan. There are no hidden junk fees.

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

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

Is there a pre-payment penalty?

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

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

There are many reasons why a borrower would choose to use private money over a cheaper institutional option. For example, professional real estate investors like to use private money when buying because they are able to make offers which are not constrained by long time lines and numerous rigid conditions. Often times speed is a very significant factor in completing a profitable transaction and in those cases it often makes sense to pay for a short-term private money option rather than loose the deal. Frequently the condition of a property won’t allow for the initial financing with conventional money, and in those cases private money may be used. Often the type of property is a factor: banks don’t like lending on raw land and lots, but private money lenders are more inclined to do so. Cash leverage is another factor. Fairfield Financial, for example, loans based on the true value of a property, not the purchase price, so sometimes we lend 100% of the total acquisition cost for a property. The structure of the deal may be a factor. Most private money lenders allow the buyer to establish their equity through the mechanism of a seller carry back; banks won’t do this. The list goes on and on.

What is the most common use for private money?

Our most common loans are probably construction, rehab, and land development loans. We have an entire FAQ devoted to these loans: see the Rehab and Construction Loan FAQ.

We have been known to close loans in a matter of a week, but more typically, you should figure on 2-3 weeks. (Keep in mind that it is only possible for us to move quickly if the borrower, broker and other third parties are moving quickly as well.)

Is an appraisal required?

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

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

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

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

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

Why do they call it “hard money”?

It is difficult to find an answer to this question. I’ve heard plenty of speculation. Some people say that it’s because the money is used for “hard to do” loans. Others say it is because the loans are “hard to get” or “hard to pay.” It is my belief that it is called hard money because traditionally it has been “real money” in the sense that it is not borrowed. Institutions loan borrowed money, and in this sense they loan “soft money.” However, I must point out that things have changed a bit over the years, and these days a good deal of hard money is in fact borrowed. (I would guess as much as 50%.)

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

There are basically four steps.

1. First, run the concept by us. You may call and discuss the loan with us, or you may e-mail a summary, or you may use our online loan submission engine, which will walk you through the process. If we like the project concept and feel that the numbers are acceptable, we proceed to the next step.
2. We review a complete loan packet. We ask that this be sent via overnight mail or delivered to the office (fax copy is not acceptable).
3. If all this checks out, we ask the borrower for a deposit (generally $1,000 to $3,000). This should be in the form of a cashier’s check or money order. If requested, we provide a conditional loan commitment letter at this time.
4. If the property checks out, we draw up the documents and close the loan through escrow.

Is the deposit check refundable?

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

How does the construction money get disbursed?

From time to time, as a borrower completes the construction of a project, the borrower will submit a draw request to Fairfield Financial. Fairfield will review this request and, upon approval, release funds either directly to the subs/suppliers (if requested to do so) or to the borrower (if the borrower has already paid the subs/suppliers). Fairfield is responsible for ensuring that (a) the work is completed to an appropriate quality standard (this may require an on-site inspection which will incur a fee specified in the Loan Agreement), (b) the project is on-budget (or if not on-budget, appropriate adjustments are made), and (c) that all subs and suppliers get paid for their work on the project.

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

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

– Clay (clay@privatemoneysource.com)

After many years of holding relatively firm, the real estate market in the Pacific Northwest may be in trouble.  The following informative piece was printed yesterday at Business Insider.  Make sure to follow the “Check out how bad Oregon has become” link and the 14 slides that accompany the article.

http://www.businessinsider.com/oregons-expanding-foreclosure-rate-could-make-it-the-next-california-2010-2

What does this mean for Oregon and Washington?  How bad is it going to get before it gets better?  And what does this mean for the rest of the nation?  Please take a minute to share your opinions by clicking on the comments link for this site.

Keep in mind that this analysis is looking at residential properties only.

– Clay (clay@privatemoneysource.com)

I thought it would be nice to publish something just for fun today.  I rather enjoy doing these TOP TEN lists, but I try to avoid doing them very often for fear that it will look like this blog is purely for my own self-amusement.  And of course to a certain extent this is true—but I wouldn’t want to give you that impression.

Drum roll please…

Top ten clues that you should probably pass on a particular loan offering:

10. The borrower looks uncannily like the young Al Pacino.  (Think Scarface.)

9. The loan packet looks like it has been through a war–beat-up, dog-eared, and coffee stained, and you detect the faint smell of urine.

8. The borrower describes his take-out strategy as, “win lottery.”

7. Worse yet: the borrower describes his take-out strategy as, “bank loan.”

6. The property exists in a different dimension and therefore cannot actually be inspected without passing though a seam in the universe.  (Think of the title problems alone: survey, easements, etc.)

5. The property is located in the near-bankrupt third-world state of California.

4. The property is located on the tropical Island of Cuba, but it is located on US territory.  Uh, yes: there is a spectacular bay view.

3. The use of funds section reads, “…to complete the design and manufacture of an advanced metallic protective hat which will deflect all external thought transitions to my brain and at the same time keep all my thoughts from escaping.”

2.  The borrower is a self-proclaimed Solo Performance Art Specialist who cannot afford to make regular interest payments but commits to make “equivalent value payments” in live regular performances on your front lawn.

1. There is an exception on title which requires that a Chihuahua named Gertrude maintain a perpetual right to fully occupy and utilize the property for the duration of her existence.  (I guess this isn’t an automatic dis-qualifier.  You might want to meet Gertrude before finalizing your position.)

– Clay (clay@privatemoneysource.com)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

When evaluating loan requests, this is the fundamental question:  what exactly do you want me to do for you?  It is impossible to count the number of times that I have receive loan packets or proposals that didn’t include a loan summary or any clear description of the request.  The process of evaluating a loan must begin with a well prepared summary of the loan proposal.  (This item might be called a loan summary, an executive summary, or a cover sheet.  We call it a Prospectus.)   I don’t know why borrowers and brokers are so reluctant to provide such a fundamental item when attempting to secure private funding for real estate projects.  I suspect that it has to do with the way banks operate.  They don’t require a summary so why should we?  And beyond that, I think that many brokers and borrowers simply don’t know what to include in a summary.  One of the ways that we have gotten around the problem is by including a loan submission form on our website which walks the broker/borrower through a simple electronic form.  At least in the initial stages of the application process, this seems to provide much needed guidance.

Ultimately, however, we will not accept a loan packet or submission which is not accompanied by an adequate summary, and if the summary is quite good, we will probably tend to be much more receptive to at least considering the loan proposal at hand.  For today’s post, I am including a sample of a prospectus (redacted) that we prepared for submission to our private money investors.  We actually place our prospectus on top of all the relevant documentation, data, photos, etc., scan it into Adobe, and then e-mail a link and password to our interested investors, so that they may review the loan proposal in its entirety.  Here then is what we consider to be a well informed prospectus.  I recommend that all private money investors insist on adequate documentation and don’t settle for less.

Clay Sparkman

Fairfield Financial Services, Inc

2727 NE Hoyt St, Portland, OR 97232

Phone (503)476-2909, e-mail clay@privatemoneysource.com

REAL ESTATE PROSPECTUS

SECURED LOAN

Purchase and rehab on 4-plex in Las Vegas, Nevada

Loan Details

1. Loan Amount: $130,000
2. Term: 2 yr
3. Interest Rate: 13%
4. Monthly Payments: $1,408.33 Interest Only
5. Construction Holdback Account: $54,750
6. Security:  Deed of Trust in 1st Position security interest in real property at xxxx Bassler Street, North Las Vegas, NV 89030
7. Completion Value by Borrower Estimate / Comps is $220,000
8. Completion Value LTV by Borrower Estimate / Comps is 59%
9. Conservative Completion Value is $195,000
10. Conservative Completion Value LTV is 67%

Loan Overview

This is a purchase and rehab construction loan for a 4-plex in Las Vegas, NV.  The property will be purchased as a bank REO for $78,000.  The borrower (hereafter referred to Flip Guy for the purpose of this sample) is bringing $13,000 to escrow in order to demonstrate some cash investment on his part, and requesting $54,750 to complete the construction on the property.  Flip is experienced flipping homes in Las Vegas, and has rehabbed over 200 properties in this area.  He currently holds 62 properties in his inventory.  42 of these homes are free and clear and all but 5 of his properties are rented and producing income.  Flip reports that these 5 properties are for sale.

Flip Guy has successfully completed four loans with Fairfield over this past year and a half.  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 Flip has never been late with a payment.  Before and after photos of two of these properties are provided as an example of his work.  In addition, Flip has provided before and after photos of a similar 4-plex that was not financed through Fairfield.

In each of Flip’s previous loans, his exit strategy was to sell the properties.  For this loan, he intends to refinance the property and hold it as a rental.  To be safe, he has requested a 2 year term, although he anticipates that he will be able to exit this loan in approximately year.  He will pursue a take-out loan as soon as the rehab is completed, which should take 1-2 months.  Flip will hold title to this property under his company, xxx, LLC, and he will personally guarantee this loan.

Property

The subject property is 3040 SF and has 4 units, each with 2 bedrooms and 1 bath.  The 4-plex was built in 1963 and sits on a .21 acre lot.  The 4-plex is structurally sound, but is in need of cosmetic repairs.  Flip plans to update and modernize each unit of this house.  He will replace the flooring, paint, update the kitchen, and landscape the property to add curb appeal.

This property is approximately seven miles northeast of the Vegas strip and one block east of the Las Vegas Blvd.  It is located in a neighborhood that is primarily working class rentals.  There are three 4-plexes neighboring this property and they are all reported to be in good condition.

Valuation

Completion Value Comps by Borrower

To determine the completion Value, the borrower utilized 7 comps in a close proximity to the subject property that range from $209,900 to $249,900.  Three of these comps are sales, while the other four are current listings.  Three of these listings have sales pending, but those pending prices are unknown.  Based on these comps, Flip estimates that the property should be worth $220,000 once the repairs are made.

Analysis of Comps by Inspector

Based on the average price/unit of all comps and listings, the value of the subject property would be $224,408, which supports the borrower’s estimate of value.  However, when the average rent is broken down to a conservative price/SF, and multiplied by the average gross rent multiplier (see inspection report), a value of 194,803 is suggested.  In addition, if the average sale price/SF is multiplied by the size of the property, it yields a value of $193,982.  Based on these calculations, the inspector suggests that it would be reasonable to consider $195,000 as a conservative value for this property.

A field report is available for review.

Market Trends

Altosresearch.com is a website that provides real time market data for single family homes, and was used to evaluate the Las Vegas market trends.  Average home prices, time on the market, and the current home inventory are all considered in the evaluation of this property.

Average home prices have continued to fall over the past year, and the median home price as of Nov 29, 2009 is $119,928.  There appears to be a significant decrease in the rate of this fall over the past few months, and in the past 30 days prices appear to be relatively stable.  Seven day averages show a very slight increase.

The average time on the market in Las Vegas area has been steadily declining over the past 8 months, and has dropped from 175 days at the high point in April 2009 to a157 days as of Nov 29, 2009.

The current home inventory is one of the most important factors to consider.  A decreasing inventory is often a precursor to stabilizing market.  Since its high point in April 2009, the home inventory has decreased by approximately 20%.  There is a current downward trend in the home inventory which could potentially explain the decrease in the rate at which home prices have dropped over the past few months.

Market trend graphs are available for review.

Flip’s first loan, the Pinedale property, sold in just less than 5 months from the time of listing.  Flip’s second loan, The Ashbrook property, was sold in just less than 8 months from the time of listing.  His next two loans, the Bengal property and the Almondwood property, each sold in approximately 3 months after the property was listed.

His average turn time is compatible with the expectations based on current market trends.  The price point at which Flip purchases these homes, his ability to rehab them quickly, his realistic approach to time on market, and the decreasing home inventory, seem to support his business model.

Process

Las Vegas does not require any permits for the type of work that will be performed, nor do they require a contractor’s license.  The borrower will be ready to go as soon as the loan is funded and plans to have the house completed in approximately two weeks.

Income

We were provided with a signed 1003 for Flip Guy, which states a monthly income of $55,000, and a net worth of $5,245,000.  Flip states that his monthly income is a combination of the rental net income and proceeds from the properties that he flips.  A copy is provided here for your review

Credit

Flip Guy has a mid credit score 686.  This is typical for rehab developers who use bank cards for construction financing.

– Clay (clay@privatemoneysource.com)

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

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

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

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

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

Regards, Alan”

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

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

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

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

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

– Clay (clay@privatemoneysource.com)

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

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

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

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

– Clay (clay@privatemoneysource.com)