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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mini-condos for simple living on the Washington coast

1.     Loan Amount: $286,000

2.     Term: 1 year

3.     Interest Rate: 13%

4.     Monthly Payments: $1,895.83 Interest Only

5.     Construction Holdback Account: $265,000

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

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

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

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

10.     Completion LTV by Borrower Comps:  62%

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

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

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

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

Adult care facility in Washington

1.     Loan Amount: $270,000

2.     Term: 24 Months

3.     6 months minimum interest

4.     Interest Rate: 14%

5.     Monthly Payments: $3,150.00 Interest Only

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

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

8.     LTV based on Appraisal:  36%

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

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

Vacation rental in central Oregon

1.     Loan Amount: $120,000

2.     Term: 36 Months

3.     6 months minimum interest

4.     Interest Rate: 13%

5.     Monthly Payments: $1,300.00 Interest Only

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

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

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

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

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

Self-storage facility in northern Washington

1.     Loan Amount: $375,000

2.     Term: 36 Months

3.     6 months minimum interest

4.     Interest Rate: 12%

5.     Monthly Payments: $3,750.00 Interest Only

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

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

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

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

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

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

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

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

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

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

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

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

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

Kris Gillmore

Fairfield Financial Services, Inc

2727 NW Hoyt St, Portland, OR 97232

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

REAL ESTATE PROSPECTUS

SECURED LOAN

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

Loan Details

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

Loan Overview

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

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

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

Property

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

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

Valuation

As-Is Value

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

Projected Value

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

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

Financial Status

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

Credit

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

Experience

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

<end of private money loan prospectus>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 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)

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)