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

Private Money Source Investor Blog

Information for investors

August 22nd, 2019

Clay Sparkman

Here is our *Information for Investors* section. It is direct and to the point. It tells you what you can expect of us and what we will expect to you, in a broker-relationship.


Best, Clay Sparkman, CEO

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

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.

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

August 1st, 2019

Clay Sparkman

Colloquialisms are funny things.  We use them pretty much every day in our speech and in our writing and yet most of us, I suspect, though we know the meanings of the expressions, frequently don’t know why the individual words have come to mean what they mean.  Take for example: “Don’t look a gift horse in the mouth.”  I must have been in my forties before I looked up one day, scratching my head, and mumbled to myself, “What the heck does that really mean?”  I remember asking my Dad about it. 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 one’s 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 then 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)

The Round Table, with King Arthur

March 27th, 2019

S. Clay Sparkman

I’ve been doing this for 25 years, and I must say, we’ve seen good times and some bad. I’ve been involved in several thousand private money loans. Certainly, I’ve experienced a full cross section of the private money lender perspective. One might wonder, how can a long-term private money lender expect to do over the long haul, through good times and bad? In order to speak of this more effectively, I would like to introduce you to one of my all-time favorite private money lenders. His nom de querre is King Arthur, and he has been lending with me for the better part of 24 years now, straight through and into real-time.

When I told him that I was going to write this piece, he reminded me of how we got started. He was looking for some money to help his son-in-law get going in business, and he called me. When I quoted our rates, he said: “I don’t think I can afford a loan from you, but do you work with lenders?” I said, “sure!” So, he decided to lend the money directly to his son-in-law, who is now a multi-millionaire, and he met with me to talk about the full-range of issues involved with investing in secured private money loans. Thus, began my adventures as a friend and associate to King Arthur.

Let me start by saying that King Arthur loves private money lending. He loves not only the returns and the security involved (risk/reward ratio), but he actually loves the process as well. For him, it is a bit like chess: he loves to play, and he is good at it. And yes, there is a Guinevere. She is a lovely person. She doesn’t get directly involved in the day to day process of making these loans, but she knows plenty about what is going down, and she is involved in any critical decisions that must be made. I am proud to say that both the King and the Queen are among my closest friends.

Let’s talk for a moment about King Arthur’s own specific investment strategy. First of all, he has spent many years in the business of buying, renovating, and renting out real estate properties, so he is comfortable with assessing a particular property, a borrower, and the potential borrower’s proposal. He also recognizes that he is playing a game of probabilities. He looks for loans that have a high chance of being trouble free, and which are also likely to offer him high odds of full recovery if the borrower drops the ball. With this in mind, he diversifies to the full extent reasonably possible. He makes small (average, $30k) fractional share investments in each of a number of loans, and he attempts to ensure that these loans are well diversified regionally, and in terms of property types, loan types, and borrowers. Thus, for example, he avoids getting into many loans with any single investor, no matter how reliable they have proven to be.

King Arthur tells me that he has been involved in over 200 loans since he started with us. At any given time, he might be holding 20-30 loans of $30k each. He and I went down memory lane together, as I was writing this. He reminded me that until 2007, he had never lost a dime of principal. (He even remembers specifically the sordid details of the first loan where we didn’t manage to recover all of his principal.)

Beyond 2007, he had some bigger losses, but he also had some greater-than-expected gains, and he is proud to say that an analysis of his first 24 years of private money lending in the aggregate shows that he has ultimately not lost any principal, and in fact he has ended up earning approximately 8-9% on these investments, and all that through the entire period of the second greatest recession in American history.

Clay: “So how have you done overall?

King Arthur: “Between the beginning and now, we are ahead by over a million.” He says. And he continues, “Part of our success is our persistence. There will always be some loans going bad. When that happens, we beat on them until the cows come home.”

Clay: “I can attest to that. You have been amazingly active investor. I will never be able to thank you enough for all the personal initiative that you took with the recovery process on these loans. As you know, the recession period was tough, and most investors need and expect more assistance. We are a tiny company, and you not only saved yourself and your fellow investors, but you greatly contributed to our salvation. Thank you!”

King Arthur: That’s what we do mate. They don’t call me King Arthur for nothing.

Clay: I bow to the king. Viva King Arthur!

King Arthur: “Yeah, yeah … hey Remember the loan in Kaiser, Oregon? This just came back to us, so I figure it is a good example of why investors must persist. If you recall, the borrower really wanted to own a rental house. We tagged the rental home and his own residence (as a second). After a year he quit paying us and quit paying water and garbage on the rental. That pissed off the tenants and they moved out. We cleaned it up and sold our share to one of the partners. We took a loss on it, but it wasn’t terrible. I kept thinking of ways to get something going on the 2nd we still had on the borrower’s home. I had my title company run a title report on the property (at the cost of 90 bucks).  I almost choked when I saw it. Lo and behold we were now in first place on his home. Damn the bad luck, eh? He had done a refi and somehow his refi came up in second place.  We went after him and settled for 50k, but they were really angry with us. All I can say is, ‘Boohoo!’”

Clay: “Advantage Arthur! I’m so glad to hear it. You know, we could go on all day.”

King Arthur: “Now we must go. We have to find Excalibur before my uncle does!”

Clay: “I don’t know if we’ll have enough time!”

Arthur: “We have to! We cannot fail.”

— Clay (clay@privatemoneysource.com, 503.476.2909)

Real estate values – what’s next?

February 4th, 2019

S. Clay Sparkman

It has been quite a challenge this past dozen years predicting the movement of real estate market values. Values spike. values crash, values spike again, and then … maybe get a little squishy. Also, note the strange happenings in the national political machinery. It might be perilous to ignore this entirely.

For anyone who has been paying attention, I believe it would be hard to make a confident projection at this point.

In reading through some of the analysts and prognosticators, I felt that the following item by Caroline Feeney at Forbes did a nice job of identifying some of the factors and trends at work and codifying a reasonable scenario going forward.

Her column is at:

Real Estate Markets Cooling Across the Country, And It’s Not Just The Winter Effect

If anyone out there has any thoughts on this one way or another, please give us your thoughts.


Clay Sparkman (503.476.2909, clay@privatemoneysource.com)

Private money – whole loans vs fractional share loans

November 29th, 2018

S. Clay Sparkman

This issue nearly always comes up in early conversations with new potential investors. Working with private money investors, we are able to fund loans in two different ways.

(1)  Single loan/single investor – This is probably most common. It is quite simple. A potential investor evaluates a loan, and if she chooses to do the loan, then she (or her trust) funds the entire loan and is secured by 100% share of the beneficial interest in the loan.

(2)  Fractional loan – This scenario involves a single loan and more than one lender. In this case, several potential investors evaluate a loan and those who choose to participate, each fund some portion of the loan and are secured by an appropriate share of the beneficial interest. In this scenario, if there are issues to be decided throughout the life of the loan, and there is not full agreement, then a vote is taken, with each lender’s voting power equal to their proportionate share of interest in the loan. By way of example: Consider a $200,000 loan where each of four lenders commit $50,000 to the loan. Then each would have a 25% share of the beneficial interest in that loan.

Note: For an investor to participate in a fractional loan (for reasons I won’t go into here), the investor must sign a document indicating that he is an accredited investor. (An accredited investor is: An individual who: (a) either alone or with a spouse, beneficially owns financial assets having an aggregate realizable value that before taxes, but net of any related liabilities, exceeds $1,000,000; or (b) an individual whose net income before taxes exceeded $200,000 in each of the two most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the two most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year.

Advantages/disadvantages to consider

  1. The primary disadvantage of a fractional loan is that an investor may want to secure full control of the loan and decisions made regarding the loan. That said, some investors lend 50% or more to ensure that they have full control over the decision making.
  2. There are several advantages to investing in fractional loans. One is that investors who don’t have a very large amount of money to work with, may make loans of $50,000 or more. Most non-fractional loans generally require at least $150,000 or more.
  3. Investors may diversify their funds over a greater number of loans by lending fractionally.
  4. Investors may keep their money close to fully invested with fractional loans, because the money is able to go back out much faster into a new loan or loans when an existing loan pays off.
  5. Some investors take comfort in knowing that the loan has been evaluated and approved of by several other investors, as well.

— Clay (clay@privatemoneysource.com)

Clay is Vice President of Fairfield Financial, a primary source for private money since 1964.  Fairfield is currently targeting loans in OR, WA, AK, CA, CO, ID, FL, GA, ID, MT, NV, NY, OK and TX.  To submit a loan to Fairfield for consideration: http://www.privatemoneysource.com/loanproposal.php

Will Amazon’s HQ2 sink Seattle’s housing market?

November 13th, 2018

S. Clay Sparkman

Will Amazon’s HQ2 sink Seattle’s housing market?


Probably not much, but it should pump up the markets in NYC and DC even furthur.



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

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

Sample loan

November 5th, 2018

Clay Sparkman

Here is an example of a loan that we recently placed. We like to show samples from time to time, so investors can see the kinds of loans that we are placing AND the format we use for the executive summary.

Kristopher Gillmore

Fairfield Financial Services, Inc

3327 SE 50th St, Portland, OR 97006

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



Purchase and rehab of Single-family residence in xxxxxx, OR

Loan Details

  1. Loan Amount: $240,000
  2. Term: 1 year
  3. Interest Rate: 11%
  4. Monthly Payments: $2,200 Interest Only
  5. Security:  Deed of Trust in 1st Position security interest in real property located at xxxxxxxxxxxxxxxxxxxxxxxx
  6. Projected Value of property by Borrower’s estimate based on recent comps:  $360-$375,000
  7. Projected LTV by Borrower’s estimate based on recent comps: 64% – 67%

Loan Overview

xxxxxxxxxxxxxxxxxxxx are purchasing this property through their LLC, xxxxxxxxxxxxxx, LLC, and are requesting this loan for the purchase and rehab of the property.  xxxxxxx is an experienced realtor, and she and her husband xxxxxxx are experienced real estate investors.  xxxxxxx is a realtor that I’ve used personally, and I’ve referred her to several of our borrowers and lenders to sell their houses.  In addition, Fairfield has used xxxxxxx for valuations on a number of properties that were used as collateral for our loans. After the renovation, they intend to rent this house for $1,500/month. They will be putting approx. 43,000 down toward this purchase, and 30K will be held back for the renovations.

Eventually, they plan to build a 700sf ADU on site, and rent that out for an additional $1,500/month.  They intend to use their HELOC for the construction funds on the ADU; that would not be a part of this loan.  Ultimately, they plan to refi this property and hold it as a rental.  However, they are prepared to sell the property should they be unable to refi.


The property has a 924sf home with a large shop on approx .1/3 acre.  It is a 2-bedroom, one-bathroom home, and photos of the property have been provided in the packet for your review. The listing can also be viewed here: xxxxxxxxxxxxxxxxxx. The listing can also be viewed in the packet as part of the comps that have been provided by the borrower.

A construction budget has also been provided in the packet.  xxxxxxx and xxxxxxx plan to do as much of this work as possible.  Xxxxxxxx is in the process of getting her General Contractor’s license, and plans to get that prior to building the ADU.  They have also included a resume of relevant experience.


xxxxxxx has provided a CMA as well as a written Comp value Analysis explaining the logic used in her valuation. This has been provided in the packet for your review. Ultimately, they estimate the projected value of the property to be in the range of $360,000-$375,000


A Commercial application has been provided by the borrower with both xxxxxxx and xxxxxxx’x financials, as they will be personally guaranteeing the loan.  They report a combined income of $190,899, and a net worth of $513,918.


The borrowers have also provided their own credit reports, which are included in the packet. xxxxxxx has a mid-credit score of 697, and xxxxxxx has a mid-credit score of 619.  These reports have been provided in the packet for your review.

— Clay (clay@privatemoneysource.com, 503-476-2909)

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

Getting started with private money investing

October 25th, 2018

Clay Sparkman

I am frequently asked by private money investors: “… so how do we get started investing in private money loans?”  You know, there is no simple answer to this question. I tell them that it is kind of like dating. If we are going to do this as an investor/broker team, then they need to get to know my company and how we 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 which only comes with experience. Also: 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 Fairfield and getting to know how this type of investing works. They are invited to ask as many questions of us as they need in order to reach a point of comfort (or decide that private money investing or this particular relationship is not a good ft).

Potential investors can learn quite a bit about private money by studying our web site and following my blogs. 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 principles 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 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 8% to 12%. 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.

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 Fairfield bringing fully vetted and live loan packets to “new” investor, one at a time (as we 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 he/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 get a whole bunch easier, and we are likely to do many more loans together in the years to follow.

— Clay (clay@privatemoneysource.com, 503-476-2909)

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 west coast is on fire

March 6th, 2018

Clay Sparkman

Between Seattle, Portland, San Francisco, LA, and San Diego, home prices are off the charts. We broker short-term loans to real estate investors, so if you wish to invest in trust deeds in these markets, consider contacting us.

And check out these two recent articles:

A Third of U.S. Homebuyers Are Bidding Sight Unseen

Seattle-area home market was nation’s hottest for 2017 — and cheaper areas from Bellingham to Spokane weren’t far behind

We don’t lend much in California just now, but we love to lend in Oregon and Washington. (At this rate, maybe California will be sliding into the ocean after all anyway.)

All the best in your endeavors, Clay

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

Clay is Vice President of Fairfield Financial, a primary source for private money since 1964.  Fairfield is currently targeting loans in OR, WA, AK, CA, CO, ID, FL, GA, ID, MT, NV, NY, OK and TX.  To submit a loan to Fairfield for consideration: http://www.privatemoneysource.com/loanproposal.php

Two hicks from Oregon go to Malibu – a cautionary tale

January 25th, 2018

Clay Sparkman

I first posted this Blog piece on 11.11.09 at this site.

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

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

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

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

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

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

So after some walking and pointing and a series of questions and explanations, I lead into my most pressing concern.  It had occurred to me on the flight down that there was a potentially serious error with the appraisal.  This error (assuming it was an error in this case) is a surprisingly frequent error in appraisals; I have seen it many times over the years.  Let’s call it “The Fallacy of Infinite Scalability.”  In order to demonstrate the Fallacy of Infinite Scalability, I’ll use an example.  Let’s say that our subject property is a five acre parcel and that we are looking at a comp which is a one acre parcel.  Assuming that the one acre parcel qualifies as a buildable parcel by virtue of size (say it was grandfathered in when the zoning was changed to 5 acre minimum size per site) and that the five acre parcel cannot be subdivided further (due to the change in zoning), then we cannot compare these properties acre for acre.  If the one acre comp parcel sold for $800,000, then we would not be correct to say that the five acre parcel, all other things being equal, is worth $4,000,000.  That would be the Fallacy of Infinite Scalability.  Instead we must determine the base price of one home site–in this case the first acre–and then determine the incremental value of each additional (incremental) acre.  So for example, we might determine that the one acre parcel is worth $800,000 and that each incremental acre (giving no more value as separately build-able land, but simply by virtue of the sheer joy, stretch, and buffer of additional land) is worth $50,000, giving us a total of $1,000,000.

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

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

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

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

— Clay (clay@privatemoneysource.com)

Clay is Vice President of Fairfield Financial, a primary source for private money since 1964.  Fairfield is currently targeting loans in OR, WA, AK, CA, CO, ID, FL, GA, ID, MT, NV, NY, OK and TX.  To submit a loan to Fairfield for consideration: http://www.privatemoneysource.com/loanproposal.php