Clay Sparkman
In Part I, I began a discussion of my gripes and likes regarding the private money lending business and various industry related matters, items, and issues. I allowed myself to amble a bit far afield and concluded by mentioning a book about the legal profession which I personally found to be informing and entertaining. I’d like to indulge myself a bit more on this topic of books at least marginally related to private money investing.
An author who I particularly enjoyed this past year is Michael Lewis. Moneyball: The Art of Winning an Unfair Game is one of the most interesting and influential books that I have read in a very long time. This book on the face of it is about baseball, but in fact it is about so much more. The book is really about exploiting pockets of inefficiency that inevitably exist in markets (for various curious reasons), and I frequently find myself applying lessons learned in this book to the way I think about other aspects of business and life in general. There is most definitely an element of applicability to private money lending and trust deed based lending. If you have read it, please comment and tell us if you don’t feel the same. (A hat tip: to Charles Duck who gave this book to me and told me to read it some good three years ago; I’m only sorry that I waited so long.)
Another Michael Lewis book that became extremely relevant with the recent collapse of large financial firms on Wall Street (though written many years before and published in 1989) is Liar’s Poker: Rising through the Wreckage on Wall Street. This book chronicles the author’s years as a bond trader for Salomon Brothers. The inside look is riveting and terrifying at the same time, and may help explain how things could have gone so terribly wrong during the recent fall from grace. And I must mention Home Game, Lewis’s book about the business of parenting. As the father of a 4 year old boy, this book worked for me (though I warn you it is quite different from his other books, doesn’t have much to do with business and investing, and you may not enjoy it if you don’t have children of your own).
As one who brokers and services private money loans, a thing that I particularly like is quite simple: I like it when the loan payments come in on time each month as per the contractual agreement and without any prodding from my office. Fortunately this happens quite frequently and it makes my life and the life of those who work for me so much easier. It also opens up the possibility for an extended ongoing relationship with the borrower. Most of our borrowers tend to need private money loans on an ongoing basis; they use them to drive a series of ongoing professional projects. And this is another thing I quite like in the business: ongoing, long-term professional relationships with borrowers, brokers, and investors. Things get so much easier when you know who you are dealing with.
I do not like it so much when borrowers become “bad boys,” having to be prompted and prodded each month to send in their payments, and consistently push the envelope, going beyond the boundaries of their agreement. This provides a certain level of strain, both physical and emotional within my organization and with certain of my investors. I will say, though, that I have had cases where the borrower paid just a few days past the grace period each and every month, almost like clock-work, and certain lenders really liked it, as they knew that the payment was coming and that it would be accompanied by a substantial late fee and default interest payment as well. This type of situation tends to push the yield up, so that a 13% loan may ultimately yield 15-16% to the investor over the life of the loan.
I do like it when borrowers who are having problems actively communicate and behave in a proactive and professional manner—seeking to work with the investors in an attempt to navigate through their financial problems and with the intention of ultimately making good on the overall commitment. I have found that investors tend to be quite reasonable in working with borrowers who are reasonable–so that quite often a successful “work out” is possible. In these situations there is ultimate satisfaction for all parties as everyone tends to benefit.
I don’t like it when borrowers who are struggling put their heads in the sand and go into hiding. Once communication stops, there is no chance for a work out, and the only choice is to foreclose, go to auction, take back the property (if a higher bidder doesn’t take it at auction), and then go about the business of marketing the property. This can still have a good ending and probably does as often as not, but the work involved is immense, and most loan servicers and investors would rather not go there. Fortunately, though this certainly happens, it doesn’t happen frequently (though a bit more frequently than usual during the difficulties of the past two year period).
I do like the fact that investors generally have an option, in these situations to either foreclose judicially or non-judicially. The non-judicial option is faster, easier, and more predictable, but the judicial option allows a the investor to obtain a deficiency judgment should the property fail to fully compensate the debt—and thus gives the investor an opportunity to recover any remaining obligation by chasing borrower income and assets.
In Part III, I will be highlighting some web based resources that I find to be particularly useful, enjoyable, and impressive. If you have any sites that you feel enable you to make better moves and decisions as you invest in trust deeds, please send me a note, and I will most likely include your information in Part III of this post.
— Clay (clay@privatemoneysource.com)
End of part II
Great post.
Thanks a lot