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

Getting started with private money investing

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.

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