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

Private money – whole loans vs fractional share loans

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

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