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A book that we must read

January 19th, 2017

Clay Sparkman

This book strikes me as a must read for anyone in the lending business. I have not read it yet, but I intend to get started now. Have any of you read it, and if so, what was your take away?

Here

The Unbanking of America: How the New Middle Class Survives

Lisa Servon. Houghton Mifflin Harcourt, $27 (272p) ISBN 978-0-544-60231-1

The failure of banks to meet the needs of the 99%—and the cottage industries filling the gap—are thoughtfully explored in this startling and absorbing exposé from Servon, a professor of city and regional planning at the University of Pennsylvania. As she describes, commercial banks now cater largely to the wealthy, and more Americans are turning to alternative financial services, including check cashers, payday lenders, and a variety of informal arrangements. To better understand the options available, Servon took jobs at RiteCheck, a check-cashing establishment in the South Bronx, and Check Center, a payday lender in Oakland, Calif. Surprisingly, she concludes that the seemingly predatory “shadow” banking system may simply be a reasonable (if inconsistently regulated) approach to customer demand. In layperson-accessible language, Servon explains the effects of banking regulations—both recent and historical—and of technological innovations in consumer financial services. Most notable is the breadth of people she finds who have removed themselves, or been removed, from the world of conventional banking, including those with chronically low income, students, and entrepreneurs. Required reading for fans of muckraking authors like Barbara Ehrenreich, this fascinating look at the future of money management insists that the ever-growing number of the “unbanked” are a sector deserving of respect and solid options. Agent: Adam Eaglin, Cheney Literary. (Jan.)

Here’s to a good year for all in 2017!

— 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.

Resources for private money profesionals

January 6th, 2017

Clay Sparkman

I posted this article in 2011, and am sad to say that I haven’t come across much in the way of new resources since. I’m going to re-post, with a few small changes, and please let me know if you know of any useful resources available to private money professionals.

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.

CNNMoney is an interesting site, with worthwhile articles regarding investing in general, and from time to time, real estate based investing.

One of our readers, Devin Schumacher, was kind enough to offer 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 email to me (so that I may in turn share in a future post).

Here’s to a good beginning in 2017!

— 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.

Private money for maijuana grow and sell operations

December 29th, 2016

Clay Sparkman

Good article in the Los Angeles Times:

Lending money to pot businesses is a high-risk move: ‘This is not for the faint of heart’

A few years back, this was starting to look like a pretty good place to consider investing your private money. Several things were favorable: (1) The general trend nationwide was clearly toward legalization of marijuana for recreational use (as well as medical use), and (2) Obama had sent clear signals that he wasn’t going to be shuttering state legal grow and/or sell operations.

Today, I wouldn’t even consider making such a loan, and so I wouldn’t even consider offering it to my investors.

So many things are up in the air as we wait for the president-elect to take office. His signals have not been clear and consistent with regard to what he plans to do in many realms of public policy, and this area is certainly no different.

My advice: Don’t even consider it! Not until we are a year or two into the first Trump term and have a better idea of what to expect. In the meantime, it would be far too risky.

Caveat: I guess if someone wants to offer you a 20% LTV position, you might want to consider it. Short of that, just say “no.”

Please weigh in if you have any additional thoughts regarding this matter. We would appreciate your input.

— Clay (clay@privatemoneysource.com)

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.

Examining an FAQ about Trust Deed investing

December 20th, 2016

S. Clay Sparkman

TNG (The Norris Group) published the following FAQ on their site. I thought it might be fun to go through this and see where I agree and perhaps disagree, and offer my annotations (in red).

Frequently Asked Questions About Trust Deed Investing

1. What is a trust deed investor?

A trust deed investor is a person seeking a competitive rate of return by loaning private funds on real estate. In short, you’re the bank. The loans are secured by real estate. A trust deed investor makes a higher interest yield than would typically be obtained by a regular bank and is secured by the borrower’s equity in the real estate transaction.

SCS: Agreed.

2. How much money do I need to start?

In 2013, the California Bureau of Real Estate (formerly the Department of Real Estate or the DRE) released new guidelines via SB978 that makes qualifying for trust deed investing much clearer. No one trust deed can be more than 10% of your net worth. This does not mean you can’t have more than 10% of your net worth invested in trust deeds.

As an example, if The Norris Group has a $100,000 trust deed available, a potential trust deed investor should have a net worth of at least $1,000,000. This same investor can come back and do another trust deed investment that meets the same 10% criteria.

The California Bureau of Real Estate (CBE) requires brokers like The Norris Group to have investors fill out an Investor Questionnaire (also known as Real Estate form 870 of re870).  We are audited by a third party auditor that reports back to the CBE on a quarterly basis and the CBE expects this form to be on file for each transaction. The form was created to ensure each investment is “suitable” for the investor.

The questionnaire is simple and asks information like name, contact info, education, experience, income, net worth, liquid capital, and goals for the investment. You can download this form and email it back to us or fax to (951)780-9827 to be added to our First Look Program to be first to see upcoming available trust deeds.

SCS: This part is specific to CA. I’m not going to comment on the CA portion, as they probably know more than I do. Beyond these CA specific issues, you need maybe $100k to get started making full TD loans (that is about the minimum size), and if you wish to make fractional loans (more than one lender has a share of the beneficial interest as security), then you need at least $50k to lend through us, but also note that you must be an accredited investor to do this type of investing with an institution that does not have a securities license or does not otherwise have some special exemption. (Note: In the United States, for an individual to be considered an accredited investor, they must have a net worth of at least one million US dollars, not including the value of their primary residence or have income at least $200,000 each year for the last two years (or $300,000 together with their spouse if married) and a reasonable expectation of the same income level in the current year.)

3. Can I use my IRA funds or 401k for trust deeds?

Yes. The Norris Group actively places funds from IRAs, Self-firected IRAs, Roth IRAs and several other retirement accounts. Trust deed investing is a fantastic way to diversify your retirement portfolio and to leverage these types of accounts.

However, please contact your plan representative as all IRAs have different rules and regulations.

SCS: Agreed. True for FFS as well.

4. What’s the typical property you loan on?

The Norris Group only lends on non-owner occupied homes in California. We mainly focus on single family homes and units (1-4 only). We offer everything from fix and flip to long-term holds to new constuction. Our programs change occassionally to adjust to the California market.

SCS: TNG specializes a bit more than FFS. We make commercial, business, and investment loans secured by property in OR, WA, ID, CO, MT, and NV (some other states as well, but this is where our focus is right now.

5. What is the yield?

Annualized yield will depend on the length of individual investment and the availability of a property for rollover. Some investments last for three months and some last for several years depending on the program you choose.

In our 6% trust deed program, investors will most likely see a 6% return annually because of the 3-year term on the loan and the one-year prepay typically ensures the investment stays in place for a longer period of time.  Many investors seeking consistent cash flow with less in-and-out tend to invest with this program.

In our shorter-term Fix and Fix and new construction programs, there is no prepayment penalty. Loan lengths vary and annualized rate of return will depend on how quickly the loan pays off and whether there is another investment available for the same amount immediately after the close of the first.

SCS: This really depends on who you are working with. FFS secures yields of from 10% to 14%. Our typical yield is 11%.

6. Do you pool my money with other investors?

The Norris Group does not typically pool funds. We will consider immediate family members, entities, and family trusts. We feel this method has served us well over the years and gives the trust deed investor more control over their investment. This is also often referred to as fractionized loans.

SCS: See above for my answer to this question. We don’t pool, but wee fractionalize.

7. Is it safe?

Every investment has risk. However, unlike many other investment vehicles, trust deed investing with The Norris Group ensures you own a first trust deed on a specific California property. This means you have ultimate control and a physical asset that can be sold or rented out.

SCS: This is a fair statement.

8. Once I’ve committed to be a private lender, what should I expect?

To find out more how the trust deed process works at The Norris Group, click HERE.

SCS: n/a

9. How large are the loans?

The Norris Group has brokered loans from $30,000 to over $1,000,000.  However, our main focus in this market is first time buyer inventory as it makes up the majority of the market. That being said, most of our loans range from the $40,000-$350,000 range.

SCS: Our numbers are similar at FFS.

10. What is your loan to value that you loan on?

The Norris Group loans up to 60-70% of the After Repaired Value (ARV) of the home. If the property is in our long-term rental program, it is already repairs so it’s the loan-to value we look at but it still falls within the range of 60-70% LTV.

When deciding on how much to lend, The Norris Group considers property location, repairs needed, investor experience, and property type.

SCS: FFS is in the same realm with regard to LTV.

11. What are points?

Points are the fees paid by the borrower to The Norris Group for acting as broker in a hard money loan transaction.

SCS: Agreed.

12. Do you offer 2nd and 3rd trust deeds?

No. The Norris Group only offers first trust deeds on all of our investments as we feel this offers a more secure investment with much lower risk.

SCS: That is good policy. We rarely take on subordinate position loans, but if a loan is extremely solid and well secured, we may vet it fully and offer it to our investors.

13. Why is my return 6% when it says 6.9% on the website? What is servicing?

The Norris Group charges a servicing fee annually on all of our programs. Servicing includes collecting checks from the borrowers and remitting them to all trust deed investors monthly. The Norris Group monitors property tax payments and insurance requirements on all investments and communicates with the borrower and trust deed investor as needed. The Norris Group also handles end-of-year tax requirements and paperwork.

SCS: FFS does not charge a servicing fee, and so you receive the full stated amount of interest.

14. Why don’t I skip you completely and work with an investor directly?

Regulations require a professional broker to obtain higher returns and for trust deed investors to be in complaince with usury laws (read more on usury laws at the California Office of the Attorney General)

In addition, using a professional and experienced broker allows you to make higher annual returns because you’re adopting an established team that finds, structures, and services the investment. It expands the marketplace for you, lowers your risk, saves you time, and ultimately increases your return tremendously.

SCS: Agreed. It is a big job to do this entirely on your own.

15. What does loan servicing include?

Loan servicing includes the back-office tasks of collecting payments from borrowers, disbursing payments to the investor, mailing required notices and statements, year-end tax documents for the IRS and franchise tax board, maintaining adequate borrower insurance coverage, and coordinating foreclosure proceedings if necessary (rare).

SCS: Agreed. Similar for FFS.

16. Who in my network might be able to advise me on these types of investments outside of the Norris Group?

Having an excellent team is always important and we suggest you check with your tax advisor, financial or retirement planner, and/or your attorney. The trifecta of estate planning!

When selecting professionals, please be advised that not all will be comfortable or allowed to help make decisions on real estate and alternative investments. It is a specialty and we always encourage our network to work with professionals that will consider a client’s entire portfolio including real estate. In our experience, real estate has been a major component of create wealth. Work with those that like the vehicle and will look at your situation holistically to do what’s best for you.

Feel free to call for referrals. We have several financial planners, lawyers, and CPAs that specialize in working with real estate.

SCS: Fair enough.

17. Where can I find more information about trust deed investments in California?

The California Department of Real Estate (DRE) has been renamed the California Bureau of Real Estate.

SCS: n/a

They have an entire document you can read on the subject of Trust Deeds.

18. Who can invest in trust deeds?

Private individuals, corporations, pension plans, 401Ks, custodianships, LLCs, retirement funds, IRAs, Roth IRAs, Self-Directed IRAs, Charitable Remainder Trusts (CRTs), Foundations, endowments, family trusts, family members, and SEP accounts. Some retirement amounts have limits so please check with your custodian or agent. The Bureau of Real Estate simply requires that no single trust deed can be more than 10% of your (or an entity’s) net worth. We’ll have to have the BRE’s Investor Questionnaire on file as they look for this as part of every transaction. You can see this HERE.

SCS: Agreed.

19. Do you require fire insurance on the property?

Yes. Not only do we require fire insurance but we require the investor inform the insurance company that the property is vacant. We require coverage in the amount of the loan or replacement guarantee.

SCS: Agreed.

20. Will I be given a complete profile on the property?

By the time we present the property for funding, we’ve already had an independent appraisal done on the property.  We’ll send to you a copy of that appraisal along with the address for you to view the property.

SCS: Agreed. However, with FFS, if we can get a good set of well annotated comps, that may serve as the valuation instrument. Probably 90% of the time, we work with an appraisal.

Please weigh in if you have any additional thoughts regarding the items discussed here. We would appreciate your input.

— Clay (clay@privatemoneysource.com)

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.

Twenty-eight questions you must ask

October 7th, 2016

Clay Sparkman

I first wrote and published this piece in its original form in September of 2009. I am of the firm belief that the key to success (defined as: having fun and maximizing your return, two closely correlated phenomena), is rigorous and comprehensive vetting of the loan proposal. If you do this right, the rest tends to follow. With that in mind, a quick review of this list tells me that not much has changed in this regard, in spite of going through the greatest economic depression since the great depression. So I see it fit to publish this again, with a few slight variations and several rather important changes (the three new items). You can never overthink and over-analyze the vetting process. So here you go:

I’m going to make a list today of twenty-five important questions that I believe an investor must ask prior to funding any private money loan transaction. I’m not going to elaborate much on each particular item here, but will drill down on each of the individual items in future posts. For the sake of simplifying this discussion to a reasonable level, I’d like to start with several assumptions: (1) we are only talking about loans secured by real property, (2) we are only talking about first position loans, and (3) we are not talking about land development or raw land loans. (Each of these exceptions, if removed, would be good for another whole list of special questions; we’ll save those particular scenarios for future discussion.)

(1) What is the Loan-to-Value (LTV) ratio of the loan you are considering and how does that fit with your own risk limits regarding this particular loan and property type?

(2) If this is a value-added loan (construction, rehab, or development), what is the front-end LTV?  Font-end LTV refers to the LTV immediately after the close of escrow but prior to any construction/development or disbursement of construction hold-back funds. (I generally reference this as FLTV, and it is understood that LTV, for a project, actually refers to the LTV upon completion of the construction/development and full disbursement of any/all hold-back funds.)

(3) How confident are you of the value?  The “L” part in LTV is easy.  It is the “V” part that can be quite difficult to accurately determine, and in fact it must be understood that any such determination (no matter how good) is only an estimate. (I.e., It must by definition be an estimate.)

(4) What are the recent market trends for the area in which the property is located? Given the real estate market of the past two years, this question is particularly relevant.

(5) How is the borrower’s credit? What is the mid-score, what are the issues, if any, and what is the trend?

(6) If the loan is a refi: how is the borrower’s pay history on the existing loan?

(7) How much “skin” will the borrower have in the game at the close of escrow? In other words, how much cash or additional collateral is the borrower bringing to the table?

(8) If this is a real estate development or investment loan or a loan to a business owner occupying his own property: what is the relevant experience and background of this borrower?

(9) What is the purpose of the loan and how will the funds be utilized?

(10) What is the term of the loan?

(11) Can the borrower afford to make payments OR does the loan scenario otherwise involve an adequate interest reserve?

(12) What is the borrower’s plan/exit strategy, and–upon careful evaluation of the project/plan–how likely is the borrower’s likelihood of success?

(13) What is the borrower’s net worth and how liquid are the borrower’s assets?

(14) If there are one or more structures on the property, will you be listed as loss payee on a hazard insurance policy or a builder’s risk policy at the close of escrow (or prior to the beginning of construction if new construction is being funded)?

(15) If there is a construction hold-back, who is administering this and do you trust them to do so effectively?

(16) Have you reviewed the operative preliminary title insurance policy and approved any liens that your title insurance policy will be listing as exceptions to your position?

(17) Is your loan compliant with all state and federal disclosure and usury laws?

(18) Will all property taxes be paid current at closing?

(19) What is the likelihood that there are any serious hazardous waste issues associated with the property?

(20) What is the likelihood that there are any wetland issues associated with the property?

(21) If relevant: what is the status of all required permits, entitlements, and/or other government approvals?

(22) What is the likelihood of one or more construction labor/materials liens taking precedent over your lien position?

(23) Does the loan size/amount, location, type etc. allow you to obtain optimal diversification?

(24) What is your plan for servicing the loan?

(25) If the loan involves a fractional interest, how comfortable are you joining with the other lenders involved in the loan?

—(end of original article)—

That was my list seven years ago (prior to experiencing the great fall from beginning to end. Now I realize that I must add two more items:

(26) Is the property in or near a major city? Keep in mind that if values fall, the fall tends to begin in rural areas, and the fall tends to be more dramatic in such areas over time.

(27) How is the area performing currently? What does the price trend look like over the past few years?

(28) And perhaps most importantly: What are the leading indicators of potential future value changes telling you? Keep in mind that price trend is a trailing indicator. You cannot assume that because values have gone up 10% per year in a given are for the past two  years, that the next two years will be an extension of the same. If we learned anything over the past 8 years (and oh … how we learned it), it is this. You must look at leading indicators if you want to get any kind of real handle on where values might be going. I recently published two blog entries on this subject, If you haven’t read them , please do. They are at Three potentially useful indicators of the likely movement of property values and Leading real estate value indicators.

I may well have left out some important items, so please provide feedback as to which items you agree with, which ones you don’t. Surely we can get this list up to 30!

— Clay (clay@privatemoneysource.com)

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.

10 things You should do before you start investing

September 27th, 2016

Clay Sparkman

Most of my discussions on this blog have to do with private money investing, and trends related to such.

I cam across a Lifehacker article recently–one that I had saved in The Pocket to read *later* (if you know what I mean), and was reminded that before one can make sensible private money investing decisions/choices, they mus evaluate their more general readiness for investing. And so, in the interest of taking a step back and gaining some important perspective, I offer you the following for consideration: 10 Things You Should Do Before You Start Investing.

If you are an investor in the realm of private money lending (or in some other realm) or if you are considering investing, I think that you will find this quite interesting and potentially useful in making solid moves into the realm of financial investing.

Please share any thoughts that you may have with regard to these indicators, and let us know of any other indicators that you look at when evaluating potential future price trends in a particular area.

Best, Clay

– Clay (clay@privatemoneysource.com)

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.

Leading real estate value indicators

August 23rd, 2016

Clay Sparkman

Of particular interest to private money investors is to analyze and spot potential trends in real estate pricing. I recently posted an article, Three potentially useful indicators of the likely movement of property values, which proposed three potential indicators to watch.

The following article, Unlike prices, real estate jobs not back at peak, published in The Orange County Register, added some useful numbers to look at, and which I hadn’t really thought about previously.

If you are an investor in the realm of private money lending, I think that you will find this quite interesting and potentially useful in making investment decisions.

Please share any thoughts that you may have with regard to these indicators, and let us know of any other indicators that you look at when evaluating potential future price trends in a particular area.

Best, Clay

– Clay (clay@privatemoneysource.com)

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.

A guide for private money lenders

July 14th, 2016

Clay Sparkman

I thought that this set of blog posts, A Guide For Private Money Lenders (in four parts), by Thad Merrill, was both interesting and informative, and so I thought I’d share them with you. (Ever vigilant: I’m combing the web for you.)

http://www.fortunebuilders.com/becoming-private-money-lender-part-1/

http://www.fortunebuilders.com/becoming-private-money-lender-part-2-breaking-private-money-loan/

http://www.fortunebuilders.com/becoming-private-money-lender-part-3-attract-investors/

http://www.fortunebuilders.com/private-hard-money-lenders-part-4/

Best, Clay

– 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.

Fairfield Financial – Information for investors

July 8th, 2016

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.

http://www.privatemoneysource.com/investors.php

Best, Clay

– 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.

Private money according to Wikipedia

July 1st, 2016

Clay Sparkman

It is never easy to come up with a universal definition/description of private money. I thought it would be interesting to see what Wikipedia had to say about it, so I looked it up and this is what I found:

Here

I have to say, I think *they* did a pretty good job of it. This is more accurate and precise than most of what I read. What do you think? Do you see anything that is wrong? Do you see anything that is there, which shouldn’t be? Or do you not see something important that you would like to see?

I’d like to hear your thoughts.

Best, Clay

– 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.