Clay Sparkman
We’ve been through nearly 3 ½ rough years in the real estate market—and projections seem to indicate that we will finally see clear up-turn in the second half of this year, but no one really knows for sure. We have managed to survive this down-time (thus far) and continue doing loans even in the face of uncertainty to borrowers and investors. Certainly our loan volume is down. Less people are borrowing for projects at the moment (though we are starting to see some upturn there) and our investors are being more conservative given the level of uncertainty. The key areas we look, I would say, even more carefully than we did before the crash are: (1) LTV: we used to do a lot of stuff at 75%. Now most of what we place is at 65% or less. (2) Professionalism of the borrower: we want to see that the borrower is proceeding with caution, has done his/her homework, has backup strategies in place, and has a reasonable track record. (3) Exit strategy: it is hard to be certain in this climate that an exit strategy will work, but we beat this to death to be as sure as we can that there is/are one or more ways to exit the loan.
Rigorously following these guidelines has served us well and has generally worked out well for our investors. By way of example, here are four loans that we have closed (or are in the process of closing) recently.
Mini-condos for simple living on the Washington coast
1. Loan Amount: $286,000
2. Term: 1 year
3. Interest Rate: 13%
4. Monthly Payments: $1,895.83 Interest Only
5. Construction Holdback Account: $265,000
6. Security: Deed of Trust in 1st Position security interest in real property at xxxxxxxxxx
7. Projected Value by Borrower Comps: $476,000
8. As-is Value by Borrower Estimate $30,000
9. As-Is Front End LTV Borrower Estimate: 70%
10. Completion LTV by Borrower Comps: 62%
This loan is to provide funds to build four detached condos on the Washington Coast. The borrowers, xxxxxxxxxx of xxxxx company requested a loan of $286,000 to provide funds for the construction and various loan costs and closing fees. $265,000 of this was deposited into a construction holdback account. The borrowers have $21,000 invested into the purchase and clearing of the lot so far, which is effectively being considered as their down payment or skin in the game.
This will be the 3rd group of condos that the borrowers have built. The first set of condos was built in the fall of 2009, and the borrowers report that they sold in approximately 2 months. The 2nd set was completed in the fall of 2010 (this is an existing construction loan with Fairfield), and at least one of those units has been sold for the full asking price. The borrower reports that there has been a lot of activity and interest in the remaining units.
Partner xxxxx is a realtor, and her husband is the contractor who will do the actual construction. The borrower plans to exit this loan through the sale of these condos, and has requested that each condo be released with a principal reduction of $75,000.
The property is located on a cul-de-sac approximately 1,800 feet from the average high tide line, and two blocks from public beach access. These condos will be 480Sq/Ft with a full kitchen and bath, and made with eco-friendly materials.
Adult care facility in Washington
1. Loan Amount: $270,000
2. Term: 24 Months
3. 6 months minimum interest
4. Interest Rate: 14%
5. Monthly Payments: $3,150.00 Interest Only
6. Security: Deed of Trust in 1st Position security interest in real property at xxxxxxxxxx
7. Value of Collateral by Appraisal: $750,000
8. LTV based on Appraisal: 36%
The borrower, xxxxx, inherited an adult care facility approximately 2 years ago. She requested this loan to funds to pay the probate and costs incurred in the transferring of the estate.
The subject property is a 4402 SF 8 bedroom 3-bath home being used as an adult care facility. There are several outbuildings being used as rentals to the borrower’s family. Leases were provided. The home sits on 5 acres, adjacent to a bare 5 acre parcel that is also being used as additional collateral.
Vacation rental in central Oregon
1. Loan Amount: $120,000
2. Term: 36 Months
3. 6 months minimum interest
4. Interest Rate: 13%
5. Monthly Payments: $1,300.00 Interest Only
6. Security: Deed of Trust in 1st Position security interest in real property at xxxxxxxxxx
7. Value of Collateral by Borrower Comps: $227,900
8. LTV based on Collateral by Purchase Price: 53%
The borrower, xxxxx company had negotiated the purchase of this property for $150,000. The seller was in financial distress and needed to sell quickly. The borrower believed that this price was well under value (the list price was reduced to $199,500 on 12/8/10), and were requesting 10K for cosmetic improvements. They put down 25k, and the seller is carried back another 25K to make the loan work. The loan was personally guaranteed.
The subject property is a 1,618SF home that will be used as a vacation rental. It is located in the xxxxx subdivision which has amenities such as a club house, swimming pool, excessive common grounds use, and paved bike paths. The property has 3 bedrooms, 2 baths, fireplace, and wrap around deck.
Self-storage facility in northern Washington
1. Loan Amount: $375,000
2. Term: 36 Months
3. 6 months minimum interest
4. Interest Rate: 12%
5. Monthly Payments: $3,750.00 Interest Only
6. Security: Deed of Trust in 1st Position security interest in real property at xxxxxxxxxx
7. Value of Collateral by Purchase Price: $565,000
8. LTV based on Collateral by Purchase Price: 66%
The borrower, xxxxx, is an experienced owner and operator of self-storage facilities. He had the subject property under contract for $565,000, and was seeking a loan of $375,000. There was approximately $20,000 in credits that the seller agreed to provide, and the borrower stepped up with a down payment of approximately $200,000.
The borrower plans to live on site and manage the property which will greatly reduce his personal living expenses as well as eliminate the wages that are currently being paid to an on-site manager. In addition, he plans to install a self-service Kiosk that would allow easier access for new tenants to sign up 24/7. He also plans to improve the signage, making the property more visible. Finally, he will offer a $1 first month move in special and change the name of the property from xxxxxxxxxx to yyyyyyyyyy. He believes that this name change will improve the search engine rankings and ultimately increase occupancy. Through these changes the borrower believes that he can increase his occupancy from the current 50% to 80% in the first year.
The borrower plans to exit this loan by refinancing with and SBA loan. More info regarding the feasibility of this exit strategy is described below.
The subject property is consists of 2 lots with a combined 2 acres and 22,923SF of rentable space over 7 buildings. In addition, there is a small 2br 1ba manufacture home on the property. The property was reported to be in excellent condition, and located in a prime spot in northern Washington. There are several self-storage facilities in this area, which are reported to have low vacancy rates.
The current occupancy rate is at 50%, which the borrower attributes to the current “absentee owner”. As far as he can tell, there isn’t much for marketing activity and no incentive for the on-site manager to increase their workload by working to increase the occupancy.
— Clay (sparkman@lendicom.com, 503-476-2909 or 800-971-1858)
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.
