Clay Sparkman
I thought it would be kind of fun, and hopefully informative, to write a piece about my likes and gripes regarding the business of private money lending. In other words, these are the things that tend to kick start my emotions and get me going. There is a bit of free association going on here, as I allow one idea to lead to another and so on, allowing my emotions to carry the narrative–so these likes and gripes are in no particular order. This is the first part in a multi-part series.
The trust deed system (particularly as it works in Oregon, Washington, and California) is a thing of great beauty! It provides for order and procedure, eliminating subjectivity (except for in the event of a judicial foreclosure), nicely balancing the interests of the borrower/owner and those of all the lien holders involved with regard to a particular piece of real estate. Most of the professional investors I know enjoy and appreciate the trust deed system and have a lot more good than bad to say about it.
Associated with this is another wonderful thing they call title insurance. Title companies are the only businesses I know that provide insurance against the possibility of their own error. Knowing title companies as I do, I’m betting against them. I will take title insurance every time AND THUS I shall be able to sleep at night.
Which brings me to the escrow service role of the title company: This is a very tough job, high stress, with many people simultaneously placing multiple demands, and the need to consistently walk a tightrope avoiding costly problems and errors. I most certainly wouldn’t want to do it. And apparently most title people don’t either. Most title companies do a poor job of training and preparing their people and setting a high standard, and thus unfortunately, most escrow services offered by title companies stink. Fortunately there are exceptions. Unfortunately, we often don’t have any control over where a particular closing is going to take place.
Now don’t even get me started on loan brokers. I have often heard that 10% of realtors do 90% of the sales—and I suspect that the numbers are even more extreme with regard to loan brokers. A good loan broker is worth her weight in gold—and there are some good ones out there—but there are … oh so many sadly disappointing loan brokers. Still, we need loan brokers so we soldier on. I figure our loans at Fairfield are about 50%/50%, with half coming to us through loan brokers and the rest coming directly from the borrowers. The problems in my experience are not so much with honesty (though this certainly can be a problem from time to time), but with matters of basic business professionalism in general and with the specific knowledge of the business in particular. Of course, it is a big step for many loan brokers to move into the realm of private money and commercial lending, but my company works hard to provide assistance, education, and support; we spend extraordinary amounts of time working to educate brokers. At the end of the day, only a few seem to stick. I think the problem in this field is one of barriers to entry; just about anyone can take a little test (and I mean little) and become a loan broker and that is probably not a good thing.
Okay, now that you’ve got me going: I am downright angry at banks for not lending money on real estate secured loans any more. “Come on banks, lend money! That’s what you do for a living isn’t it?” We in the private money sector need banks. We lend money to help generally strong borrowers get from point A to point B, and point B is frequently a bank loan (or a buyer who needs a bank loan in order to be a buyer). This needs to change. There are plenty of good safe loans for banks out there that don’t require the banks to disregard every rule of good lending (as they did with many sub-prime loans leading up the collapse in fall of 2007). It reminds me of something Mark Twain said (and I’m paraphrasing). He said that if a cat sits on a hot burner it will never sit on a hot burner again. But then it won’t sit on a cold burner again either.
I love my attorney. It took me years to find a guy like this. Everything that you have ever heard that can be bad about attorneys: the opposite is true about my guy. He is honest, pragmatic, honorable, and fair. He knows his limitations—and will be the first to tell you when he comes up against them–but at the same time has a vast breadth of knowledge regarding real estate matters and business in general. And he doesn’t start a clock every time he picks up the phone or answers an e-mail. Believe it or not, he actually seems to charge for “real work:” research and document preparation and such. (And on top of all that, he’s the kind of guy you’d want to have a beer with.) If you want me to put you in contact with him, I will.
And speaking of lawyers, I have to say that I really enjoyed Happy Hour is for Amateurs, by Philadelphia Lawyer. If you are offended by explicit talk of sex, drugs, and binge drinking, you may want to give it a miss. But beyond the raucous tales, this book takes you right into the bowels of the enormous billing machine that is “the law firm in America.” This book takes what we thought we already knew and knocks us right upside the head with it. It turns out we knew nothing at all.
End of part I
— Clay (clay@privatemoneysource.com)
Regardless of the reasons, I think there are three items which do not bode well for commercial real estate prices in the next few years. First and perhaps most overlooked, investment or income producing properties, during the boom years, where purchased more for appreciation, rather than “income”. In other words, many deals were justified by investors who were willing to forego a rate of return (income), for future price appreciation. But as its name suggests, this is not what “income producing property” is all about. If it doesn’t give you an income stream in good times, it sure won’t be able to in bad ones. Only a “flipper” can make money on appreciation, and the trick is to know when to get in and when to get out. Second, the credit crisis has reduced the chances of obtaining loans, and also the leverage previously afforded owners/purchasers. Less money means less deals, and more cash out of pocket. This can only lead to lower prices. Third, we are for now in a “new” economy (although Americans often prove to be driven by fads and can be short sighted), where we will consume less, which should mean less need for commercial space. If there is one truth that history makes clear over and over again, it’s that most sectors of the economy will move in conjunction with one another, not in spite of one another. No doubt prices are tied to supply and demand issues, but too much of a swing invites change. So when prices double and triple in one sector while the rest of the economy isn’t going in that direction, chances are some force will snap that imbalance back into its proper place in the overall economy. And that change can be from social, economic, and/or political means.
Is buying a foreclosed house really a good idea right now? Shouldn’t we wait and see how long it takes for the market to bounce back from this recession? I would have to think some cities are progressing faster than others, but what are your thoughts on our country as a whole?
I think it is a good idea for those who are either (a) getting in and out fast (quick-flip) or (b) those who are in for the long hold. Otherwise, it is not a good idea. There is too much uncertainty.
Clay