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The Private Money Broker

The private money lending business: Likes and gripes (Part II of III)

March 26th, 2021

S. Clay Sparkman

In Part I, I began a discussion of my gripes and likes regarding the private money lending business and various industry related matters, items, and issues. I allowed myself to amble a bit far afield and concluded by mentioning a book about the legal profession which I personally found to be informing and entertaining. I’d like to indulge myself a bit more on this topic of books at least marginally related to private money borrowing, brokering, and investing.

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One of my favorite non-fiction authors is Michael Lewis. His book Moneyball: The Art of Winning an Unfair Game is one of the most interesting and influential books that I have ever read. This book on the face of it is about baseball, but in fact it is about so much more. And as time has gone by, the techniques and strategies applied to sports in this book are being applied more and more to some degree in nearly every significant aspect of human existence. The book is really about exploiting pockets of inefficiency that inevitably exist in markets (for various curious reasons), and I frequently find myself applying lessons learned in this book to the way I think about other aspects of business and life in general. There is most definitely an element of applicability to the private money lending business. If you have read it, please comment, and tell us if you do or do not feel the same. (A hat tip: to Charles Duck who gave this book to me and told me to read it some many years ago. I only wish that I had read it sooner.)

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Another Michael Lewis book that became extremely relevant with the recent collapse of large financial firms on Wall Street (though written many years before and published in 1989) is Liar’s Poker: Rising through the Wreckage on Wall Street. This book chronicles the author’s years as a bond trader for Salomon Brothers. The inside look is riveting and terrifying at the same time, and may help explain how things could have gone so terribly wrong during the 2007/2008 fall from economic grace.

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As one who brokers and services private money loans, a thing that I particularly like it when the loan payments come in on time each month as per the contractual agreement and without any prodding from my office. Fortunately, this happens quite frequently and it makes my life and the life of those who work for me so much easier. It also opens up the possibility for an extended ongoing relationship with the borrower. Most of our borrowers tend to need private money loans on an ongoing basis; they use them to drive a series of ongoing professional projects. So a positive ongoing relationship is crucial.

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And this is another thing I quite like in the business: ongoing, long-term professional relationships with borrowers, brokers, and investors. Things get so much easier when you know who you are dealing with.

Gripe

I do not like it so much when borrowers become “bad boys,” having to be prompted and prodded each month to send in their payments, and consistently pushing the envelope, going just beyond the boundaries of their agreement. This provides a certain level of strain, both physical and emotional within my organization and with my investors as well.

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As mentioned previously, I do like it when borrowers who are having problems actively communicate and behave in a proactive and professional manner—seeking to work with Fairfield (and the investors) in an attempt to navigate through their financial problems and with the intention of ultimately making good on the overall commitment. I have found that investors tend to be quite reasonable in working with borrowers who are attempting to communicate their issues–so that quite often a successful “work out” is possible. In these situations, there is ultimate satisfaction for all parties as everyone tends to benefit.

Gripe

I do not like it when borrowers who are struggling put their heads in the sand and go into hiding. Once communication stops, there is little chance for a workout, and the only choice is to seek appropriate legal remedy. Fortunately, though this does happen. It does not happen frequently, but it does happen from time to time (particularly during times when the general economy or the real estate markets are behaving badly).

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I am particularly fond of small businesses. My parents started this company in 1964, and it remains small but well entrenched to this very day. We prefer doing business with individuals and small businesses. We are the anti-behemoth in a time when so many companies have grown to be to be the size of small to medium-sized countries. We do not have a customer service department. We are all the customer service department. So, if you like the good old days of clean, direct, and honest dealing, consider that you might like working with us.

In Part III, I will be highlighting some web-based resources that I find to be particularly useful, enjoyable, and impressive. If you have any sites that you feel enable you to make better moves and decisions as you invest in trust deeds, please send me a note, and I will most likely include your information in Part III of this post.

End of part II

— Clay (sparkman@lendicom.com, 503-476-2909)

Clay is Vice President of Fairfield Financial, a primary source for private money since 1964. Fairfield is currently targeting loans in OR, WA, ID, MT, CO, and GA. To submit a loan to Fairfield for consideration: http://www.privatemoneysource.com/loanproposal.php

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The private money lending business: Likes and gripes (Part I of III)

March 8th, 2021

S. Clay Sparkman

Some time ago, I published a 3-part post on our Private Money Investor blog regarding my personal likes and gripes as a purveyor of private money. This has been my sole job for the past 27-years, so I like to rant and rave about it every now and then. After all, who wouldn’t? The original posts went over well, so I thought I would bring them out, dust them off, and generally bring them up to date and post them here on our Private Money Broker blog. I hope you find these posts to be useful, and maybe even a little entertaining as well.

There is a bit of free association here, as I one idea leads to another and so on, allowing a combination of logic and emotion to carry the narrative, and thus these items are in no particular order. Here then are my most notable Likes and Gripes in my world of private money investing and lending:

Like

The trust deed system (particularly as it works in Oregon, Washington, and California) is a thing of 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 their interests in a particular piece of real estate. Most of the professional investors I know enjoy and appreciate the West-coast trust deed system, and they have a lot more good than bad to say about it.

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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 (as will my clients).

Like/Gripe

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. I not only like a good Escrow Officer, he/she is my hero. On the other hand, a bad Escrow Officer tends to be very bad, and can easily kill a good transaction due to their ignorance, negligence, rotten attitude, or combination thereof.

Like/Gripe

Now I realize that this post is going primarily to loan brokers, but I still have to do this. I have often heard that 10% of realtors do 90% of the sales—and I suspect that the numbers are similar with regard to Loan Brokers. A good Loan Broker is worth her weight in gold—and there are some good ones out there (premium)—but there are oh so many sadly disappointing Loan Brokers as well. Many of these have simply gotten in way over their heads (particularly in the realm of private money brokering, where loans are not rolled out on an assembly line, but must be custom made by hand from the ground up). It takes a certain advanced degree of knowledge and skill to work with these loans effectively. 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 knowledge of the private money lending 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 an extraordinary amount of time working to educate Loan Brokers (and are pleased to do so). If you are already a top-notch professional in the realm of private money, please come and do business with us (immediately). If you are professional in your dealings and organized, but not very savvy with regard to the particulars of private money, come to us with an open mind and we will lead you through the process and do our best to give you a “Master Class” in private money. (Hey, a free education is not so easy to come by these days.)

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I love my attorney. It took me years (and many discarded attorneys) to find a guy like him. Everything that you have ever heard that can be bad about attorneys: the opposite is true about my attorney. 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 only for “real work:” research, written correspondence, document preparation and such. (And on top of all that, he’s the kind of guy you’d want to have a beer with.)  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 firms of America.”  This book takes what we thought we already knew and knocks us right upside the head with it. It turns out that most of us didn’t even have a clue to how bad it is.

End of part I

— Clay (clay@privatemoneysource.com, 503-476-2909)

Clay is Vice President of Fairfield Financial, a primary source for private money since 1964. Fairfield is currently targeting loans in OR, WA, CO, MT, ID and NV. To submit a loan to Fairfield for consideration: http://www.privatemoneysource.com/loanproposal.php

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Where do we go from here?

January 22nd, 2021

S. Clay Sparkman

What the…what just happened? Was that 2020 that just ran over our nation like a buss out of control, knocking down everything in its path? Uh, yes.

Today is January 22nd, 2020! We have a new POTUS and VPOTUS in The White House. We have a new congress ruled by a razor thin majority of Democrats. We have the promise of 100 million Covid vaccinations administered in 100 days–which, though extremely ambitious, would go a long way toward alleviating the effects of Covid on the way we live (or die) and on the health of the financial markets which lift us up or pull us down. And we haven’t had an insurrection in over two weeks now. Though no one can claim to know what tomorrow will bring, things momentarily look like they may be moving toward a period of relative calm and stability.

So much has been so tentative and chaotic for so long now that it is difficult to imagine that we may be settling in for a period of greater stability by the summer of 2021. And yet we must always remain vigilant, because we really don’t know what 2021 will bring. Just the hangover effects of 2020 will be washing over us and our lives for some time to come.

Let’s take stake of where we think we are now. Throughout much of the nation, it continues to be a seller’s market in real estate. This may make many investors nervous as once again we think back to the balloon which popped in 2007-2008. Generally, though, there sems to be a feeling among experts that this is not a balloon market—but rather that high prices are driven by lack of sufficient supply. Portland, where our office happens to be based, is experiencing the lowest home inventory at any time since these records were kept. The inventory is 0.8, which indicates that there are just over three weeks of inventory on the market. Think about that: If no new homes were to be listed in the next three weeks, the inventory would drop to zero! It is difficult to argue that a market like that is inflated.

Still, it should be noted that record low interest rates and a wave of people working from home due to Covid has also driven these markets. There should be some correction as remote workers make their way back into the office. However, there is also speculation as to what extent “home workers” may remain home workers after Covid is no longer driving this trend.

CNBC’s Jim Cramer sees the state of real estate markets as a positive. He argues that the boon provides a bridge by which the rest of the economy may adjust and stabilize in a healthy manner. See Kevin Stankiewicz’s January 21st article in CNBC, Cramer says the hot housing market is a boon, not a red flag, for U.S. economy.

Our traditional sweet sport here at Fairfield is to arrange money for home projects (renovation and construction). There are indicators that buyers are less willing to take on updates and repairs. They are walking away from properties that are not turnkey ready. Hence in spite of generally low inventories, this should provide an access point into the markets for those who fix and flip or fix and rent properties for a living.

Of course, we would be remiss if we failed to take note of the state of rental defaults as we move forward in 2021. A recent Forbes article touches on this point. The December 28th, 2020 Of course, I would be remiss to ignore the impact of rental payment defaults as we forge ahead in 2021. A recent Forbes article by Nathan Miller, Three Predictions for The Rental and Housing Markets in 2021, points out:

“While home sale prices and activity have hit record highs in some areas, landlords and renters across the country have been struggling to make ends meet, despite federal legislation and private programs put in place for their protection. As of November, data aggregated from over 600,000 rentals in the U.S. shows a nearly 30% drop in rent payments received compared to the same period in March — before the pandemic hit.

As a private money provider, we are always looking for ways that we may assist those who need bridge or short-term funding for commercial or profit ventures. We have decided to actively seek out landlords who may be in trouble due to the impact of this tremendous decline in rental payments over the past year. Again, that is what we do: We provide bridge funding to those who either (a) wish to take on a short-term real estate project, or (b) need an infusion of cash for a relatively short period of time to help them through periods of dramatic cash shortage due to unpredictable or unexpected scenarios.

If you happen to know of someone who has these or similar types of needs, we would be happy to discuss our private money options with you or your associates.

May this be a year of health and prosperity for you and the ones you love.

Regards,

Clay

Clay Sparkman

Fairfield Financial Services, Inc

503.476.2909

clay@privatemoneysource.com

www.privatemoneysource.com

Broker blog: https://privatemoneysource.com/broker-blog/

Investor blog: https://privatemoneysource.com/blog/

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Posted in Analysis, Commercial loans, General perspective, Investor perspective, Multifamily, Private money loan uses, Real estate market general, Rehab and constuction loans, Rental property loans, SFR mortgage loans | No Comments »

Covid-19 be damned!

October 12th, 2020

S. Clay Sparkman

Okay, so here we are. Halloween is just around the corner. (I wonder how that is going to work. One good thing: There should be plenty of masks.) But let me not deter my own intentions. So here we are: We’ve crawled through 7+ months of unanticipated and unpredictable Covid DMZs and war zones–sometimes battling fiercely at the front and other times hiding in the woods with all the patience we could amass. Our communication systems have held up to combat, but our problem is more with regard to what we communicate and who we communicate it to. There has been a great deal of chaos and confusion with regard to the command structure. In times of battle, we need to know our commander and listen intently and often solely to this commander, because generally we are just lone chess pieces lacking the ability to see the grand arena of war in its entirety (the chess board). Add to that an opponent unlike any we have battled in the current era. Maybe the last great battle of this sort was the Spanish flu in 1918, just over one hundred years ago. But it was different then (though somewhat the same), and things have changed in so many ways since then. No, this is an entirely new experience for those of us who are here now to deal with it.

What have we done? First we waited. We hunkered down and waited to see what would happen next and to avoid the initial onslaught. Then, having seemingly–after much struggle–gotten our attacker to retreat or at least brought them to somewhat of a draw, we mostly decided to abandon our jungle-cat strategies of hide and kill, and we began making plans to get back to something of an ordinary existence, though not entirely so: rather, revised, to greater or lesser degrees, to ward off the sneaky little Covids. And ultimately…this worked with varying degrees of success and then failed with varying degrees of failure–and it became clear to any coherent Sapien adult that this campaign was going to be significantly more difficult than any of us could have ever known. Where are we now? Sapiens are brave (if at not times foolish). I would say that we are getting on with our lives the best we can, taking measure frequently, and adjusting accordingly. But one thing is for sure. We can no longer just wait this bad boy out. A life spent hiding under the bedcovers…well frankly, this is not life at all.

And that, I suppose, is what this has to do with real estate projects and private money lending. (You knew I was going somewhere with this.) It is time to get on with what we do the best we can: live our lives and feed our families. If we deal in real estate, these are uncertain times, though thus far much less certain than I would have guessed six months previously. Markets are holding up–particularly in places like the Pacific NW. Prices are holding firm in places like Portland and Seattle, where demand for housing continues to greatly exceed supply. I believe that this may be an opportune time in these markets. If you buy, build, renovate, rent, and sell real estate, the opportunities may be now.

And we–at Fairfield Financial Services, Inc–are choosing to move forward with what we do, more fiercely perhaps than even pre-Covid. We are better conditioned now. We are alert! And we are ready to work twice as hard as we did previously (if that be the right thing to do). Let’s say that we all tend to get lazy when things are too good. Quite frankly we are not feeling the least bit lazy any more. We say, let’s go! We say, bring us your deals. We say, let’s get creative and make things happen together. What do you say?

What we do, of course, is help people (who do what you) to do what you do, and with greater command of your projects. We help you buy with confidence (knowing that the funds are there), and we make it possible for you to move your projects with greater velocity. In vaguely unpredictable markets, speed is your friend.

I hope you find this useful as a starting place to advance your own projects or to discuss these matters with your clients.

If you think we might be able to assist you, I recommend you ask. A few things to note: We tend to make small loans (under $750k). We make short-term loans (generally 1-2 years). Our rates are at an an all-time loan for us (operating in Oregon since 1964). We lend in the 8-11% range. We have no prepayment penalties (velocity). And we can move fast, particularly as we develop a solid working relationship (more velocity), with you understanding our needs and us understanding yours. Most of our clients are repeat clients (of many loans and projects) or repeat brokers who see us as their go-to Private Money Source.

We wish you all the best in your endeavors. (May Covid-19 be damned!)

Regards,

– Clay Sparkman (clay@privatemoneysource.com, 503-476-2909)

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Posted in Analysis, construction loans, Creative solutions, General perspective, Private money loan uses, Real estate market general, Rehab and constuction loans, Rental property loans, REO funding | No Comments »

Covid-19 and real estate markets

March 17th, 2020

S. Clay Sparkman

Clearly these are unusual times worldwide. We have very little precedent to draw on in in speculating about how Covid-19 will affect real estate markets in the US. Most investors, of course, don’t like uncertainty. So many will tend to take their chips off the table when things get weird. At the same time, there are investors who look for unusual conditions affecting markets and speculate about possible opportunities to be had. The following article struck me as a good thought piece to help real estate investors figure out where they stand. The article is:

“Impact of Coronavirus Pandemic on the Real Estate Market,” by Marco Santarelli at Norada Real Estate Investments, March 17, 2020

I hope you find it useful as a starting place to discuss these matters with your clients and/or speculate about your own opportunities.

All the best in your endeavors, Clay

– Clay Sparkman (clay@privatemoneysource.com, 503-348-7011)

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Using a private money option

February 14th, 2020

S. Clay Sparkman
Just about every broker should have a private money option to go to. Here are a few quick tips on how to get that going.
(1)   Find a Lending source that you like and trust. Also, make sure that they will work with you, guiding you through the process AND giving you quick feedback as to loans that you run by them on an ongoing basis.
(2)   Read through their loan specification guidelines and discuss these with them so that you have a decent idea of where private money might be a better option than a bank loan.
(3)   Find out what their sweet spots are. Ask them: Where do you bring options or value that a bank cannot?
(4)   If they want large non-refundable deposits up-front, I suggest that you don’t work with them.
(5)   Whenever a loan comes to you that doesn’t fit your ordinary lending criteria, think about private money. Would this scenario be a good fit?
(6)   If you feel like talking this out a bit with someone in the industry, give us a call. We are a small family business, started in Portland, Oregon in 1964. I myself have been at it for about 25 years, and I’m still learning new things every day.
All the best in your endeavors, Clay
– Clay Sparkman (clay@privatemoneysource.com, 503-476-2909)

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National home pricing and supply

January 24th, 2020

S. Clay Sparkman

A recent article (“Supply of homes for sale hits record low, and prices suddenly jump,” penned by Diane Olick at the CNBC site, posted 1/22/20) discusses the current numbers and issues related to home supply, demand, and pricing.

It seems that in general, high demand for housing coupled with a precariously low supply, has lead to even higher prices for homes. It seems that investors are jumping into the fixer market (both fix/sell and fix/flip) at high rates competing with consumers for the existing supply of homes, driving prices even higher.

It is not entirely clear but I get the feeling that Ms. Olick views investors as gumming up the works, but I am inclined to think that they add critical value, as they often buy homes which need a significant amount of work–homes which most consumer buyers would be hard pressed to tackle on their own (with issues like financing, the problems inherent in renovating a home which you wish to live in, and of course the problems of how to get that work done and done at a quality level and according to specs).

At any rate, this is both good and bad for the investors, as they face a more competitive buyer’s market (and this is where there profit is really made), but also face a high demand sellers market (allowing them to move the property quickly or rent it, and maximizing the value).

I always tell buyers that the buying is the hardest part. Many don’t have an operation setup for buying, and they should. I would argue that even small operations should devote one third of their resources and time to the buying process, and that process should be continuously ongoing so that the investor always has the next home lined up in time to move the construction team to the new property immediately upon completion of the prior home.

Consider sharing this with your appropriate clients and let us know if they need funding for a project. After 55 years in the business, we can give a few pointers and some guidance, and would be happy to provide funding when projects make sense and fit our parameters.

— Clay (clay@privatemoneysource.com, 503-476-2909)

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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A Typical Loan

December 4th, 2019

Clay Sparkman

Here is a prospectus for a loan that we placed in 2019. This is fairly typical of the types of loans that we do. We provide samples of our work several times per year.  Not only does it give borrowers and brokers a better idea of the kinds of things that we do, but it also gives them a nice working format for presenting new loans.

REAL ESTATE PROSPECTUS

SECURED LOAN

Cash out refi on SFR rental property in Lake Oswego, OR

Loan Details

  1. Loan Amount: $380,000
  2. Term: 24 Months
  3. Interest Rate: 9%
  4. Monthly Payments: $2,850 Interest Only
  5. Security: Deed of Trust in 1st Position security interest in real property at XXXXXXXXXXXX, Lake Oswego, OR
  6. Clackamas County Assessor Market Value $1,768,046
  7. LTV based on Assessor Value: 21%

Loan Overview

Mr. and Mrs. XXXXXXXXX purchased this property with all cash in 2014 for 1,450,000 in April of 2014.  Mr. XXXXXXXXX is an Attorney in CA, who was specializing in construction liability law.  Shortly after purchasing this house, there were changes to the regulations in CA that essentially destroyed his business.  This caused a cash flow shortage (and a hit to their credit), and he then borrowed $264,000 against this house through Fairfield.  His loan is ballooning in a few months, and rather than pay it off, he’d like to pull out some more cash to take advantage of an investment opportunity.  His current workload is such that another private loan through Fairfield (vs. a more conventional loan) is attractive because he simply doesn’t have time to shop around or go through the process with a bank.   

The property is being used as a short-term rental, marketed to people moving to the area while they look for permanent housing.  The borrower reports that a typical rental time is 2-6 months.  Currently, they are between tenants.

The borrower plans to exit this loan with a refinance or to simply pay it off with cash out of pocket in the next 2 years.

Property and Valuation

The property is .6 acres with 7,569 SF home that includes 4 bedrooms, 3.5 baths, finished basement, attached 2 stall garage, detached 3 stall garage (that the borrowers intend to convert into a separate living space), climate controlled wine cellar, vaulted ceilings, sun room, and high end finishes.

I visited the property when we made the loan in 2017, and although the furnishings are different, the photos are a good representation of the house. This is a very nice property in a high-end location in Lake Oswego.  The land value alone is estimated by the county assessor as $423,646.  Zillow.com estimates this property to be worth just under 1.7MM, and Realtor.com estimates a value of $1,832,400. I have no concerns with the value of this property as being more than sufficient to collateralize this loan with very little risk.

Income

A commercial loan application has been provided by the borrower’s showing an annual income of approximately $360,000.  Property taxes are not included in this loan, or their current loan, and the borrower has kept them current.  In addition, I’ve included a copy of their pay history in the loan packet.  Mr. XXXXXXXXX’s bookkeeper makes the payments each month, and the pay history is excellent.  The June 2019 payment was late, but that was an oversight by the bookkeeper.  When I let Mr. XXXXXXXXX know, they sent a check out immediately.

Credit and Prelim

A credit report for Mr. and Mrs. XXXXXXXXX have been provided in the packet.  As I briefly mentioned above, the demise of Mr. XXXXXXXXX’s practice a few years ago had a big impact on their credit.  At the time of the loan in 2017, their credit scores were in the upper 500’s.  currently, their scores are in the mid-600’s, each with a mid-score of 643.  There are some charge-offs on the report, and one account still in collection left over from his business, but all other accounts are current.  I believe this is an excellent sign, and it has also put them in a position to where they could qualify (or at least meet a min. credit score requirement) for a more traditional

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The private money lending business: likes and gripes (part I)

September 6th, 2019

Clay Sparkman

Awhile back I published a 3-part post on my Private Money Investor blog regarding my personal likes and gripes as a purveyor in of private money.  This has been my sole job for the past 20 years.  Who wouldn’t want to go rant and rave publicly about their job?  I guess I could have easily made it a 24-part post, but that would have been amusing for me, yet not so much for the rest of you.  At any rate, I decided that these posts would be relevant to this audience as well, and so I decided to publish them here.

There is a bit of free association here, as I allow one idea to lead to another and so on, allowing my emotions to carry the narrative, and thus these items are in no particular order.  So I give you the things that tend to kick start my emotions and get me going (for better or worse):
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 they 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 I realize that this post is going primarily to loan brokers, but still I have to do this.  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.  If you are already a top-notch professional in the realm of private money, please come and do business with us (immediately).  If you are professional in your dealings and organized, but not very savvy with regard to the particulars of private money, come to us with an open mind and we will lead you through the process and do our best to educate you.  (Hey, a free education is not so easy to come by these days.)

Now here’s one that really gets me going:  I am downright angry at banks for not lending money on real estate secured loans anymore.  “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 only 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, 503-476-2909)

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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Flexibility and creativity: the beauty of private money loans

August 7th, 2019

Clay Sparkman

This post was first published on this site on July 6th. 2010.

Our private money lending programs tend to be fairly rigid with regard to LTV requirements but quite forgiving with regard to most other issues. One of the nice things about private money is that it allows for creative problem solving. I have put many transactions together, that initially didn’t appear to be doable, simply by seeking out a creative way to bridge the gap.


Let me give you an example.   Say that you have a client come to your office and they want to buy a commercial building in Seattle, and they need financing. The borrower is strong and the property is prime but the construction on the building is only 90% completed and there are no tenants yet (and thus no income), and in addition to all that there is no appraisal and the buyer doesn’t have the time to wait for a commercial appraiser as this is a distress sale situation. So, I would say that this guy might have a tough time getting bank financing. So, you consider private money and decide that this loan is a good fit.

You check with a private money outfit such as ours and determine that we will loan 65% LTV against the value of this property. Now let’s say that the buyer has negotiated a purchase price of $800,000 for the property and he has $80,000 (10%) for the down payment. At 65% it appears that he may need to bring $280,000 (plus costs) to the table to make this loan work, and so you are thinking that you’ve reached a dead end.


Well, that’s where the flexibility angle kicks in. There are at least four ways that you can meet the equity requirements without the buyer bringing additional cash to the table.   Study these because if you are going to work with private money you should know them by heart.


Solution #1: The borrower may borrow based on the true value of the property.
If he can demonstrate that he is buying well, and that the true value is higher than the purchase price, then some private money lenders will be willing to base their LTV on the true value of the property. In this case, if there is a strong argument to be made that the property is actually worth $1.2MM, then a private money lender may be able to arrange to lend enough to cover much of the purchase of the property (how much, of course, depending on the overall “strength” of the borrower).


Solution #2:  The borrower may borrow based on the projected value of the property.
Say that he needs an additional $100,000 to complete the construction on the building, but that the building will be valued at $1.2M upon completion, then certain private money lenders would be willing to arrange a loan of up to $880,000 to cover both the purchase price and establish a construction fund. The construction funds would then most likely be held in a trust fund and disbursed as the work is completed on the project.


Solution #3: The borrower may be able to persuade his seller to carry back a portion of the sales price as short-term debt.
Particularly if the seller is in a distress situation, he may be willing to negotiate on this point.  So, in our example, let’s say that the buyer is able to convince the seller to carry back $400,000 of the sales price in second position subordinate to a $500,000 loan arranged by Fairfield Financial.  In this case, we may be willing to move forward with a low down-payment loan. With a strong borrower, we would, for example, be willing to make a loan for $500,000, of which $100,000 would go into a construction account for improvements and something like $30,000 would go toward loan fees and closing-costs, and the buyer would only need to come in with the $30,000 needed to cover loan fees and closing costs.


Solution #4:  It may be the case that the borrower has additional real estate assets that he is willing to pledge as collateral to make up for the shortfall in down payment money.
Private money lenders are almost always willing to consider additional collateral, to make a transaction come together.  Say the borrower has another commercial building, this one at the coast, in Lincoln City, Oregon, and that it is worth $1.6M with $750,000 owed against it.  The lender would quite possibly be willing to make the loan, with the borrower bringing in $80,000 cash and the Lincoln City building as additional security for the transaction. And if the borrower is concerned about tying the building up, because he has plans to sell it or refinance it in the future, then it should be easy enough (and standard practice) to negotiate and write into the loan a specific release clause provision stating that we are willing to release the Lincoln City property as security in exchange for a principal reduction, for example in this case, of $200,000.


Keep in mind that these solutions can be brought to bear in combination, so that all four may come into play in order to bridge the gap for any particular loan scenario. Private money is flexible and creative and for this reason often takes up where the other options leave off. (In these moments, it tends to tap dance away from the competition.) I have often said that if the banks ever acquire imaginations, we will be out of business, but in fact I’m not worried about it because it isn’t going to happen.  The banks are not interested in creative problem solving because it requires too much special handling.  The banks prefer to batch process the plain vanilla loans–the kinds of loans where the whole story can be fit into a sequence of boxes–and then leave the loans which must be custom built, one by one, to people like us. So, come join us for some loan building and some creative problem solving.  It is not only lucrative, but it is fun.

– Clay (clay@privatemoneysource.com, 503-476-2909)
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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