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

Bridging the Gap

Clay Sparkman

One of the most notable advantages of using private money to source your borrower’s projects is that it allows for creative problem solving due to the flexible nature of the beast.  In particular, there are a number of ways that one can often make a private money transaction work, on any given project, even when the LTV initially appears to be too high. And as you likely know, that is all too frequently the case. Here are some of the loan-hacks that we may use to get around that problem:

  • We are able to base LTV on the true value of a property (as opposed to purchase price); frequently our savvy commercial investors are able to buy under value and thus this makes a significant difference when establishing true LTV.  (The caveat here is that the borrower must be able to make a case to support the alleged higher value. This need not be formal, only well organized, clear, and logical.)
  • We are able to base LTV on the projected value of a property when rehab or construction is involved. (Money well be held in a trust account and disbursed as the project is completed, ensuring that the LTV never gets wonky.)
  • We will allow a seller carry back in second position when a buyer is able to negotiate this type of arrangement to his/her advantage. With a cooperative seller, this may make up the majority of a borrower’s down payment.
  • We will allow a borrower to pledge other real estate assets as additional collateral to make up for a shortfall in LTV on the primary project. (And we will build in release clauses allowing for the release of additional collateral properties prior to the completion of the project.)
  • And ultimately, one of our most effective tools for bridging the gap when the LTV ratio is running too high is to carry some or all of our fee (either to be paid monthly or to be paid in one lump sum at the completion of the project. My father has often said that the difference between being able to do a loan and not being able to do a loan is generally our fee. And there was a time when that was too often the case. Well, we at Fairfield have made a conscious policy decision to ensure that this never happens again. Based on the premise that a dollar tomorrow is better than no dollars today, we have decided to carry the necessary portion of our fee (as a small second) any time that this is necessary to make an otherwise good loan fit our LTV criteria. This is no small thing, as our fee generally runs in the range of 3-5% (depending on various aspects of the loan, including size, location, degree of difficulty, risk factors, and speed of closing, among others), and originating brokers (when involved in a transaction) generally charge somewhere around 1% for their part in the loan. Thus, combined fees may run as high as 6%. (I never claimed that private money was cheap; I said that it is fast and flexible.) Hence, with broker cooperation, we are able to reduce, for example, 71% LTV exposure on the main loan to 65% LTV, and this will frequently bring it to within a workable range of exposure.

Bottom line: Private money gives us flexibility in many situations where more conservative loan sources cannot. And with our commitment to making good loans come together, we are willing to work with brokers and borrowers to utilize the full range of this flexibility.

Give us a try.

— 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, ID, MT, and NV. To submit a loan to Fairfield for consideration: http://www.privatemoneysource.com/loanproposal.php

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