Clay Sparkman
This article was originally posted at this site in August of 2010. I feel that these essential points are so important for those seeking creative ways to get deals done that I felt I should post it again (I have made some modifications to the original article so as to bring the facts up to date. 3+ years is a long time.)
In a prior posting, I pointed out that one of the primary advantages of private money is that it allows for creative problem solving due to the flexible nature of the beast. I went on to discuss some of the ways in which one can often make a private money transaction work, on any given project, even when the LTV initially appears to be too high.
In particular, I profiled the following creative scenarios:
(1) We are able to base LTV on the true value of a property, as opposed to purchase price; frequently our savvy investors are able to buy under value and thus this makes a significant difference when establishing true LTV. (It is kind of like North and True North.)
(2) We are able to base LTV on the projected value of a property when rehab or construction is involved.
(3) 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.
(4) We will allow a borrower to pledge other real estate assets as additional collateral to make up for a shortfall in down payment money or earned equity.
And it turns out that I failed to mention one of our most effective tools for bridging the gap when the LTV ratio is running too high. 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 not let that happen ever again. Based on the premise that a dollar tomorrow is better than no dollars today, we have decided to carry some or all 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 5% of the gross loan amount, and our originating brokers (when involved in a transaction) generally charge anywhere from 1-3% for their part in the loan process; so with combined fees ranging from 5-8% (I never claimed that private money was cheap; I said that it is fast and flexible), and assuming broker cooperation, we are able to stretch 65% LTV to as high as 73% LTV (and we might be able to get to 78% if the loan is really solid). That is a big stretch and frequently it has made the difference between doing a loan and the opposite of that, and the opposite of that aint so good.
— 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
Tags: Commercial loans, construction loans, hard money borrowing, hard money brokering, hard money loans, Multifamily, private money borrowing, private money brokering, private money loans, Quick flip loans, real estate investing, rehab loans, REO funding, Short sales, subordinate loans
