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

Our sweet spot: Rehab and Constrcution loans

Clay Sparkman
One of the most promising areas at the moment for real estate investors and brokers, by all indications, is new construction, REO, short sale, rehab, and quick flip properties.  The opportunity to buy distressed properties at a low price point is evident in many markets.  And yet it is difficult for most end-buyers (with a non-profit initiative) to take advantage of these opportunities, as they are not prepared to deal with the financing challenges or the rehab work involved when buying one of these properties.  Thus comes a wonderful opportunity for those real estate investors who can size up a market effectively, move to buy challenged properties at below value prices, rehab them quickly, and get them back onto the market at a slightly below market price.
Another point in favor of this brand of real estate buying/investing:  Real estate investors who either (a) buy and sell quickly or (b) hold for the long haul are not as likely to get hurt by falling market values.  It is those who are planning to hold a property for 2+ years that are in the most danger.
And as we know, what is good for the borrower in this business is generally good for the lender as well. These types of loans may be some of the best that private money lenders can expect to see for the next year or two and thus the easiest to get funded.
With these thoughts in mind, it seems appropriate to duplicate here the Rehab and Construction loan FAQ that I publish on my company website.
We tend to receive an endless parade of questions from brokers, borrowers, and investors as to how to best structure these types of loans, so here is an example (representative, I think, of private money organizations in general) of how one organization goes about it.


What is your maximum LTV ratio for rehab and construction loans?
Well, it is important to talk about front-end and back-end LTV, because this is one of the most important parameters in our decision making process. Our maximum back-end LTV is generally 65% (though in certain cases we may go as high as 70%).
What do you mean by “back-end LTV”?
By back-end LTV, I mean the LTV at the completion of the project. For example: let’s say a borrower needs $90,000 for the acquisition of a property and $20,000 for construction funds and thus wishes to borrow $100,000 (he’s coming in with the rest at closing: $10k + loan fees and closing costs). If the completion value of the property is conservatively figured at $175,000 based on comps provided by the borrower, the back-end LTV will be 110/175 or 63%.
Do you require an appraisal?
For rehab projects, rarely ever do we ask for an appraisal. We know that professional investors must move quickly and that they are frequently the best source for data regarding the projected value of their project. If an investor tells me that he expects to sell a property for $200,000 upon completion, I say, “Show me how you have come to this conclusion.” A good set of comps is frequently an adequate substitute for an appraisal (though not always). (With construction projects, it is a little tougher sometimes to get a handle on the completed project, so on occasions we will ask for an appraisal.)
Are you able to loan 100% of hard costs?
Occasionally, though the borrower would have to cover the soft costs out of pocket. It really depends on three factors: (1) How strong is the borrower financially? (2) How well is she buying? And (3) How much relevant experience does she have?
How does the construction money get disbursed?
At the close of the loan, the construction funds are held back in a client’s trust account by FFS. From time to time, as a borrower completes the construction of a project, the borrower will submit a draw request to Fairfield Financial. Fairfield will review this request and, upon approval, release funds either directly to the subs/suppliers (if requested to do so) or to the borrower (if the borrower has already paid the subs/suppliers). Fairfield is responsible for ensuring that (a) the work is completed to an appropriate quality standard, (b) the project is on-budget (or if not on-budget, appropriate adjustments are made), and (c) that all subs and suppliers get paid for their work on the project. Borrowers are encouraged to make as many draw requests as they require, and if a request is complete, and deemed to be valid by FFS, we can generally disburse funds within 48 hours.
How much experience do you require from the borrower?
Well, it is nice to see a borrower come in with moderate to substantial experience, but I have learned over the years that success in this business isn’t as much about experience as it is about common sense and the willingness and the ability to work tenaciously toward the completion of a project. So if you don’t have experience but you can show me that you have the drive, the discipline, and the common sense, we’ll give you a chance.
What sort of credit and financial stability do you require from the borrower?
We don’t have specific underwriting guidelines. As far as credit, I am not looking for a perfect credit score (though we do have quite a few borrowers with credit scores in the mid-to-high 600s and 700s). I am looking at a pattern of payment over time. If a person has had a few bumps in the road or even a BK, for example, along the way, this doesn’t bother me. What concerns me is the borrower who has consistently shown a disregard for debt obligations over a period of time. I probably won’t want to get into a project relationship with this person.
Regarding financial strength (net worth, income, and liquidity), my primary concern is seeing that the borrower has either enough income (stated) or enough cash or liquid assets (stated) to get through the project (even if setbacks occur). That means showing the capacity to make payments for the duration of the project (if an interest reserve account has not been set up) and to deal with the situation if it becomes necessary to weather a few bumps in the road if the project doesn’t go exactly as planned. Beyond that, we don’t expect our borrowers to have any great wealth. We know that they are in the process of attempting to build something, and sometimes that starts from practically nothing.
What is the term of your loan and how are the payments handled?
The term of the loan is generally one year, though if a project is expected to require longer, we can make a loan for two years or more. Payments are made monthly and are interest-only. If there is enough equity in a project, we can arrange to have some number of payments held in reserve and applied to the loan for the initial period of the project.
What are your rates?
For this sort of thing, rates generally range from 11% (sometimes 12%). The rate is determined by (a) the LTV, (b) the strength of the borrower, (c) the amount of leverage involved, (d) the merits of the overall project, and (e) the perceived volatility of the local market.
What fees are involved?
We charge a loan fee equal to 5% (under certain conditions, this may be 4%) of the gross amount of the loan. We also charge a doc prep fee (which ranges from $675 to $2900, depending on the size of the loan; for example: 675 for a loan of $150k or less), an account setup fee (which is $470 plus $1/$1000 of the loan amount), and a property inspection fee (which is typically in the $500-$1000 range, but may be more if the property is far from our central location in Portland, Oregon). There are no hidden junk fees.
Is there a pre-payment penalty?
Typically, there is no pre-payment penalty.
What is the approval process?
There are basically four steps.

  1. The borrower (or a representative for the borrower) runs the project concept by us. If we like the project concept and feel that the numbers are acceptable, we proceed to the next step.
  2. If the project conceptually makes sense to us, we produce a quote, listing all of the relevant costs and other information for the requested loan.
  3. The borrower signs off on the quote.
  4. We review a complete loan packet. We ask that this be sent via overnight mail or delivered to the office (fax copy is not acceptable). An electronic packet is acceptable, provided that all items are in a single packet (either Word or Adobe). The packet should include the following items:
    1. 1003 for each borrower/personal guarantor
    2. Credit (tri-merge) for each borrower/personal guarantor (or permission to pull credit)
    3. Company financials if the borrower is an entity (2 years)
    4. A privacy notice signed by the borrower
    5. A purchase agreement (when property acquisition is involved)
    6. A preliminary title report
    7. A detailed line-item budget for all construction work to be done on the project
    8. Plans (for all construction loans, and for rehab loans that involve changes in the basic floor plan)
    9. Borrower’s estimate of the completion value of the project, and comps (or other value analysis) to support this estimate
    10. Photos of the subject property
    11. Borrower credentials
    12. A copy of contractor license, bond, and insurance (for all construction loans)
  5. If all this checks out, we ask the borrower for a deposit (generally somewhere between $500 and $1500). This should be in the form of a cashier’s check or money order. We provide a conditional loan commitment letter at this time.
  6. If the property checks out, we draw up the documents and close the loan through escrow.

Is the deposit check refundable?
If we close the loan through escrow, the deposit is applied as a credit to the loan fees. If we don’t close the loan because (a) the borrower does not or cannot perform or (b) the project upon inspection is significantly different than as represented, we keep the deposit to reimburse us for our costs. Otherwise, if Fairfield fails to perform for any reason, we return the deposit to the borrower.
How long does it take to put the loan together?
We generally ask for a minimum of two weeks from the time we review a project packet until closing.
– 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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