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

The Private Money Broker

Rehab and construction loan FAQ

February 14th, 2013

Clay Sparkman
One of the most promising areas at the moment for real estate investors and brokers, by all indications, is 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 1-5 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 how one organization goes about it.

REHAB AND CONSTRUCTION LOAN FAQ

What is your maximum LTV ratio for rehab and construction loans?
Well, it is important to talk about front-end and back-end LTV. Our maximum back-end LTV is generally 70% and our maximum front-end LTV is about the same (with a little more flexibility), though in the present market we try to keep that closer to 65%.
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 $30,000 for construction funds and thus wishes to borrow $110,000 (he’s coming in with the rest at closing). 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%.
Okay, so then what is “front-end” LTV?
Front-end LTV is the LTV immediately upon the closing of escrow but prior to any construction. In the example above, it is a little tricky to talk about the current value of the property since it is a fixer (and fixers are tough to comp directly), but if we determine that the AS IS value of the property is $95,000 then the front-end LTV is 60/95 or 63%. Generally with rehab projects, if the back-end LTV is in-line then the front-end LTV will be in-line also. This is because with rehab projects, the profit is made primarily in the buy, and less so in the construction.
With construction loans, on the other hand, it is usually the other way around. The profit is made in the construction and generally not in the acquisition of the land. So with construction loans, we need to work a little harder to make sure that the front-end LTV is in order.
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 substitution 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?
Yes, and sometimes we are able to finance a portion (though not all) of the soft costs as well. Our very strong repeat borrowers are sometimes able to leverage 100% and are not required to bring any money into the project. It really depends on two factors: (1) How strong is the borrower? (2) How well is she buying? And (3) How much relevant experience does she have?
How does the construction money get disbursed?
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 a little 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 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 and income), 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 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 12-14%. 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.
Does the borrower pay interest on the full amount of the loan or only on the funds that have been disbursed?
The borrower must pay interest on the full amount of the loan for the duration of the loan. The funds are being held in trust by Fairfield Financial on behalf of the borrower. As such, the funds are not available to the lender throughout the duration of the loan and thus the lender has committed these funds and cannot utilize them in any way or earn interest.
What fees are involved?
We charge a loan fee equal to 5% 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), 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.
Can the fees be paid from the proceeds of the loan?
Yes, if there is enough equity in the project. This is frequently the case.
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. 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)
  4. If all this checks out, we ask the borrower for a deposit (generally somewhere between $500 and $2000). This should be in the form of a cashier’s check or money order. We provide a conditional loan commitment letter at this time.
  5. 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)
Vice President of Fairfield Financial, lending since 1964.  Currently targeting loans in Oregon and Washington, with potential to loan in:  AK, CA, CO, ID, FL, GA, ID, MT, NV, NY, OK and TX.  To submit a loan to Fairfield Financial for consideration: http://www.privatemoneysource.com/loanproposal.php

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Posted in construction loans, Rehab and constuction loans, REO funding, Short sale funding | No Comments »

Quick flipping

February 7th, 2013

Clay Sparkman
As you probably know, we work with a lot of people who are doing quick flip properties/projects. That means: buying low, generally fixing up (though not always), and then selling fast, at a fair price, for a nifty profit.
Until now, we have made many such loans, and we have done so as follows: 5 points, 12-14% interest, a one year term, and with no pre-payment penalties.
Lately we have had borrowers asking if we could offer a 6 month term with a lower up-front cost. The idea being that these folks could get in and out in six months or less—and thus save money on the cost of capital.
Well, we finally have an answer to that. Starting today, we are offering the following program:
Six Month Quick Flip Loan

  • Available for quick flip loans (with or without renovation expenses)
  • 6 month term
  • 3 points
  • Option to extend for an additional 6 months is assured if borrower is timely on first 5 payments (paid within the grace period), and not past balloon date)
  • The additional extension will cost 3 points
  • If borrower is not timely, there may be an extension offered, but the decision as to whether or not to offer an extension is at the discretion of the lender.
  • No prepayment penalty

That’s it. Sound good? We hope so. Go out there, offer this new product, and get a piece of the action in the quick flip market that is rapidly unfolding around you. We dub 2013 as the year of the quick flip. I’m guessing you do too.
– 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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Posted in Auction funding, Private money loan uses, Promotional announcement, Real estate market general, Rehab and constuction loans, REO funding, Short sale funding | No Comments »

Draw process for rehab and construction loans

February 5th, 2013

Clay Sparkman
We plan to do as many rehab and construction loans as we can this year. We see great potential in that area. Builders are under-building (by a substantial number), and this is mostly because banks haven’t recovered to the point where they aren’t comfortable doing construction style lending–and thus there aren’t many options for those looking to make money, through value added, in the real estate market.  Unless, that is, you consider private money.
We are frequently asked how our draw process works. I have included a copy of our Draw Request Submission Requirements document below.
One final note: If you’d like a sample copy of our Budget Matrix, please send me an e-mail requesting it. I tired to get it formatted correctly for this blog post, and it just didn’t want to go.
DRAW REQUEST SUBMISSION REQUIREMENTS
You are entering into a loan that contains a construction disbursement account.  As the project progresses, Fairfield Financial may disburse funds on work that is completed.  In order to request disbursements, a draw request must be submitted to our office.  There is a $150 Draw Processing Fee for every draw you submit.  You may submit as many draw requests as you wish.  Each time you wish to submit a draw request, please follow the requirements listed below:
Cover page / Instructions:
For each disbursement item:

  • Description of work completed
  • The disbursement category (allocated from budget)
  • Total amount of disbursement
  • Instructions for payment/reimbursement: to whom, how much, invoice numbers (if appropriate), and how to deliver payment (including address)
  • Final total of all items
  • Authorized signature


Photos:
Include photos (digital photos, or photos via mail) of all work that is complete.  For example, for flooring work, provide photos of the flooring in all rooms where it has been completed.  Please label each photo with a detailed description.
Updated Budget / Draw Record:
From the original budget that was approved when the loan closed, submit an ongoing budget and draw record that compares each budgeted amount to actual expenses, a draw history, and completion status.  Please use the following spreadsheet example.  Fairfield will provide a template (MS Excel or MS Word) upon request.
If expenditures do not meet budget expectations:
For every item that is either over or under budget, please provide an explanation and submit a proposal for a budget revision
Copies for Payment / Reimbursement:

  • If paying vender directly, a copy of the invoice
  • If reimbursement to you is needed, evidence of payment (a copy of the cancelled check, credit card receipt, or the invoice marked “paid” and signed by the vender)

Email, Fax, or Mail:
Please send your request one of three ways: e-mail, fax, or regular mail.
NOTE:  From the time that all required items have been received and deemed adequate, please allow up to 3 working days for draw request approvals and disbursement of funds.  Disbursements are only given when project item is completed (some exceptions include permits, etc.) For a copy of this document and examples, please visit our website at http://www.privatemoneysource.com.
– 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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Posted in construction loans, Private money loan uses, Real estate market general, Rehab and constuction loans, REO funding, Short sale funding | No Comments »

Investing in real estate in 2013: Three articles you should read

January 31st, 2013

Clay Sparkman
On occasion, I try to publish links to articles that are relevant, useful, and interesting. Here are three articles which give useful perspective on the matter of investing in real estate in 2012—each from a different perspective.
A money.cnn article on how to find real estate opportunities in 2013:
http://money.cnn.com/2012/12/01/real_estate/housing-outlook-2013.moneymag/index.html
Dailyresearchhunter.com on global real estate investing:
http://dailyresourcehunter.com/universal-language-moneymaking-real-estate/
An investopedia.com article on strategies for making money on residential property investments in today’s market:
http://www.investopedia.com/articles/mortgages-real-estate/09/residential-real-estate-invest.asp#axzz2JUEcrOsf
On another note, please let me know: (1) if you have any questions about private money that you would like answered (I will do my best to provide an answer, and (2) if you have any specific suggestions for a private money related topic that you would like to see addressed in an upcoming e-mail (sometimes I run out of ideas, so I can always use your help).
– 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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Posted in Analysis, General perspective, Investor perspective, Real estate market general | No Comments »

2013: Think construction loans

January 25th, 2013

Clay Sparkman
I rather enjoyed the following article in the www.thefiscaltimes.com (quite an impressive publication at first blush), and thought it would be a good one to share.
“Ten Real Estate Trends to Watch in 2013”
http://www.thefiscaltimes.com/Articles/2012/12/06/10-Real-Estate-Trends-to-Watch-in-2013.aspx#page1
The article begins by noting that “national home prices have been on the uptick for eight straight months,” and then goes on to identify ten areas to watch closely as probable determinants as to whether or not, and to what extent, this upward trend will continue.
A key word for me, coming away from this article is “construction.” Item #1 notes that “… construction of new homes and apartments needs to be between 1.25 and 1.5 million a year just to keep up with population growth. But since the housing crash, new construction has been at 500,000 units or fewer for 6 years running …”
Item #10 then goes on to note that there is an immense shortage of bank funding available for construction loans. “… only 22 percent of the country’s largest banks are making them …” Further, they point out that “many medium and small builders who rely on loans for regional and community banks aren’t getting the capital they need to launch projects.”
They don’t mention “private money” as an alternative source for such players. They rather seem to suggest the demise or consolidation of these smaller players. Yet, as a purveyor of such, private money is the first thing that comes to my mind. Light bulb! Solution at hand!
I expect that we’ll be doing more construction loans in 2013 than in recent past years. Please feel free to comment, and let me know what you think, with regard to that suggestion and the article in general.
– 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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Posted in Analysis, construction loans, General perspective, Multifamily, Private money loan uses, Real estate market general, Rehab and constuction loans, REO funding, Short sale funding | No Comments »

2013 – The year of the quick flip

January 23rd, 2013

Kris Gillmore and Clay Sparkman
Over the past five years we’ve all watched real estate prices come crashing down, in many cases forcing lenders to foreclose and take back the property. Although this is a sad misfortune for some, it is a tremendous opportunity for others. With regard to quick-flip investment property, we have always been of the opinion that the profit is in the purchase, not in the renovation or sale.  And now, more than ever, banks are willing to unload their inventory at a discount below market value.
As you know from previous posts, Fairfield Financial is laser focused on doing these types of loans. Here are some guidelines for what we’re looking for and what we’re generally able to fund.
65-70% of the ARV – Depending on the area and the strength of the borrower, 65% LTV is our target (including fees), but for a very strong loan we can often get to 70% LTV. We hold construction funds in an escrow account, which enables us to loan based on the ARV, as opposed to the purchase price.
Loan Size – Right now our sweet spot is in the $150,000 – $250,000 range, although we’ll consider loans from $50,000 – $750,000.
100% Financing – We can finance 100% of the acquisition and rehab costs, assuming that the LTV is appropriate.
Down Payment – We do require that the borrower have some skin in the game for at least the first few loans. Generally speaking, this amount can be as little as 5% down, but the down payment is really determined on a case by case basis, depending on the property and the strength of the borrower.
Secondary collateral – If a down payment isn’t feasible, we can always consider the use of a second property as collateral. This is another way to put some skin in the game.
Term – Typically, these are 12 month deals with no prepayment penalty. Multifamily rental properties can go up to five years, but this too is determined on a case by case basis.
Exit Strategy – As always, this is critical. We’re looking for borrowers with a solid working plan and a clear and likely exit strategy.
Knowledge of local market – This goes hand in hand with the exit strategy. We want to be sure that our borrowers are familiar with the current market trends, and that their plan is consistent with local market activity.
– 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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Posted in construction loans, Multifamily, Private money loan uses, Rehab and constuction loans, REO funding, SFR mortgage loans, Short sale funding | No Comments »

Where do you go to learn about private money?

January 11th, 2013

I can’t tell you how many times I have been asked by prospective private money investors, “Where do I go to learn more about this? Where are the books? Where are the articles? where are the websites”
I have generally had to shrug my shoulders and say, “You know, I don’t know.” I can’t tell you why, but very little has been formalized regarding the matter of private money basics (or the finer points for that matter).
Yesterday I was talking to a new prospective lender, and he told me about a book that he read. He said that it was very good at covering the basics of private money in simple language. This guy should know. He has spent a great deal of time researching the matter, and has been dead set on learning the workings of the private money realm.
With the caveat that I haven’t read this book, I offer this resource to you.
Private Mortgage Investing: How to Earn 12% or More on Your Savings, Investments, IRA Accounts and Personal Equity–A Complete Resource Guide with 100s of Hints, Tips and Secrets From the Experts Who Do It Every Day
http://www.amazon.com/Private-Mortgage-Investing-Investments-Secrets/dp/0910627622
If any of you read this book, or have read this book, and have any feedback–I would be delighted to receive it and share it with the blogregarion (yes, I made that word up).
I hope this is of use to some of you.
– 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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Posted in Resources | No Comments »

Private Money FAQ

January 7th, 2013

Clay Sparkman
I try to update and publish this FAQ every once in awhile, as it is a handy guide to better understanding the market for private money loans in general–and more particularly, how we operate here at FFS, by way of example.


Private money is often misunderstood. Many industry professionals know very little about it, and fallacies and misconceptions tend to dominate the collective wisdom. As you know, as a subscriber to this list, I have made it my mission to try to educate professionals regarding the realities of private money. In this capacity, I spend a lot of time answering questions about private money. I figured it was about time to prepare a FAQ on private money and share it with this group. So here you go.
-What is private money used for?
Private money is generally used as a bridge: a way to get from point A to point B. It is generally a short to medium term solution (1-6 years), and there is nearly always an exit strategy going in. It is used for all types of real estate secured financing: commercial retail, restaurants, hotels/motels, marinas, elder care facilities, industrial, agricultural, raw land, land development, construction, rehab, multi-family, single family homes, manufactured homes, and floating homes. For a list of our private money loan programs, click here.
-What are the interest rates?
Private money rates generally range from 10 to 15%. The rate is determined by looking at a combination of factors: (a) LTV ratio, (b) strength of borrower, (c) condition/desirability of property, (d) actual cash-in or real equity contributed by borrower. Typically our rates fall in the 12-13% range. A list of our loan guidelines may be found here.
-What fees are involved?
We charge a loan fee generally equal to 5% of the gross amount of the loan. We also charge a doc prep fee ($675 or more, depending on the size of the loan), a property inspection fee ($500 or more, depending on the location of the property), and a collection account setup fee ($470 or more, depending on the size of the loan). There are no hidden junk fees.
-Can the fees be paid from the proceeds of the loan?
Yes, if there is enough equity in the project. This is frequently the case.
-Is there a pre-payment penalty?
Most of our loans have no pre-payment penalty.
-Why would anyone pay those kinds of rates and fees for a loan?
There are many reasons why a borrower would choose to use private money over a cheaper institutional option. For example, professional real estate investors like to use private money when buying because they are able to make offers which are not constrained by long timelines and numerous rigid conditions. Often times speed is a very significant factor in completing a profitable transaction and in those cases it often makes sense to pay for a short-term private money option rather than loose the deal. Frequently the condition of a property won’t allow for the initial financing with conventional money, and in those cases private money may be used. Often the type of property is a factor: banks don’t like lending on raw land and lots, but private money lenders are more inclined to do so. Cash leverage is another factor. Fairfield Financial, for example, loans based on the true value of a property, not the purchase price, so sometimes we lend most of the acquisition cost for a property.. The structure of the deal may be a factor. Most private money lenders allow the buyer to establish their equity through the mechanism of a seller carry back; banks won’t do this. The list goes on and on.
-What is the most common use for private money?
Our most common loans are probably construction, rehab, and land development loans. We have an entire FAQ devoted to these loans at: http://www.privatemoneysource.com/articles/rehabfaq.php
-How fast can private money loans close?
We have been known to close loans in a matter of a few days, but more typically, you should figure on 10-15 business days. (Keep in mind that it is only possible for us to move quickly if the borrower, broker and other third parties are moving quickly as well.)
-is an appraisal required?
Some private money lenders require them. We don’t. Evidence of value is a critical part of the private money loan process. However, it is our opinion that a good set of comps is just as effective in establishing value as a good appraisal. Many of our borrowers are professional investors, and we feel that they are qualified to perform the value analysis. This allows us to streamline the process. However, it is important to note that putting together a god set of comps is hard work. See the following article on our website for a detailed description of how to prepare a proper value analysis: http://www.privatemoneysource.com/articles/comps.php
-As a mainstream mortgage broker, I don’t see much of this type of thing. Why should I be interested in private money?
To be perfectly frank, it is my belief that mainstream mortgage brokers are being slowly squeezed out of the industry. Lenders are ramping up their operations to better provide online loan sourcing directly to borrowers. We saw a similar thing in the travel industry. The travel agents that have survived, and even thrived, are the ones who effectively established niches within the industry. It is my belief that the same will ultimately be true for mortgage brokers. Plain vanilla loans can be easily processed in an assembly line fashion which easily translates to the world of the novice and a web browser. Niche lending, on the other hand, tends to be a hand-crafting of sorts, and cannot be easily automated. Look at private money. There are no absolute rules. Many factors must be considered in making a decision and frequently those factors are intangible. Ultimately a high degree of thought work and common sense is involved. Private money will always be a people process. So if you tell me, I am not interested in private money because I don’t do unusual loans, I say to you, you might want to reconsider.
-As a mortgage broker bringing you this transaction, how do I get paid?
It is simple. You bring us a borrower. We price the loan to you. (Think of yourself as a wholesale buyer.) You price the loan to your client, adding your fees as appropriate. You stay involved in the loan (or not) as you choose, and prior to closing, you submit a fee demand to escrow and receive a check directly from the title company. For more information on this topic, see: http://www.privatemoneysource.com/brokers.php
-Why do they call it hard money?
It is difficult to find an answer to this question. I’ve heard plenty of speculation. Some people say that it’s because the money is used for hard to do loans. Others say it is because the loans are hard to get or hard to pay. It is my belief that it is called hard money because traditionally it has been real money in the sense that it is not borrowed. Institutions loan borrowed money, and in this sense they loan soft money. However, I must point out that things have changed a bit over the years, and these days a good deal of hard money is in fact borrowed.
-How do I go about doing a private money loan with Fairfield Financial?
There are basically four steps.
(1) First, run the concept by us. The best way to get started is to provide us with a high level summary of the loan. You may e-mail a summary, or you may use our online submission engine, which will walk you through the process. It is quite simple to use. You will find that at: http://www.privatemoneysource.com/loanproposal.php
(2) If we like the project concept and feel that the numbers are acceptable, we provide you with a rough quote.(3) Once you approve the rough quote, we provide you with a list of items that we need to receive and review in packet form.
(4) We then review this loan packet. We ask that this be sent via overnight mail or send via e-email, as a single Adobe or Word attachment.
(5) If all this checks out, we ask the borrower for a deposit (average amount = $1,000). 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) We send someone out to inspect the property.
(7) 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.
-What needs to be included in a private money loan package?
As I said, we provide a list specific to your loan scenario. However, if for a list of our general packaging guidelines, please see the following: http://www.privatemoneysource.com/packaging.php
– 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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Posted in Fundamentals, Private money loan uses, Rehab and constuction loans, Submiting loans, Valuation | No Comments »

Private Money – The Rules of Physics May Not Apply

December 12th, 2012

This article was published in The Scotsman Guide as “2 Private-Money Myths: Debunked” back around the time when the sub-prime market was just beginning to collapse.  I thought it might be of interest to some of you on this blog, and so I’m posting a slightly different version here.

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Clay Sparkman

I would like to make a proposal.  I would like to propose that the standard universal laws don’t necessarily apply to private money lending.  That is, the things which we most take for granted—or assume to be true–may not be true in the realm of private money lending.
Let’s talk about systems for a moment.  Let’s take physics as an example.  Physics is the scientific mechanism which man has devised for describing, conceptualizing and predicting the behavior of the physical world.  In the realm of physics, if one rule or one aspect of the system is called into question—even a small matter—then the entire system must be called into question.  This has happened on various occasions as the science of physics has evolved, and as you can well imagine, it has caused quite a fuss among those who study physics.
My goal here is to break your notion that the things which you “know to be true” in the realm of private money lending can be correctly assumed to be true.  Let’s start with something absolutely fundamental.  Everyone agrees that there is a direct relationship between the perceived risk of loss of investment capital associated with a particular investment and the rate of return from that investment.  And I think it would be fair to say that pretty much everyone in the field agrees (1) that private money loans are riskier than their institutional counterparts (hereinafter referred to as institutional loans, a category to include conventional loans, sub-prime loans, and everything not included in the category of private money) and thus carry higher interest rates, and (2) that within the private money realm, riskier loans carry higher interest rates than those which are perceived to be less risky.  I would be quite surprised if any of my readers take issue with either of these two basic notions.  Let me clarify one more time because this is important: when I speak of risk here, I am referring to the risk of direct monetary loss of investment capital.
So let me now proceed to turn these two basic notions upside down.  Fundamental notion #1 suggests that private money loans are riskier than institutional loans and that this is the reason why they carry higher interest rates.  This is quite simply wrong.  Institutional lenders don’t avoid risky loans per say.  In fact, the sub-prime realm tends to thrive on them.  Institutional lenders can (and do) factor known risk into their lending process.  What institutional lenders will not tolerate is this: they will not tolerate loans which cannot be analyzed or characterized within a specific manageable and objective framework.  Put another way, institutional lenders are only interested in commodity loans—as opposed, let’s say, to custom loans.
And why is this true?  It is true because institutional lenders choose to manage risk and this can only be done effectively within a commodity loan system.  Even though these lenders can accommodate almost any degree of risk, they cannot–and will not–accommodate unknown risk.  All risk must be measurable, and risk—to say it another way–is only measurable within a specific manageable and objective framework.  Using FICO scores and other specific measures, the typical institutional lender can predict to within a dime the value of their loan portfolios that will go bad.  So you see, by managing risk, in effect they eliminate risk.  Any given loan involves a certain amount of risk, but a portfolio of commodity loans is utterly predictable.
In case you’re not buying this particular line of logic, and you think that I’m just working with smoke and mirrors here, let me offer some (fairly) objective data.  At Fairfield Financial, we manage a portfolio of 200+ private money loans at any given time, a package that adds up to about $30 million dollars in face value.  Our average mid-score for that package is between 650 and 660.  That portfolio sees an average of 2 loans per year go to REO.  That is a 1% default rate.  Those are good figures: 650-660 mid scores and 1% default rate.  I suspect that many institutional lenders would rather enjoy such numbers.  And thus, it seems that our loans are not necessarily more risky—or even as risky—as their institutional counterpart.  Then of course our rates must be on par with the institutional realm as well, yes?  No.  Our median interest rate is 13% (fixed).
Okay fine.  Certain irregularities occur in the risk-reward relationship when crossing from the institutional money realm to the realm of private money.  But surely we can say—with complete confidence–that within the realm of private money, riskier loans carry a higher rate of interest than those perceived to be less risky.  Here again, I would respectively suggest: it just aint so!
Private money lenders are averse to risk–as are all investors.  However, private money lenders on the whole are particularly averse to risk of default (as opposed to risk of loss).  Risk of default involves (a) temporary cash flow interruptions (something we affectionately refer to as “cashflowus interuptus”), (b) lying awake at nights and worrying about non-performing or sporadically-performing loans (which we call “bad boys”), and (c) lots of hassles and many hours of work (which tend to accompany the bad boys).
In fact, I would assert that on the whole private money lenders are less averse to risk of long-term potential loss then they are to risk of default, which we shall refer to hereafter as the “bad boy problems.”  I have spent the past 15 years of my life pricing private money loans and have a pretty good idea of how the market works.  Pricing private money loans is a little like pricing antiques but tougher; it is a highly subjective process.  But of course there are certain guidelines.  One takes a hard look at the long-term risk of the loan and at the potential for bad boy problems.  I would argue that the best indicator of long-term risk is LTV.  Bad boy problem indicators (such as credit, income, and pay history) may play into the risk equation, but as any private money lender will tell you, they are betting on the equity first and the borrower second—and in fact the borrower is a distant second.  Having established LTV as a risk indicator, let’s look for a bad boy indicator.  Let’s go with FICO mid-score.  I have found that FICO mid-score is indeed a very reliable indicator of the likelihood that you will have a bad boy on your hands.  When it comes to financial responsibility/performance, it seems that the past is a very good predictor of the future.
So now we have two objective scales to work with: LTV and FICO mid-score.  Here I’m going to take a giant leap (very unscientific, but also very interesting) and make the assumption that these two scales are basically linear.  The LTV scale for private money loans basically runs from 0% to 75%.  The FICO mid-score scale runs from 300 to 850.  So that now we have established a ratio of 7.33 between the two scales ([850-300]/75).  Thus we can say that a 10% change in LTV on the risk scale is roughly proportionate to a change of 73 in FICO mid-score on the bad boy scale.
If risk is the primary factor driving interest rate, then a 75% LTV loan to a borrower with a 700 mid-score would carry a higher interest rate than a 55% LTV loan to a borrower with a 554 mid-score.  Well, in fact just the opposite happens.  Equalizing for other factors, I would tend to price the first loan at 12-13% and the second loan at 14-15%.  So you see, long-term risk is a distant second to bad boy factors when pricing a private money loan.
Someone I respect immensely recently said that it is not what we don’t know that endangers us the most.  It is what we think we know but know incorrectly.
If you go away from this post knowing that the risk-reward relationship as applied to private money is a myth, then you have learned a little something.  If you lie awake tonight and wonder if things that go up in the private money universe really must come down—then that dare I say may qualify as an epiphany.
– 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, but is able to source loans nationwide. To submit a loan to Fairfield for consideration: http://www.privatemoneysource.com/loanproposal.php

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Posted in Analysis, Fundamentals, General perspective, Investor perspective, Structuring loans | No Comments »

Funds available

December 7th, 2012

Clay Sparkman
I think most of you know my company, Fairfield Financial. I just wanted to take a moment to put in a shameless plug, and let you all know that, with the upturn in the real estate economy, we have funds available for commercial loans of all types. Our sweet spot is relatively small construction, fix and flip, and investment real estate, and we have a special place in our heart for the Pacific NW.
We currently fund in OR, WA, CA, CO, MT, ID, WY, AK, OK, GA, TX, NY, FL, and NV.  We do strictly private money funding, and the lion’s share of our loans are for commercial, business, or investment purposes.
To get to know better, what we do and how we work, I recommend that you begin by reviewing our web site in some detail.  You will find all of the info regarding our rates, fees, criteria, etc, at www.privatemoneysource.com.
For more information regarding our company in general see:  http://www.privatemoneysource.com/hard_lender.php
Our loan programs are outlined at: http://www.privatemoneysource.com/commercial_loans.php
Our general guidelines are discussed at: http://www.privatemoneysource.com/guidelines.php
Our process is described in some detail at:
http://www.privatemoneysource.com/process.php
And our packaging guidelines are described in detail at the following link:
http://www.privatemoneysource.com/packaging.php
Having reviewed these items, you will have a much better idea of what Fairfield is all about.  You may well have some questions at this point.  If so, please either e-mail me with your questions or call me at 503-476-2909.
Thanks for hearing me out, Clay
– 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, but is able to source loans nationwide. To submit a loan to Fairfield for consideration: http://www.privatemoneysource.com/loanproposal.php

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Posted in construction loans, Promotional announcement, Rehab and constuction loans, REO funding, Short sale funding | No Comments »

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