Clay Sparkman
In the spirit of learning by example, I’d like to take the opportunity to describe an interesting scenario that we put together.
They say that when it rains, it pours. Well, for our borrower it had been pouring for a long time. A long run of bad luck had left him in a difficult situation, and he needed a good luck charm.
SCENARIO: About a year previous, the Borrower had purchased a house for his own residence. During the first weeks of living there, he discovered that watering his lawn also resulted in watering the contents of his basement–the foundation was bad, and had to be replaced completely. Not to be discouraged, he contracted to have the house lifted and a proper foundation installed. It was a small bump in the road, but everything seemed to be manageable.
But when the house was raised and waiting for the foundation, a hydraulic jack failed, and dropped the structure 18 inches. The operation was supposed to have had no impact on the cosmetics and structure of the house, but the fall had reduced it to what the bank lender of record called a “shack.” Consequently, the bank called the loan due.
What’s more, it soon became clear that the insurance and bond information provided by the contractor was false, and that he was in fact uninsured. Before long he was in bankruptcy, and the borrower had a dozen other aggrieved parties ahead of him in line for a civil suit, with no possibility of recovering damages.
The Borrower persisted. Out of pocket, he had the house put on a proper foundation and began repairing the damage, completing much of the work himself. But finally, with a remaining balance on his contract of sale, an outstanding rehab loan, a significant amount remaining in repairs to finish the house, and no additional funds of his own available, he was unable to move forward.
PROBLEM: Because the house was, in the bank’s evaluation, a shack, they had called the loan due, and no other conventional source could be found that would lend on the property given its status. Additionally, the Borrower had been the victim of identity theft, and although he had documented this well, filed reports with the police, and notified all three credit bureaus of the status of the accounts appearing on his credit report, he was still, in the end, left with a mid-score in the low 500s.
ANALYSIS: Thanks to the detailed plans and photos provided by the Borrower and our own inspection of the property, we were able to clearly see what the house would be when it was finished. And thanks to the good comparable sales analysis he had assembled, we were also able to see what it would be worth. Given this projected value, the amounts currently owed on the property, the amount needed to finish construction, fees and closing costs, our LTV was 73%. We had a Borrower who had already invested a large amount of money out-of-pocket and countless hours of work into the project, so he was plainly 100% committed to the project. According to his credit report, service of his own debts (not those resulting from the identity theft) had been good. His income appeared to be sufficient to service the loan.
SOLUTION: Despite these positive elements, the LTV was still a bit high for under the circumstances. So, we decided to carry our fees as a second position lien, reducing the LTV of the first position lien to 69%. We were able to pay off all existing debt on the property, and the funds required to finish the house were deposited into a construction account, to be drawn upon as work was completed.
– 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
The Private Money Broker
Private money – getting from point A to point D
December 28th, 2011Private Money – 5 DONT's and 5 DOs
December 20th, 2011Clay Sparkman
I would say that as much as 75% of our loans are initiated by third-party loan brokers. We rely heavily on our wholesale broker relationships and dearly value the strong working relationships that we have. As much as we love our relationships with brokers, it is an ongoing challenge to develop new relationships.
Perhaps the greatest challenge I find in working with loan professionals is that most have received their training in the institutional money realm. As such, they often have difficulty adapting to the very different approach required for brokering private money loans.
I thought it might be worthwhile to lay out a few dos and don’ts as helpful guidelines for brokers adapting to the unfamiliar demands of private money lending. So here you go.
Don’ts
(1) Don’t Spin or tweak or hide information regarding the particulars of a loan. That might work with banks, but it doesn’t go over well in the world of private money. We are trying to get the whole picture in order to make a sensible decision on a loan. If something doesn’t line up quite right, we will generally notice. If there are inconsistencies we will tend to shy away from the loan.
(2) Don’t think that: private money is a good source for everything that the banks won’t do because private money parameters are more relaxed across the board. It is not that simple. Generally speaking, private money is more rigid when it comes to equity requirements and more relaxed, given sufficient equity, regarding other funding criteria. (You’d be surprised at how many people come to me looking for a 100% CLTV second to top off a residential deal; this is not the type of thing private money was made for.)
(3) Don’t submit individual tax returns with your files. We almost always go stated income with individual borrowers. (However, we do generally require company financials when an organization is involved.)
(4) Don’t drop the ball. Banks are like machines stamping out large volumes of loans. In a sense they are indifferent. Private money, on the other hand, is much more personal. You work directly with a few people and those people get really involved and work hard on your file and are directly accountable to other people. It is important to be vigilant with regard to your part in the loan process because effectively, you are part of a bigger team.
(5) Don’t get discouraged easily. Putting private money loans together is hard work, but if you take the time to learn how to do it, you will be rewarded.
Dos
(1) Do submit a summary cover summary sheet with every file.
(2) Do submit property and value information with every file.
(3) Do quote all particulars to your borrower early in the transaction. Some brokers seem to think that if they don’t mention all the fees and points, maybe a borrower won’t notice. Borrowers always notice. It is better to put all the facts out there right up front. You will be doing yourself a favor. After all, why work on a loan that never was going to happen.
(4) Do take the time to learn about our loan programs, guidelines, process, and packaging guidelines. You will find useful information on our web site.
Programs: http://www.privatemoneysource.com/commercial_loans.php
Guidelines http://www.privatemoneysource.com/guidelines.php
Process: http://www.privatemoneysource.com/process.php
Packaging Guidelines: http://www.privatemoneysource.com/packaging.php
(5) Do feel free to utilize us as a source of education on private money. That is how we view ourselves. We will always have time to answer your questions and discuss your transactions. We don’t care how much you know. We care that you are interested in learning and desire to bring professional values to the table.
– 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
Private Money Loan Simulator
December 14th, 2011Clay Sparkman
I firmly believe that the best way to learn about anything complex is by doing. The second best way is by example. If I could provide you with a private money loan simulator I would, but I haven’t figured out how to do that yet (though I assure you, we haven’t given up on the idea). So for now I will continue to rely on examples as an aid to help demonstrate how private money might be useful to you as you go about your daily business as a lending professional. Some of you will never need private money, others might need it 2-3 times in the course of your entire career and still others will have the chance to use it several times monthly. The important thing is to know when you need it.
I’d like to profile a small commercial loan that we closed, as I think it embodies many of the good qualities of private money, and it neatly demonstrates a classic win-win scenario.
Scenario: We were approached by a Loan Broker representing a retired woman who had worked 20 years in the hospitality industry. This woman decided that she would like to live near her family and own a motel/resort, so as to get back to doing what she loved and to create a business that her family could be involved in. She made an offer on an REO motel/resort property and was able to get her offer accepted at $240,000. The property appeared to be just what she had dreamed of.
Problem: Now, even though this woman had near perfect credit (766 mid-score) and an excellent track record in the hospitality industry, there were some factors that banks just couldn’t warm up to. First of all, the property, though quite spectacular for the money, was a bit rough around the edges (most REO properties are). Secondly, our borrower only had $15,000 to bring to the table as down-payment money for this transaction.
Analysis: We took a hard look at the property. The tax assessed value was $359,750. (This looked good, but tax values can be deceptive with distressed properties.) We did some comp work and couldn’t turn up many good comps, but found one or two that seemed to support the higher value for the property. There was no time for an appraisal so we had to do the best we could with the information we had available on short notice.
Solution: Since we weren’t quite certain about value and had to move fast, we made arrangements with the borrower to place a second against her primary residence to further secure the loan. Her residence was on the market, so we worked it out–between us–that when she sold, we would release it as collateral for a principal pay-down of $45,000. We put her into a 12% loan for three years, and she figured on selling her house, paying down the motel loan balance, cleaning up the property, showing income on the books, and seeking conventional financing within the year.
Now, an invitation: please send me your questions about private money and I will answer them publicly in an upcoming blog post (so long as they are fit to print).
– 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
Submitting private money loans
December 7th, 2011 Clay Sparkman
One of the challenges for individuals and professionals pursuing a private money option is figuring out what information to provide for a specific loan request (and in what format). Because the questions and issues are quite different for private money, and certainly different within the private money context depending on the type of property and type of loan being requested, this is not always so easy to figure out.
Of course you are always welcome to call and discuss a specific file, or to e-mail us your questions; nonetheless, we have an additional option that is quite simple and only takes a few minutes of your time (so long as you know your file/loan).
If you have a file lying on your desk and you’re trying to figure out where to go with it or how to submit it, please consider using our online loan submission forms specifically designed for private money. Click on the following link, and you will be guided through the process of submitting a detailed private money loan proposal.
http://www.privatemoneysource.com/loanproposal.php
Go ahead and have at it. We will do our best to respond to all loan submissions within 24 hours.
We have tried to provide as much guidance as possible without being overly rigid. We are very interested in your feedback. If you have ideas regarding ways to improve this process, please let us know.
If you would like to discuss private money loans further or run a particular scenario by me, get the ball rolling by sending an e-mail to clay@privatemoneysource.com.
Otherwise, if you would like to get a better feel for our company and the types of programs we do, please browse our web site at 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
Private money and the question of value
November 18th, 2011Clay Sparkman
When it comes to private money, the rules–as you may know them–generally don’t apply. Certainly, with regard to the matter of valuing a property, most of you would do well to throw away what you’ve already learned and start over. To help you along these lines, I would like to share an article written by Aaron Heinrich, a Loan Coordinator here at Fairfield Financial. Keep in mind that this is primarily relevant when dealing with investment borrowers (builders, developers, REO and short sale purchasers, rehabbers, fix and flip artists, commercial property owners, and the like).
The Quest for “a Good Set of Comps”
What We Need From You
A professional appraisal can be a helpful tool, but appraisals are by no means foolproof, and a well-prepared set of comps is often superior and entirely sufficient for our purposes. Since appraisals are expensive and time-consuming, it is often well worth an investor’s time and effort to do their own value work. But although a good set of comps is often sufficient for our purposes, it is difficult for borrowers and brokers alike to understand exactly what we need from them in the process of determining the value of a subject property. This is unfortunate, since this evaluation is perhaps the most important part of the entire process of assembling a loan with Fairfield, and the borrower or broker often has an integral role to play in this evaluation. As an equity lender, our loans are only as secure as our determination of the value of the property against which we are lending, and consequently it is essential that we are confident of this determination. In point of fact, the confidence we require is nothing more than what any borrower should require and from himself or herself going into a project.
The following rules and their explanations describe what we need from those investment professionals who choose to take advantage of this alternate approach to the valuation of their subject property. Let’s consider what we mean by “a good set of comps”:
Rule Number 1: Computer-generated listings are starting point, not an ending point.
Very often we tell a borrower or a broker that we need an “objective measure of value” or a “good set of comps”, and in response are sent, for example, five or six comparable sales generated by the online search program of a public database containing sales histories. We have access to these programs also, and will most probably have already looked at these, or similar, listings. These sorts of listings are the beginning of the process, not the end, and by themselves they will almost never be sufficient. Don’t send these to us alone and expect that they will suffice.
Rule Number 2) Be skeptical.
What we need from you is more involved than simply typing search criteria into a listing service, although this is indeed where the process usually starts. Once you have obtained a group of comparable sales listings with which to begin, take a hard look at them. From what you can see in the listings, are they really similar to your subject property in type, size, age, location and condition? If all of them aren’t similar in all these aspects, do some of them illustrate value factors that the others don’t? For example, all your comps are more than a mile away from your subject property, except for one, which although newer and larger than your subject property, is next door. The value of your location may be best indicated by this one property, although the building itself is not all that similar. It is important not to accept that a property is comparable just because a program or real estate agent tells you so.
Rule Number 3) There are more things in heaven and earth than are dreamt of in the MLS’s philosophy.
Now, once you have selected your five or six most representative comps, grab a notebook and a camera and go find them. As you drive, ride or walk past each one, stop, look at the neighborhood, notice the condition. Are there differences between the listing you were given and the reality you are seeing? Are there things not included in the listing which are important factors in the value of the property? Is there a grist mill next door or a condemned meth lab across the street? Write it down in your notebook. Take a picture or two.
Rule 4) Think like an appraiser.
Borrowers are often a bit daunted at the prospect of putting on the appraiser’s hat and analyzing the information they have gathered. “I’m not an appraiser,” they say, “I’m not trained for this.” We’re not asking you to be an appraiser; all we’re asking from you is to think through the information you’ve gathered, apply a little common sense, and to make your best case for value. When we look at your analysis, we may find corrections that need to be made, we may disagree with your logic in places, but if you’ve done your work, chances are your value is close.
Let’s take an example to illustrate what’s involved in this analysis: Our subject property is a 3000 sq. ft. SFR built in 2001. Let’s say it’s across the street from a nice park, with a school nearby. One of the comps we’ve looked at is a 2800 sq. ft. house built in 2000, about 1/4 mile from the subject property. It sold two months ago for $179,000. Our notes from when we looked at the house say that it is essentially in the same neighborhood as our subject, and is also a newer house with generally the same quality of construction. The two properties are quite comparable, even without any adjustments; but we can probably refine the value a bit more by taking the small differences into account. First, our subject property has a superior location, being across the street from the park. Depending on the neighborhood, we might determine that this location increases the value of the property by $5000. We add this figure to the sales price of the comparable property, to arrive at an adjusted value of $184,000. Next, we need to make a small adjustment for the size: dividing our adjusted value by the comparable property’s 2800 square feet, we arrive at a per square foot value of $65.71. Multiplying this value by our subject property’s 3000 square feet, we get a final adjusted value of $197,130.
Now, in your own case, your subject property might be a bowling alley, a piece of raw land, or an office building, and so your considerations might be very different. But in all these cases, the general process will still apply. There may be more research involved in finding out what individual differences are worth, but the overall approach described above can always be applied.
Rule Number 5) Presentation isn’t everything, but it helps.
Now that you have gathered all the information you’ll need, and done all the necessary analysis, you are ready to assemble your “good set of comps.” This set should include:
1) Your comparable sales analysis,
2) A map of the area indicating the location of the subject property and the comparable sales, and
3) a photo and essential information for each comparable property, including the address, specs, sale date, sale price, and distance from the subject property.
Your comparable sales analysis should be a concise summary of all your reasoning in adjusting the values of the subject properties, with one paragraph or section for each property, stating what was different, how you adjusted for these differences, and why. At the end of each paragraph you will indicate an adjusted value; and at the end of the analysis you will summarize your conclusions, and give your final estimated value for your subject property. The documentation for each comparable sale (Number 3) gives us a frame of reference in which to read the analysis for that property.
When you haven’t done it before, this may seem like a lot of work. But again, anyone making an investment in a piece of real property should be at least this confident of the value of their investment, whether or not he or she is looking for a loan. And it is often well worth the work. “
(Article by Aaron Heinrich, Fairfield Financial Services, Inc, July 2004)
– 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
A few useful and interesting resources for private money profesionals
November 10th, 2011Clay Sparkman
These days–with uncertain markets—tools and resources which provide us with information and data are more crucial than quite possibly ever before.
I am always trying to find more resources that will be of use to both me and readers of this blog. Here are a few items that have popped up lately.
ALTOSResearch offers this wonderful site, offering “real-time real estate data.” I haven’t fully researched the treasures on this site, but have been quite impressed by their market specific data (just click on the “Take me to the data” tab off the main page.” It is free to use at a basic level and offers a very useful set of analytics giving you invaluable data on the current state of various real estate markets. The section for Portland looks like this. It actually offers some promise for the future of this market as we move into 2012.
I came across an interesting article at CNNMoney: Housing markets: Best recovery bets. This article begins, “Home prices are poised to fall in most markets this year, but 2012 will bring a rebound. Here are the 10 large metro areas that will record the largest price gains.” Thus more hope for 2012.
I am particularly excited to see that Tacoma, Washington is #1 on the list and that Seattle is #6. Since Oregon and Washington tend to move together, I think this bodes quite well for the chances of recovery in the Pacific Northwest—our core region.
One of our readers, Devin Schumacher, was kind enough to offer the the last two items. Thank you Devin!
First of all, I have long searched for a good beginning text book on private money investing and private money loans. Devin found something that might be pretty good.
Devin says, “The first book I just finished might be worth referencing on your blog. It is a very basic intro to how the business works, and how a person would go about setting one up. It reads almost like an intro to private money lending textbook might read if there was a class on the subject. But nonetheless, probably a good starting point for a lot of people to get an understanding of how it works on a very fundamental level.”
The book is, Private Mortgage Investing by Terri B Clark & Matthew Stewart Tabacchi. You can find it here on Amazon.com (where it gets good ratings, by the way).
And then this last juicy little morsel, a novel apparently built around the financial realm of hard money. You will find it here on Amazon.com. I haven’t read it and neither has Devin, so it is hard to say for sure that they mean Hard Money as in the sense of Private Money. If anyone ventures to read it, please let us know.
And with that, my well is dry for now. If you know of any other resources that might be of interest to the readers of this blog, please share them with us either via the comment section or in a direct mail to me (so that I may in turn share in a future post).
Here’s to a good finish to 2011 and a better year in 2012!
– 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
Free Lunch
November 3rd, 2011Clay Sparkman
Do you believe that there is really no such thing as a free lunch? We at Fairfield feel that we have something that comes pretty close. Just for being in the right place at the right time, mortgage professionals can earn a pretty handsome little fee. Think about referring loans to us, when appropriate, rather than brokering them all the way through. It is quite a painless process. Here’s how it works:
(1) As a representative for a licensed mortgage brokerage, you receive a lead for a loan that doesn’t fit into the context of what your company ordinarily chooses to broker. Still, you suspect that it might be a good fit for a private money lender. You e-mail or call us and tell us a little bit about the loan and advise us that you’d like to handle the loan as a referral. (You can also use the online submission mechanism on our website.)
(2) We say whether or not it fits our parameters, and if it does, you go to step #3.
(3) You ask the borrower to contact us.
(4) We work directly with the borrower to determine if this is a loan that we are able to fund. If we fund it, we will pay 1% of the gross amount of the loan to your company at closing. Plus–and this is the clincher–we’ll buy you lunch!
So keep an eye out for the following types of loans and have yourself a free lunch.
Commercial Property – we make loans on commercial properties of all types, including office buildings, retail buildings, mixed use, restaurants, taverns, motels, car lots, gas stations, mini-storage, malls, industrial properties, and multi-family residential. 70% is generally our maximum.
Renovation – we have strong ongoing relationships with many investors who buy fix-up properties and re-sell them. We can generally loan up to 70% of the projected value of a project. Generally we arrange for the financing of the renovation money as well. This is a large niche for us, and one of our preferred loan types.
REO (and other under-market) Property Acquisition – we have had a number of borrowers come to us in search of financing to purchase REO properties. We can generally loan up to 70% of the current value of a project.
Raw Land – we will lend on raw land (i.e., land without infrastructure/utilities) that qualifies as build able. This includes both commercial and residential zoning, urban and rural, and anything from 2,500 square feet to 5,000 acres. With a strong borrower and a good property we will consider loaning as much as 50% of the value. This is pretty much unprecedented in the industry.
Lots and Acreage with Utilities – though the banks seem to be hesitant about loaning on developed land (lots or acreage), we are generally eager to do this type of loan. Our maximum LTV on developed land is 70%.
Construction – we tailor our construction loan programs to meet individual contractor needs. Though more expensive than traditional bank financing, we are more flexible regarding many issues, and have had many contractors return to utilize our construction loan services repeatedly. Our maximum LTV for construction is 70% of the value of the completed project.
Floating Homes – the Vice President of Fairfield Financial (that’s me) lived on a floating home on the Multnomah Channel for eight years, and was very much a part of that community. We understand the unique issues related to borrowing either to refinance or purchase a floating home. We have loaned money on floating homes that don’t fit the bank’s strict criteria, and we have frequently loaned money for the upgrade or expansion of an existing floating home. Our maximum LTV for floating homes is 70%.
Manufactured Homes – on private land – we are not terribly concerned about the year or model, or whether the home is a single-wide or double-wide. We look at the whole package, home and land, and if the value is there, we can make the loan. Our maximum LTV on manufactured home/land packages is 70%.
Seconds on Investment and Commercial Properties – these are generally short-term scenarios, ranging from six months to one year. The loan must be for at least $50,000 in Oregon (due to a certain Oregon usury law), and the maximum CLTV is 50%.
Foreclosure Bailout – if there is a good explanation as to why the foreclosure situation occurred and what has changed to remedy the problem (and if the LTV does not exceed 60%) we are frequently able to refinance properties out of foreclosure.
Cash-out Refinances – frequently our borrowers will refinance a property with the intention of pulling cash out. This cash might be used to consolidate bills or to initiate some sort of a project. We can loan up to 70% LTV on cash-out refinances.
– 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
Top Ten Ways you know it might be time to consider private money
October 26th, 2011Clay Sparkman
This has been a tough four years for many of us, so in celebration of the anniversary of the sub-prime collapse, I thought it would be nice to start off by having a little fun. With that in mind, I have prepared a top ten list, Top Ten Ways you Know it Might be Time to Consider Private Money. This is all done for the sake of laughter, so I hope you get that much out of it. It actually tends to reinforce some of the stereotypes that I work hard all year long to dispel regarding private money and private money borrowers. Still – just this one time, I couldn’t resist. Drum roll please…
Top Ten Ways you Know it Might be Time to Consider Private Money
10. The bank asks you to return the promotional pen which they gave you last month.
9. Your neighbor keeps throwing orange peels and egg shells on your house because they think it is a compost pile.
8. You are continually confusing your FICO score with your bowling score.
7. The Account Rep for your favorite lending institution laughs so hard that he suffers a hernia and is rushed off to the hospital before you can finish telling him about your loan request.
6. When figuring your net worth on a 1003, you include as assets: your karma, your winning smile, your exotic house cat Mrs. Buttons, and your $5,000 instructional video course on how to make a million bucks investing in real estate.
5. The bank officer repeatedly refers to your floating home as a “boat”, and insists on using terms like “port” and “bow”, and “thar she blows.”
4. Meth lab shmeth lab! (A true real estate investor doesn’t let minor obstacles stand in her way.)
3. Your down-payment consists of twelve cases of Budweiser empties, an IBM 386 computer, and a Tim Duncan rookie card.
2. Your timeline is so short that you are working on a scheme which involves flying an escrow team westward to the international dateline and closing the deal at 12,000 feet.
1. The land which you hope to borrow against is so raw that it bleeds when you stick a fork in it.
Even though it is likely that none of the above apply to you or your client, private money might still be a good option to consider. In fact, there are many reasons to use private money. Simply put: Institutions do the stuff inside the box (and I’m not sure they do that any more), and we do the stuff outside the box. The banks don’t get on our turf and we don’t go on theirs. We figure that’s a pretty good arrangement.
– 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
On the art of handcrafting loans
October 20th, 2011Clay Sparkman
As I pointed out in a previous mailing, our private money lending programs tend to be fairly rigid with regard to LTV requirements, but quite forgiving with regard to other issues. One of the nice things about private money is that it allows for creative problems 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 one 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, right? After some consideration, you decide that this is a good fit for private money. You check with me and find out that we will loan up to 65% LTV against the value of the property given your particular scenario. 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 loan fees and closing costs) to the table to make this loan work, and so you are thinking that you’ve reached a dead end.
Well, not so fast. 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 current *true value* of the property (so long as the true value can be reasonably determined on a 90% completed project). If he can demonstrate that he is buying well, and that the true value is higher than the purchase price, then we will tend to base our LTV on the true value of the property. In this case, if it is sufficiently demonstrated to us that the current true value of the property is $1.3MM, then we would be willing to arrange to loan enough to cover the purchase price ($800k) plus the loan fees and closing costs (this would vary depending on what the broker is charging, but let’s say $50k), minus the $80k down. Our loan here would be $820,000. The front-end LTV here (LTV at the close of escrow) is only 63% but note that we would require the $80k down payment at any rate with a new borrower because aside from LTV calculations we like to see sufficient “skin in the game” until we have some experience on projects with a particular borrower. As we get to know a borrower and they build a track record with us, this requirement diminishes significantly. Also note that in order to make this scenario work, the borrower needs to demonstrate one or more of the following: (a) funds to complete the project, (b) that the remaining 10% is not critical to the security of the property or to the marketability, (c) that there is a buyer ready to go under contract to buy the property as is, or (d) some other clear path to completion of the property or early exit.
Solution #2 – the borrower may borrow based on the projected value of the property. (This is our preferred modus operandi.) Say that he needs an additional $100,000 to complete the construction on the building, but that the building will be valued at $1.4M upon completion, then we would consider arranging a loan of $900,000 to cover both the purchase price and the construction fund. We would hold the construction fund money in our client’s trust account and disburse it as the work is completed on the project. The borrower will only need to bring in enough in this scenario to cover closing costs.
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 $450,000 loan arranged by Fairfield (to cover the balance of the purchase money plus the loan fees and closing costs plus the funds to complete the project minus the $80,000 down payment).
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. We are always willing to consider additional collateral to make a transaction come together. Say the borrower has another commercial building, this one in Twin Falls, Idaho, and that it is worth 1.5M with $500k owed against it. We would most likely be willing to make the loan, with the borrower bringing in $80,000 cash and the Idaho 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, than we negotiate and write into the loan a specific release clause provision stating that we are willing to release the Idaho property as security in exchange for a principal reduction.
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, I 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 series of boxes–and then leave the loans which must be hand crafted one by one to people like us. So come join us for some loan crafting 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
