The Private Money Broker

Resources – show me the good stuff!

March 29th, 2011

Clay Sparkman
I have long searched for resources that might be useful to those who wish to learn more about private money and hard money loans, and in the process I have become increasingly convinced that our particular niche field is somewhat of an intellectual/informational wasteland. Every time I stumble upon an article or site that looks like it might be of interest, it turns out to be a blatant plug for some specific product or company. And the stuff that isn’t blatantly biased, quite often seems to be hack work, badly lacking in quality and perspective. It would be as though I were searching for articles and blogs on gourmet food only to find that all of them had been written by employees of McDonald’s, Burger King, and Taco Bell. (Hopefully I won’t get sued for this. I did not mean to disparage the great corporate food powers in any way, shape, or form.) My real point is: if I see one more article entitled “Hard Money Made EZ” or if I see “hard money” referred to as “hard $$$” one more time, I’m outa here.
Moving on, I turned up a few items of interest that might be of interest. Much of this material is written from the investor perspective, but to a great extent—and if you really want to learn all about private money—that is just another side of the same coin which deals with borrowing and brokering.
The following article is quite dated, but still might be of interest for those looking to expand geographically (and into a very large target market).
http://www.danwei.org/front_page_of_the_day/private_money_lending_business.php
I also stumbled onto this site/book by Paul Wells who claims to hold the secrets of private money. I hope indeed he does, as we could use a good text book in this field. I asked him for a review copy, but never received one, so I cannot comment on the quality of the material.
http://www.paulwellsauthor.com/mortgageinvesting.html
I couldn’t help but be amused by this post by Leonard Rosen in August of 2007.
“America’s hard money expert shares his views on real estate investing. There are many different types of investing strategies that are available to the novice and sophisticated investor.
However, I do not know a safer investment strategy coupled with a higher rate of return than real estate. Unlike the equity markets, real estate has proven to be a safe haven for many investors. Over the past 40 years, real estate has risen in value in literally every major market in the United States.”
Oh well … perhaps a bit dated. The full text is here:
http://www.americanchronicle.com/articles/view/35089
And here is another book on the topic, specific to California (but that is a pretty good starting point for talking about the basics of private money lending nationwide), and with five of five stars on five reviews. I can’t figure out how to ask for a free review copy, so if anyone knows the book please weigh in here.
http://www.amazon.com/Smart-Trust-Deed-Investment-California/dp/0934581010
About.com defines private money pretty much the same way as most outsiders do:
http://www.answers.com/topic/hard-money-loan
At least they hedge the “last resort” part with the “short-term bridge” bit. However, I am beside myself with how many people who should know better who claim–I see this over and over again–that the borrower (credit/income/net worth and such) is irrelevant to the private money lending process. Why would anyone make a private money loan and disregard readily available information about the financial status of the borrower? It is beyond me.
Please oh please … if you know where the goodies are hiding out there, please share them with the rest of us. That after all is what this blog is all about: sharing quality information and resources with like-minded folks who care about private money borrowing, brokering, and investing. (Oh yes: and promoting me and my company; but NOT BLATANTLY MIND YOU … good lord no … not blatantly.)

— Clay (clay@privatemoneysource.com, 503-476-2909)

Clay is Vice President of Fairfield Financial, a primary source for private money since 1964. Fairfield is currently targeting loans in OR, WA, AK, CA, CO, ID, FL, GA, ID, MT, NV, NY, OK and TX. To submit a loan to Fairfield for consideration: http://www.privatemoneysource.com/loanproposal.php

Tags: hard money borrowing, hard money brokering, hard money investing, hard money lending, hard money loans, private money borrowing, private money brokering, private money investing, private money lending, private money loans, real estate, real estate investing, trust deed investing
Posted in Fundamentals, Investor perspective, Resources | No Comments »

Don’t get mad, get going

March 10th, 2011

Clay Sparkman
It is often quite difficult for professionals to get a sense of what hard money is all about and to know when it is the best option for putting a transaction together. I have found that the best way to teach is by example. So to that end I will profile some sample loans for you.
A real bargain
A loan broker brought us a transaction involving the purchase of a rather unusual multi-unit complex in Lebanon. The borrower had locked in a purchase price of $230,000 for the property, and was buying it as an investment. He was getting discouraged because he felt that he was buying this property for way under market value and he was eager to complete the transaction, but the Loan Broker had been having a tough time putting the transaction together due to (1) the required LTV based on purchase price (borrower needed to borrow nearly 100% of the purchase money), (2) the unusual nature of the property (several single family homes, a duplex, an 8-plex, and a large commercial property all on two tax lots), and (3) the lack of a proper commercial appraisal. We took a look at the file and then the property and got very excited about the transaction. This was a property, in our opinion, that was easily worth as much as $500,000 (based primarily on an analysis of potential income; no wonder the borrower was nervous). We arranged to loan $260,000 to the borrower–enough to cover the full purchase price, fees and closing costs, and an additional construction fund of about $15,000 to be used for completion of deferred maintenance on the property.
A row house project
We had a contractor call us up. He was quite discouraged, because he had arranged all of the elements for putting up a four unit row house project in Southeast Portland and had gone to a local Loan Broker and after nearly two months, was not any closer to having his project funded and was in danger of loosing the option to buy the lots for the project. By the time he got to me, he had just over a week to complete the transaction. We felt good about the contractor and good about the project, so we hustled to put it together. We made the deadline and those units are going up right now.
An Idaho ranch
We had a file come into our office from two different sources on the same day. Once again, a borrower was in danger of losing the right to purchase a property that was of great importance to him. He was a strong borrower with good credit and strong assets but he needed funding for the purchase of a cattle breeding ranch in backcountry Idaho and he needed it in one week. There was no way to extend the purchase agreement, so I booked the first available flight to Idaho, rented a car in Boise and drove five hours to look at the property. All the while, I was in direct contact with my office via cell phone where my top loan coordinator was preparing the documents and coordinating with the title company so as to complete this loan on time. We made the deadline and funded 75% of the value of the property, and our borrower is now the proud owner of a cattle breeding ranch in Idaho.
These are a few examples of the loans that we do. In the end, with hard money, it is always about equity. The important thing to remember is that if the equity is there to support the loan we can move fast and overlook a number of otherwise undesirable factors.

— Clay (clay@privatemoneysource.com, 503-476-2909)

Tags: Commercial loans, construction loans, hard money borrowing, hard money brokering, hard money loans, Idaho, Oregon, private money borrowing, private money brokering, private money loans, real estate, real estate investing
Posted in Commercial loans, General perspective, Private money loan examples, Uncategorized | No Comments »

How to broker private money loans when real estate markets are uncertain

March 6th, 2011

Clay Sparkman
We’ve been through nearly 3 ½ rough years in the real estate market—and projections seem to indicate that we will finally see clear up-turn in the second half of this year, but no one really knows for sure. We have managed to survive this down-time (all who are still present please take a moment to pat your own back) and continue doing loans even in the face of uncertainty
Our loan volume is down. Less people are borrowing for projects at the moment (though we are starting to see some upturn there) and we have been forced to be more conservative given the level of uncertainty in markets. The key areas we look at, I would say, even more carefully than we did before the crash are: (1) LTV: we used to do a lot of stuff at 75%. Now most of what we place is at 65% or less. (2) Professionalism of the borrower: we want to see that the borrower is proceeding with caution, has done his/her homework, has backup strategies in place, and has a reasonable track record. (3) Exit strategy: it is hard to be certain in this climate that an exit strategy will work, but tend to obsess about this point these days so as to be as sure as possible that there is/are one or more ways to exit the loan.
Rigorously following these guidelines has served us well. And knowing of and understanding these guideposts, our broker clients are managing to bring us more loans that succeed in closing now than at any time in the past 3+ years. By way of example, here are four loans that we have closed (or are in the process of closing) recently.
Mini-condos for simple living on the Washington coast
1.     Loan Amount: $286,000
2.     Term: 1 year
3.     Interest Rate: 13%
4.     Monthly Payments: $1,895.83 Interest Only
5.     Construction Holdback Account: $265,000
6.     Security: Deed of Trust in 1^st Position security interest in real property at xxxxxxxxxx
7.     Projected Value by Borrower Comps: $476,000
8.     As-is Value by Borrower Estimate $30,000
9.     As-Is Front End LTV Borrower Estimate: 70%
10.     Completion LTV by Borrower Comps: 62%
This loan is to provide funds to build four detached condos on the Washington Coast. The borrowers, xxxxxxxxxx of xxxxx company requested a loan of $286,000 to provide funds for the construction and various loan costs and closing fees. $265,000 of this was deposited into a construction holdback account. The borrowers have $21,000 invested into the purchase and clearing of the lot so far, which is effectively being considered as their down payment or skin in the game.
This will be the 3^rd group of condos that the borrowers have built. The first set of condos was built in the fall of 2009, and the borrowers report that they sold in approximately 2 months. The 2^nd set was completed in the fall of 2010 (this is an existing construction loan with Fairfield), and at least one of those units has been sold for the full asking price. The borrower reports that there has been a lot of activity and interest in the remaining units.
Partner xxxxx is a realtor, and her husband is the contractor who will do the actual construction. The borrower plans to exit this loan through the sale of these condos, and has requested that each condo be released with a principal reduction of $75,000.
The property is located on a cul-de-sac approximately 1,800 feet from the average high tide line, and two blocks from public beach access. These condos will be 480Sq/Ft with a full kitchen and bath, and made with eco-friendly materials.
Adult care facility in Washington
1.     Loan Amount: $270,000
2.     Term: 24 Months
3.     6 months minimum interest
4.     Interest Rate: 14%
5.     Monthly Payments: $3,150.00 Interest Only
6.     Security: Deed of Trust in 1st Position security interest in real property at xxxxxxxxxx
7.     Value of Collateral by Appraisal: $750,000
8.     LTV based on Appraisal: 36%
The borrower, xxxxx, inherited an adult care facility approximately 2 years ago. She requested this loan to funds to pay the probate and costs incurred in the transferring of the estate.
The subject property is a 4402 SF 8 bedroom 3-bath home being used as an adult care facility. There are several outbuildings being used as rentals to the borrower’s family. Leases were provided. The home sits on 5 acres, adjacent to a bare 5 acre parcel that is also being used as additional collateral.
Vacation rental in central Oregon
1.     Loan Amount: $120,000
2.     Term: 36 Months
3.     6 months minimum interest
4.     Interest Rate: 13%
5.     Monthly Payments: $1,300.00 Interest Only
6.     Security: Deed of Trust in 1st Position security interest in real property at xxxxxxxxxx
7.     Value of Collateral by Borrower Comps: $227,900
8.     LTV based on Collateral by Purchase Price: 53%
The borrower, xxxxx company had negotiated the purchase of this property for $150,000. The seller was in financial distress and needed to sell quickly. The borrower believed that this price was well under value (the list price was reduced to $199,500 on 12/8/10), and were requesting 10K for cosmetic improvements. They put down 25k, and the seller is carried back another 25K to make the loan work. The loan was personally guaranteed.
The subject property is a 1,618SF home that will be used as a vacation rental. It is located in the xxxxx subdivision which has amenities such as a club house, swimming pool, excessive common grounds use, and paved bike paths. The property has 3 bedrooms, 2 baths, fireplace, and wrap around deck.
Self-storage facility in northern Washington
1.     Loan Amount: $375,000
2.     Term: 36 Months
3.     6 months minimum interest
4.     Interest Rate: 12%
5.     Monthly Payments: $3,750.00 Interest Only
6.     Security: Deed of Trust in 1st Position security interest in real property at xxxxxxxxxx
7.     Value of Collateral by Purchase Price: $565,000
8.     LTV based on Collateral by Purchase Price: 66%
The borrower, xxxxx, is an experienced owner and operator of self-storage facilities. He had the subject property under contract for $565,000, and was seeking a loan of $375,000. There was approximately $20,000 in credits that the seller agreed to provide, and the borrower stepped up with a down payment of approximately $200,000.
The borrower plans to live on site and manage the property which will greatly reduce his personal living expenses as well as eliminate the wages that are currently being paid to an on-site manager. In addition, he plans to install a self-service Kiosk that would allow easier access for new tenants to sign up 24/7. He also plans to improve the signage, making the property more visible. Finally, he will offer a $1 first month move in special and change the name of the property from xxxxxxxxxx to yyyyyyyyyy. He believes that this name change will improve the search engine rankings and ultimately increase occupancy. Through these changes the borrower believes that he can increase his occupancy from the current 50% to 80% in the first year.
The borrower plans to exit this loan by refinancing with and SBA loan. More info regarding the feasibility of this exit strategy is described below.
The subject property is consists of 2 lots with a combined 2 acres and 22,923SF of rentable space over 7 buildings. In addition, there is a small 2br 1ba manufacture home on the property. The property was reported to be in excellent condition, and located in a prime spot in northern Washington. There are several self-storage facilities in this area, which are reported to have low vacancy rates.
The current occupancy rate is at 50%, which the borrower attributes to the current “absentee owner”. As far as he can tell, there isn’t much for marketing activity and no incentive for the on-site manager to increase their workload by working to increase the occupancy.

— Clay (clay@privatemoneysource.com, 503-476-2909)

Tags: commercial lenders, Commercial loans, construction loans, hard money borrowing, hard money brokering, hard money loans, private money borrowing, private money brokering, private money loans, Quick flip loans, real estate, real estate investing, real estate rental, rehab loans
Posted in Fundamentals, General perspective, Investor perspective, Private money loan examples, Structuring loans | 2 Comments »

How to communicate your deals

February 28th, 2011

S. Clay Sparkman and Richard Sundvall
There are certain key pieces of information that we need to know when we’re sizing up a deal. Having this information when you contact us can speed up the process considerably. Also, if you have these pieces in hand you can talk about your deal more clearly and present yourself as someone who is professional. Because of the way we work at Fairfield, all of the pieces here are necessary to complete the picture of a scenario in order to get you and your clients a quote on a loan quickly.
This is important: don’t send us everything you have on a scenario and expect us to find the loan in a sea of documents. Sending too much information can overload us quite quickly. We would prefer the basics of the scenario before turning on the document hose. Also, please, never send us your borrower’s personal information unsolicited.
Description of the property
We need to know where it is, what it is, the size and its status. If it’s land, we’ll need to know the zoning and its access to utilities. As an equity lender, we’re all about the property. This will form the basis of our loan.
Description of the Project
You need to be able to tell us what the borrowers plans are for the property. Be prepared to talk about the strengths as well as the weaknesses. You can also give us some perspective by talking about the area around the property and how the borrower’s project compares to other projects that are similar nearby.
Loan Amount Requested and Use of Funds
When you do a rough calculation of loan amount, let us know if your amount is the net amount you need after fees or if you are giving us an amount that includes fees. Also, tell us how the funds will be used.
‘As-Is’ Value of the subject property
This is a critical value for us. Even more so than a future value. It’s the first step in making sure the loan works. We base our Front End LTV on this number (pay off plus loan fees divided by ‘as-is’ value is the formula). Our loans are critically dependent on this value. Also be able to tell us how you derived this number.
Future Value
This is also the finished value or after repair value. Again, be able to tell us how you derived this number.
Pay Off Amounts or Purchase Price Due
We’ll need to know the balance of any loans that need to be paid off. If the loan involves a purchase, refer to the Purchase Agreement to give us the price AND the expiration of the agreement (which is important to determine if we have enough time to close or not).
Construction Budget (if applicable)
This is a line item listing of all the expenses required to complete any construction on a project. This should include soft costs.
Interest Reserve Amount if Requested
Obviously, since you won’t know the actual rate prior to a quote, you can estimate the amount here or just state how many months your borrower is requesting.
Requested Term
Generally our loans are for one year to three years.
Statement of Exit Strategy
Exit is also critical to hard money loans. It is important to us that you have a clear way out of the loan and it’s even more effective if the strategy contains multiple contingencies. For example, if you state the exit strategy is sales, then also tell us what will the borrower do if there are no sales.
Number of Points for Brokers
Let us know how many points you are adding for yourself and your referring entities (if there are any).
Borrowers stated income per month, stated net worth and mid FICO score
These items are necessary for a quote.
These dozen items may seem like a long list, but each will only take a line or two to answer. We know it’s difficult to pare down the amount of information an enthusiastic borrower can bestow upon you. Borrowers usually know volumes about their deals. Breaking it down to these essential items will give us the picture simply and clearly. It will also allow us to tell you quickly whether on not it’s a loan we can do and at what price.

— Clay (clay@privatemoneysource.com, 503-476-2909)

Tags: Commercial loans, construction loans, hard money borrowing, hard money brokering, hard money loans, Multifamily, private money borrowing, private money brokering, private money loans, Quick flip loans, real estate, real estate rental, rehab loans, subordinate loans
Posted in Commercial loans, Fundamentals, Rehab and constuction loans | 2 Comments »

Fairfield broker promotion – free iPad

February 10th, 2011

Clay Sparkman
We at Fairfield Financial Services (FFS) are pleased to announce that we will once again be running our free iPad bonus promotional program.
Starting Friday, February 11, we are offering a free promotional iPad to any broker or borrower who submits a loan through FFS that we actually close.
The conditions are as follows:
(1) You must register with FFS by sending an e-mail to inquiries@privatemoneysource.com with “REGISTER” in the subject line and your name, company name, and phone number in the body of the e-mail.
(2) Start date is February 11, 2011
(3) The end date is March 18, 2011
(4) A full application (with all items requested by FFS) must be received no earlier than the start date and no later than the end date.
(5) The loan must close through FFS and still be under control of the submitting broker at the time of closing. The loan may close at a date later than the end date, so long as the application is submitted in full prior to the end date.
(6) Only one borrower/broker may be credited with each loan. That will be the first party that submits the loan directly to FFS. It is possible that other brokers may get paid for a role in the transaction, but only the party directly submitting will receive a free iPad.
(7) The minimum loan size for this promotion is $100,000.
(8) You (or your company) must be in full compliance with licensing regulations required for loans of the type submitted for the giveaway in the state in which the property associated with the loan is located.
Who doesn’t want a free iPad, right? So good luck and get going.
Check out our website for details re our loan criteria, our packaging guidelines, and our process.
www.privatemoneysource.com

— Clay (clay@privatemoneysource.com, 503-476-2909)

Tags: commercial lenders, Commercial loans, construction loans, free ipad, hard money borrowing, hard money brokering, hard money loans, Multifamily, private money borrowing, private money brokering, private money loans, Quick flip loans, real estate, real estate investing, real estate rental, rehab loans
Posted in Promotional announcement | No Comments »

The private money lending business: likes and gripes (part III)

February 4th, 2011

Clay Sparkman
I finished Part II with a brief mention of something I quite like about the trust deed system: that is, the option (generally available) to foreclose judicially.
Before moving on, I’d like to offer you a crude little decision tree which shows how investors might go about making the decision whether to foreclose a given trust deed judicially or non-judicially.
First, is there an option to foreclose this particular trust deed non-judicially? If the answer is no, then foreclose judicially. If the answer is yes, continue.
Having done sufficient research, does it appear to be highly likely that the investor will fully recover by taking back the property at auction and then selling it? If the answer is yes, then foreclose non-judicially. If the answer is no, then continue.
Again, having done adequate research, does the investor feel that the borrower/personal guarantor has sufficient income and/or assets that he/she would stand a pretty fair chance of recovering on a deficiency judgment? If the answer is yes, then foreclose judicially. If the answer is no, then foreclose non-judicially.
Now moving on, I will focus on a few website based tools that I have found to be useful in the business.
Let’s start locally (We are located in Portland, Oregon) and then expand out from there. A really nice little site if you are doing business in the Portland area is:
www.Portlandmaps.com
The City of Portland provides PortlandMaps.com as a new way of easily accessing public data regarding properties and property areas. A wide variety of data is available for the Portland Metropolitan Area, including the following:

Assessor/Tax Lot Information
Aerial Photography
Building Footprints
Building Permits
Census
Crime Data
Elevation
Parks
Mass Transit
Natural Hazard
Schools
Urban Growth Boundary
Underground Storage Tanks
Water/Sewer
Zip Code
Zoning Maps

Fortunately most states offer all kinds of helpful data on-line now. For instance, this handy site offered by the state of Oregon gives you access to a wide range of licenses, permits, and registrations.
www.licenseinfo.oregon.gov/index.cfm
Of particular interest to me is this site which allows me to lookup a mortgage broker’s license:
www.licenseinfo.oregon.gov/?fuseaction=link_class&class_list=1732,14592,26398&class_name=Mortgage%20lenders&LinkType=P
It is also frequently useful to lookup the license status of a given contractor, which you may do in Oregon at:
www.licenseinfo.oregon.gov/?fuseaction=link_class&class_list=13833,13830,13831,1536,1551,1683,1537,1555,1556,1713,1677,1666,1665,13829,13828,1739,14724,26481,1674&class_name=Construction%20contractors&LinkType=P
I’m sure that just about everyone in this business already knows about Zillow:
www.zillow.com
Zillow is a great little comp tool, easy to use, with a vast national database, and free. It does not offer the range of options available with most professional comp tools, but then they are expensive. I can remember when we first signed up to MetroScan at Fairfield. The price was very substantial and the software was localized to the machine, so that you could only use it at one workstation at one site without paying even more, and updates were given monthly via mailed CD-ROMs. We also had very limited regional access and had to pay for access by county (that is if a particular county were available at all). We’ve come a long way.
Also, I hear good things about the Zillow blog, though I haven’t had time to properly check it out for myself:
www.zillow.com/blog
I know I don’t need to tell anyone about Google Earth. When I was first introduced to this site, I just about fell off my chair! I still can’t quite believe that such a powerful far reaching tool exists, at my fingertips and for free.
http://earth.google.com
And it just keeps getting better. The Street View layer of Google Earth is incredible. It allows you to do drive by inspections from your home office or living room. Of course it is not really as good as an actual drive by, but it certainly allows you to get a feel for a property and its neighborhood.
Now, if you want to look at real estate trend data for a given area, this site is terrific:
www.altosresearch.com/altos/Home.page
The Scotsman Guide has long been regarded as the “bible” of the commercial and residential loan industry, offering detailed categorical listings of various active lenders and loan sources. Their online site is here:
www.clender.com
And Lendicom may be of interest to you. This site is geared toward commercial lending, and allows borrowers and brokers to sign up and submit specific loan proposals to lenders who have also signed up online. If you are a hard money broker looking for funding sources that are a good match for your commercial loans, you may sign up as a broker and create an account. This then allows you to submit specific loan requests, specify detailed criteria, and automatically search for lenders that have programs matching your loan criteria. In the interest of full disclosure, I am an officer and a part owner of the company that offers this site. Maybe that’s why I like it so much.
www.lendicom.com
So that’s a lot to like, wouldn’t you agree? It is hard to imagine that just ten years ago, none of this existed. And there is so much more. Please write in and tell us about other tools that you know of and websites of interest.
End of Part III

— Clay (clay@privatemoneysource.com, 503-476-2909)

The private money lending business: likes and gripes (part II)

January 13th, 2011

Clay Sparkman
In Part I, I began a discussion of my gripes and likes regarding the private money lending business and various industry related matters, items, and issues. I allowed myself to amble a bit far afield and concluded by mentioning a book about the legal profession which I personally found to be informing and entertaining. I’d like to indulge myself a bit more on this topic of books at least marginally related to private money borrowing, brokering, and investing.
An author who utterly fascinates me is Michael Lewis. Moneyball: The Art of Winning an Unfair Game is one of the most interesting and influential books that I have read in a very long time. This book on the face of it is about baseball, but in fact it is about so much more. The book is really about exploiting pockets of inefficiency that inevitably exist in markets (for various curious reasons), and I frequently find myself applying lessons learned in this book to the way I think about other aspects of business and life in general. There is most definitely an element of applicability to the private money lending business. If you have read it, please comment and tell us if you don’t feel the same. (A hat tip: to Charles Duck who gave this book to me and told me to read it some good four years ago; I’m only sorry that I waited two years too long.)
Another Michael Lewis book that became extremely relevant with the recent collapse of large financial firms on Wall Street (though written many years before and published in 1989) is Liar’s Poker: Rising through the Wreckage on Wall Street. This book chronicles the author’s years as a bond trader for Salomon Brothers. The inside look is riveting and terrifying at the same time, and may help explain how things could have gone so terribly wrong during the recent fall from grace. And I must mention Home Game, Lewis’s book about the business of parenting. As the father of a 4 year old boy, this book worked for me (though I warn you it is quite different from his other books, doesn’t have much to do with business and investing, and you may not enjoy it if you don’t have children of your own).
As one who brokers and services private money loans, a thing that I particularly like is quite simple: I like it when the loan payments come in on time each month as per the contractual agreement and without any prodding from my office. Fortunately this happens quite frequently and it makes my life and the life of those who work for me so much easier. It also opens up the possibility for an extended ongoing relationship with the borrower. Most of our borrowers tend to need private money loans on an ongoing basis; they use them to drive a series of ongoing professional projects. And this is another thing I quite like in the business: ongoing, long-term professional relationships with borrowers, brokers, and investors. Things get so much easier when you know who you are dealing with.
I do not like it so much when borrowers become “bad boys,” having to be prompted and prodded each month to send in their payments, and consistently push the envelope, going beyond the boundaries of their agreement. This provides a certain level of strain, both physical and emotional within my organization and with certain of my investors. I will say, though, that I have had cases where the borrower paid just a few days past the grace period each and every month, almost like clock-work, and certain lenders really liked it, as they knew that the payment was coming and that it would be accompanied by a substantial late fee and default interest payment as well. This type of situation tends to push the yield up, so that a 13% loan may ultimately yield 15-16% to the investor over the life of the loan.
I do like it when borrowers who are having problems actively communicate and behave in a proactive and professional manner—seeking to work with the investors in an attempt to navigate through their financial problems and with the intention of ultimately making good on the overall commitment. I have found that investors tend to be quite reasonable in working with borrowers who are reasonable–so that quite often a successful “work out” is possible. In these situations there is ultimate satisfaction for all parties as everyone tends to benefit.
I don’t like it when borrowers who are struggling put their heads in the sand and go into hiding. Once communication stops, there is no chance for a work out, and the only choice is to foreclose, go to auction, take back the property (if a higher bidder doesn’t take it at auction), and then go about the business of marketing the property. This can still have a good ending and probably does as often as not, but the work involved is immense, and most loan servicers and investors would rather not go there. Fortunately, though this certainly happens, it doesn’t happen frequently (though a bit more frequently than usual during the difficulties of the past three very unusual years).
I do like the fact that investors generally have an option, in these situations to either foreclose judicially or non-judicially. The non-judicial option is faster, easier, and more predictable, but the judicial option allows a the investor to obtain a deficiency judgment should the property fail to fully compensate the debt—and thus gives the investor an opportunity to recover any remaining obligation by chasing borrower income and assets.
In Part III, I will be highlighting some web based resources that I find to be particularly useful, enjoyable, and impressive. If you have any sites that you feel enable you to make better moves and decisions as you invest in trust deeds, please send me a note, and I will most likely include your information in Part III of this post.
End of part II

— Clay (sparkman@lendicom.com, 503-476-2909)

The private money lending business: likes and gripes (part I)

January 5th, 2011

Clay Sparkman
Awhile back I published a 3-part post on my Private Money Investor blog regarding my personal likes and gripes as a purveyor in of private money. This has been my sole job for the past 20 years. Who wouldn’t want to go rant and rave publicly about their job? I guess I could have easily made it a 24-part post, but that would have been amusing for me, yet not so much for the rest of you. At any rate, I decided that these posts would be relevant to this audience as well, and so I decided to publish them here.
There is a bit of free association here, as I allow one idea to lead to another and so on, allowing my emotions to carry the narrative, and thus these items are in no particular order. So I give you the things that tend to kick start my emotions and get me going (for better or worse):
The trust deed system (particularly as it works in Oregon, Washington, and California) is a thing of great beauty! It provides for order and procedure, eliminating subjectivity (except for in the event of a judicial foreclosure), nicely balancing the interests of the borrower/owner and those of all the lien holders involved with regard to a particular piece of real estate. Most of the professional investors I know enjoy and appreciate the trust deed system and have a lot more good than bad to say about it.
Associated with this is another wonderful thing they call title insurance. Title companies are the only businesses I know that provide insurance against the possibility of their own error. Knowing title companies as I do, I’m betting against them. I will take title insurance every time AND THUS I shall be able to sleep at night.
Which brings me to the escrow service role of the title company: This is a very tough job, high stress, with many people simultaneously placing multiple demands, and the need to consistently walk a tightrope avoiding costly problems and errors. I most certainly wouldn’t want to do it. And apparently most title people don’t either. Most title companies do a poor job of training and preparing their people and setting a high standard, and thus unfortunately, most escrow services offered by title companies stink. Fortunately there are exceptions. Unfortunately, we often don’t have any control over where a particular closing is going to take place.
Now I realize that this post is going primarily to loan brokers, but still I have to do this. I have often heard that 10% of realtors do 90% of the sales—and I suspect that the numbers are even more extreme with regard to loan brokers. A good loan broker is worth her weight in gold—and there are some good ones out there—but there are … oh so many sadly disappointing loan brokers. Still, we need loan brokers so we soldier on. I figure our loans at Fairfield are about 50%/50%, with half coming to us through loan brokers and the rest coming directly from the borrowers. The problems in my experience are not so much with honesty (though this certainly can be a problem from time to time), but with matters of basic business professionalism in general and with the specific knowledge of the business in particular. Of course, it is a big step for many loan brokers to move into the realm of private money and commercial lending, but my company works hard to provide assistance, education, and support; we spend extraordinary amounts of time working to educate brokers. If you are already a top-notch professional in the realm of private money, please come and do business with us (immediately). If you are professional in your dealings and organized, but not very savvy with regard to the particulars of private money, come to us with an open mind and we will lead you through the process and do our best to educate you. (Hey, a free education is not so easy to come by these days.)
Now here’s one that really gets me going: I am downright angry at banks for not lending money on real estate secured loans any more. “Come on banks, lend money! That’s what you do for a living isn’t it?” We in the private money sector need banks. We lend money to help generally strong borrowers get from point A to point B, and point B is frequently a bank loan (or a buyer who needs a bank loan in order to be a buyer). This needs to change. There are plenty of good safe loans for banks out there that don’t require the banks to disregard every rule of good lending (as they did with many sub-prime loans leading up the collapse in fall of 2007). It reminds me of something Mark Twain said (and I’m paraphrasing). He said that if a cat sits on a hot burner it will never sit on a hot burner again. But then it won’t sit on a cold burner again either.
I love my attorney. It took me years to find a guy like this. Everything that you have ever heard that can be bad about attorneys: the opposite is true about my guy. He is honest, pragmatic, honorable, and fair. He knows his limitations—and will be the first to tell you when he comes up against them–but at the same time has a vast breadth of knowledge regarding real estate matters and business in general. And he doesn’t start a clock every time he picks up the phone or answers an e-mail. Believe it or not, he actually seems to charge only for “real work:” research and document preparation and such. (And on top of all that, he’s the kind of guy you’d want to have a beer with.) If you want me to put you in contact with him, I will.
And speaking of lawyers, I have to say that I really enjoyed Happy Hour is for Amateurs, by Philadelphia Lawyer. If you are offended by explicit talk of sex, drugs, and binge drinking, you may want to give it a miss. But beyond the raucous tales, this book takes you right into the bowels of the enormous billing machine that is “the law firm in America.” This book takes what we thought we already knew and knocks us right upside the head with it. It turns out we knew nothing at all.
End of part I

— Clay (sparkman@lendicom.com, 503-476-2909)

Tags: hard money borrowing, hard money brokering, hard money investing, hard money loans, private money borrowing, private money brokering, private money investing, private money lending, private money loans, real estate investing, trust deed investing
Posted in Fundamentals, General perspective, Investor perspective | No Comments »

The Art of the Summary

November 17th, 2010

Clay Sparkman and Kris Gilmore
Between phone calls, emails, and on-line submissions, most private money lenders/brokers/sources receive a tremendous number of loan requests. It’s pretty common for these loans to have tight deadlines, and so we’d like to suggest three ways to speed up the process when you are submitting a private money loan request for review and approval.
1) If the company offers an on-line proposal form (and many do), consider using it. By using the online form provided by a company, you have the best chance of meeting their own particular needs and requirements. It is so much easier if you hit the mark with your initial request, providing all the applicable information for the high level analysis and response. Fairfield has an online form and we are always pleased when brokers and borrowers choose to use it. Our form can be accessed through our web-site or by going directly to this link. This simple form often provides us with everything we need to know to issue a quote. It’s very effective.
2) Leave a description of the loan transaction in a voice mail. We’ve spent days playing phone tag with brokers, only to find out that they were looking for a loan in a state that we didn’t lend in. If we get a detailed voice mail, and have to leave a message back, we can still make progress and answer some questions that will help speed up the process.
3) Send an email with a summary of the loan. This can be an efficient way to submit a loan request, and most lenders can evaluate a good summary very quickly. However, if critical information is lacking or hard to find, it will delay the process, so be thorough in providing a high level summary. Generally a good summary is not more than 1-2 pages, and is very much in the nature of an executive summary. At Fairfield, We’re looking for an outline of the loan request, not pages of reading material. Here’s a list of information that we like to see:
The Property

Property address
Specs on the property (property type, Square footage, # of units, NOI, etc…)
Property condition
Purchase price amount owed
As-Is value and ARV
Amount needed for repairs (if applicable)
Amount of money invested so far

The Borrower

Monthly income
Net worth
Credit score
Reasons for credit issues (if there are some)
Relevant experience

The Loan

Broker fees
Net amount of funds required by the borrower
Amount available for down payment
Use of funds
Closing deadline
Requested term
Exit strategy (This is very important with private money since it is only a bridge.)

A good summary should highlight the features of the loan without the reader having to hunt for information. By providing this information in a clear concise format, you will facilitate the process and ultimately be able to either close loans faster or get to “no” sooner (if that should be the case)—and either way, faster is better.

— Clay (clay@privatemoneysource.com, 503-476-2909)

Tags: Commercial loans, hard money borrowing, hard money brokering, hard money loans, private money borrowing, private money brokering, private money loans, real estate
Posted in Fundamentals, Tools | No Comments »

A story of adaptation: or how to survive and succeed in a challenging real estate market

November 7th, 2010

Guest post by Matthew Whitaker, Managing Member of Magnolia Partners, LLC and Golden Key, LLC

In December of 2007 we were faced with a decision. After three years of successfully flipping properties to low and moderate income buyers, we awoke one day with no buyers and no plan to find new ones. Our dilemma was very simple, do we dissolve the company or do we create a new viable model that will work in this new economy? If we decided to create a new model, what would that look like?
We had just begun to hit our groove in the spring and summer of 2007. We had successfully flipped around 100 properties in the first 2 ½ years of business and we were working at about a 4 to 5 house pace per month. We were making money and had been in the black for quite some time. We considered ourselves “real estate investors” and thought we were pretty darn good at it. So when we found ourselves faced with a flight or fight decision only a few short months later, it seemed surreal. My partner, Karen, and I spent days talking about what a viable model was for the new economy. We had heard of other local groups “selling to out of state investors.” We decided to attempt to replicate a similar model, but with a focus on local investors.
For three months Karen and I worked on a plan and developed systems and processes that involved Golden Key (GK) (www.gkhouses.com) selling properties to investors that wanted to invest passively in real estate. Our vision was that everyone recognized the opportunity, but very few people had the skills to do something about it. We thought we would approach professionals (executives, doctors, lawyers) and pitch them on the idea of owning 10 – 15 properties instead of investing all their money in the stock market. Locally, based on our expected average sales price, this involved them investing $100K to 150K individually. Our responsibility in this plan involved acquiring the properties, rehabilitating them, leasing them, and then finally selling them to these new found investors. We felt this model would eliminate most of their risk and objections. Questions like, “What would it rent for?” and “How much will the rehabilitation cost?” became commonplace in our initial pitches. What we decided was that we really needed to mold two businesses–an acquisition business (to find the deals) and a management business (to process the houses and manage them on a go-forward). Our office quickly became a “mission control” of spreadsheets and flow charts.
In 2008 we had only moderate success with pitching this business. We had very little trouble getting people to agree that there was an opportunity, but a whole lot of trouble getting them to write a check. We were able to identify some investors, but continuing changes in the lending environment made it harder and harder to close the deals and made it more difficult for one person to purchase multiple properties. This resulted in a time intensive process of dealing with lenders during the close and constantly finding new investors.
Because we became very frustrated with how slowly the business was progressing, we decided if we could pool the investors versus dealing with them individually, this would allow us to really deal with one “client” and speed up the process. Since we didn’t know how to put together a fund, we approached a local investment bank, Founder’s Investment Banking (FIB) (www.foundersib.com) in late 2008. We thought FIB to be a good fit since they had a real estate practice that had previous experience putting together real estate focused funds. At the time, they were disinterested, but we did plant the idea. We continued to approach other similar groups, but with very little success. So we continued to sell to both local and out of state investors, one house at a time.
In the spring of last year (2009), FIB came back to us and said they would be interested in putting together a fund. The fund’s investment thesis was to purchase the homes, already renovated with a tenant already paying rent, and then to hold the properties in a portfolio renting them, and as the market recovered begin selling them to homeowners, preferably the tenants. What they saw was that the current market was allowing for a unique opportunity, and they could purchase these homes at similar returns to what they could expect from an apartment community; however, apartment communities will always sell using the same criteria (cap rate, cash flow, etc.) that they used when purchasing it. In comparison, single family homes can be sold to a homeowner who purchases for much different reasons and thus will pay a premium for that home.
FIB also saw this as an opportunity to enter the single family management business. They asked if, that in addition to putting together the fund, they could invest as a partner in both the acquisition business and the management business. This fund would give both businesses a tremendous amount of horsepower, so settling on a sales price was a challenge. After a series of meetings, over about three months, we finally agreed on a sales price for a portion of our business.
January 1^st of this year the deal was completed and the fund was closed. The fund has purchased around 35 properties to date. It takes us about 75 days from the time we acquire the property until the time we are able to sell it to the fund. The fund has provided us exactly what we expected. We’ve been able to produce product with speed. Our margins are about 70% of what they were in the past, but we expect to do significantly more deals under this new model.
Our story is one of reinventing ourselves for the new economy. Our biggest challenge these days is finding something that is sustainable long past the opportunities the current economy is presenting. We never want to find ourselves in the same position we were in three years ago. Our management company has grown from 20 houses in 2007 to almost 300 today. We believe that the challenging market will be an opportunity for quite some time; maybe not as BIG of an opportunity as it is today, but we believe the U.S. will feel this pain for the next four to five years. Additionally, single family management will benefit from the slow recovery and continue to grow over that same time period.
We’ve learned quite a few lessons over the last three years which will probably be, as we look back, the greatest return on our adventure reinventing Golden Key.
Our first lesson is that very few people really understand real estate investing. This is very dangerous in a business where we talk about leverage being able to multiply an investor’s returns and the same holds true for his losses. Becoming intimate with the actual data is a very healthy process. What are the real expenses? What are the real revenues? How might they change?
Secondly, we’ve learned that investing for value over investing based on speculation is a whole lot less sexy, but it sure pays the bills. In the past we purchased properties based on what we “thought” we could sell them for. Today we purchase properties based on what we KNOW they will sell for. Rental value is a much more accurate measure of intrinsic value than a sales price.
Lastly, it is hard to both manage and invest–so no matter how emotional the month is, you have to examine your business as both the operator AND the investor. Make sure it makes sense for both.
We continue to grow and learn daily and I hope that our story will add some value to what you are doing.
Matthew Whitaker is Managing Member of Magnolia Partners, LLC and Golden Key, LLC (www.gkhouses.com) in Birmingham, Alabama. He has been investing in single family houses since 2004. He has acquired over 150 houses personally and has a team that has the collected wisdom of acquiring over 400 houses.