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What you will only learn on the streets about how to read an appraisal (and hopefully without the scars to prove it)

August 9th, 2010

Clay Sparkman
The crucial thing that you must understand about any appraisal (or other real estate valuation instrument) is that it is only as good as its logic.  So that—in other words—you must never accept an appraisal’s conclusion regarding value without looking beyond the surface to understand the logic that leads to the conclusion and without making some reasonable determination as to the quality of the logical argumentation.
With that in mind, I offer you ten critical steps to follow when reading/analyzing (and thus attempting to assess the “goodness” of) an appraisal.
(1)    The very first thing you must ask as you analyze an appraisal is to what degree is the appraisal transparent?  In other words, how much of the logic leading to the value conclusion is on display for you the reader?  If the answer is none, the appraisal is useless.  Throw it away.  If the answer is some (in other words there are gaps in the logic) then you must either (a) once again, decide to toss the appraisal, (b) decide to accept some degree of uncertainty, (c) attempt to fill the gaps on your own, or (d) contact the appraiser and see if she can provide the missing logic.  (Sometimes the appraiser will have the information you need on file, but they just didn’t include it in their final report.)  Ideally the answer is none or very little, and the appraisal can be said to be highly transparent.  At any rate, you will need to be asking this question throughout your analysis.
(2)    The next thing you need to do is get a handle on what is being appraised.  Is it a home, a commercial building, a parcel of land?  What are the basic specifications?  Where is it located?  Is it urban or rural?  How desirable is the surrounding area?  Are there functional inadequacies?  If it is land, what horizontal infrastructure is in place or lacking and what does the current zoning allow?
(3)    I have never heard anyone else say this, but I stand by it (at least when valuing buildings and structures; for valuing land, not so much): one of the first things I do after getting a basic sense of the property is go straight to the photos.  (And by the way, make sure you have an original appraisal or color copies.  The photos can be quite useful, but not if they are blacked out by copying and faxing.)  I study the photos of the subject property and then I compare them to the photos of each of the various comps.  You will be surprised at how often you will begin to sniff some bad cheese at this point in the process (particularly when dealing with structures).  What you are looking for here is: (a) whether or not the comps in the same general condition as the subject property, and (b) whether or not the comps are in the same general “class” as the subject property.  By class I am referring to the level of quality and distinction of the property.  If the answer to one or both of these is no, it is not necessarily game over, but you will now be looking even more closely at the adjustment matrix later on to see if the apparent differences are effectively accounted for to your satisfaction.
(4)    Next, you will want to check the effective date of the value given.  How current is the appraisal?  In a steady up economy we used to be comfortable using appraisals that were as much as 1-2 years old.  We would adjust the value to be in-line with changes in the market.  With the chaos of the past (nearly) 3 years, this is much more difficult.  Generally speaking (though this would depend to a certain extent on regional are) you would want your appraisal to be less than 6 months old.
(5)    Check carefully to see if there are any “subject to” items associated with the value.  Generally this will initially be indicated by checking a box that indicates the appraised value is subject to certain additions, improvements, or modifications as indicated later in the appraisal.  This of course is a critical item, so make sure you have read through the entire body of the appraisal so as not to miss any such “subject to” items or conditions.
(6)    Look to see if any extraordinary assumptions are made by the appraiser.  Here again, you will be forced to read through the entire body of the appraisal to be sure.  On more than a few occasions I have seen what looked to be a perfectly reasonable appraisal completely neutralized (or actually nullified) at the discovery of one or more extraordinary assumptions.  The problem with most extraordinary assumptions is that they are indeed extraordinary.  If I am evaluating a parcel of bare land zoned rural agricultural, and an extraordinary assumption in my appraisal states that “The zoning will be changed to allow multi-unit residential at 8 units per acre.” … well chances are, the gig is up.  Even if some serious local zoning change is in the works, what is the chance that you can count on it to come through and turn this “straw” property into gold?
(7)    Take an accounting of the methods utilized for valuing the subject property.  In my opinion, a market sales comparison approach is ALWAYS essential and should be the primary method—and the one given most weight—in valuing a property.  The only true value anything has in a  market economy is the amount that others are willing to pay for it, and thus the attempt to estimate market value by looking at recent sales—though still at best a process of estimation—is the only method we have that goes to the heart of the matter.  Beyond that, it would be nice to have a cost approach and an income approach (where relevant) but these are, in my opinion, at best a good way to cross-check the market value derived by the appraiser.
(8)    Another thing you need to take a close look at is the aging of the comps.  If all the comps were sold quite recently, then you are good in this department.  But if one or more of the comps are more than 6 months old, this may be a problem.  The next step would be to look at the comp matrix to see how much the appraiser adjusts the target value to factor comp aging.  If one or more of the comps are listings … well then, these aren’t really comps at all.  I have seen comp workups using nothing but listings.  This is totally unacceptable. Anyone can list a property for any price they want.  It would perhaps be reasonable to have 1-2 listings along with at least as many “true” comps, but even this is getting into squishy territory.  So here again, you would have to look at how the appraiser adjusted the subject value based on the “listing” comps.
(9)    You should spend the majority of your effort fussing over the comp matrix.  This is the matrix which compares various characteristics of the subject property with various characteristics of the comps and makes specific adjustments for each of the comps to arrive at adjusted values for the comps (effectively attempting to monetarily “convert” each of the comps into the subject property).  If you have: (a) many adjustments, (b) large adjustments (relative to the price of the property), and/or many seemingly subjective adjustments, then you may want to seriously question the integrity of the appraisal.  You will want to walk through each and every adjustment, and here again, you must look for transparency.  Does the appraiser explain the logic behind his adjustment decisions?  If not, you have a transparency problem.  At the end of the day, you must be comfortable with the adjustments and you must feel that they are objective, transparent, well thought out, and seemingly reasonable.  If not, you must either (a) discard the appraisal, (b) contact the appraiser for further explanation, and/or (c) revise one or  more adjustments and revise the final subject value accordingly.
(10) And finally you will want to be sure and take a look at other methods of valuation utilized (generally income and cost on commercial appraisals).  And then you will want to determine how the appraiser has gone about reconciling the different values arrived at utilizing different methods.  Sometimes a weighted value approach is used.  If so, how much weight is being given to the comp value approach relative to other methods utilized.  As you may have guessed by now, I generally like to see all or at least the vast majority of weight given to the comp analysis.  If the appraisal doesn’t explain the reconciliation, you have a transparency problem.  If the comp value approach is not given enough weight, you may want to fall back on the value arrived at by the comp value approach as your own final value.
And there you have it.  There is a great deal more that can be said about reading an appraisal, and certainly this list of ten items is far from exhaustive, but it does give you a few things that you will not want to overlook.  If anyone has their own favorite “crucial” steps we would love to hear about them.  Please let us know and we wills share them with the group.
Last word: don’t think that you don’t need to “read” an appraisal just because you are the broker (or a borrower).  I often ask brokers and borrowers if they have read the appraisals they have submitted and what was their opinion of them–and if they hadn’t read them or clearly hadn’t really been able to make sense of them … well that didn’t necessarily kill the deal, but it dealt a serious blow to their credibility.  As a broker (and certainly as a professional investor borrower), you must read and understand the items that you are submitting.  Anything less will generally become apparent to the lender and will ultimately undermine your ability to do your job effectively.

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

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

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Posted in Valuation | 2 Comments »

Ignoring the experts

August 2nd, 2010

Clay Sparkman
One thing I can tell you about private money is that the regular rules don’t work there.  And in fact, there aren’t really any rules that you can count on.  At best, there are guidelines and these vary greatly depending on the broad spectrum of particulars that define a particularly loan request.
With private money, it is the entire story that matters.  In general, it is not possible to say that one thing isn’t relevant or another is always a critical factor.  When making a decision about a private money loan request, it is necessary to assimilate all of the relevant information, and what’s more, this information must be assimilated by a curious, creative, thinking individual–not a robot or a decision machine.  There is no equivalent of the lender matrix in the world of private money.
The analytical process is powerful—particularly in contrast with the black and white criteria based “thinking” of the banking world.  In order to demonstrate, I’m going to tell you about two occasions during the past three months when we did what no bank would ever do.  We listened to the experts, and then proceeded to ignore their advice.
On the first occasion, we were approached by a land developer in Oregon with a somewhat unusual loan request.  This man is an ongoing client of ours, and we respect him immensely for his knowledge and his ability to get things done.  Let’s call him Mr. C.  Mr. C wanted to borrow on a subdivision in process on the southern coast, and his request had an unusual aspect.  It based the lot configuration of the site, and thus the appropriate current valuation, on a very obscure reading of the legal code.  Mr. C showed me the code and explained to me what it meant, and I said that I tended to agree with his reading, but didn’t trust myself to interpret code in such a critical matter.  I suggested that we run it by my attorney and get a conclusion in writing.  My attorney came back with a view that appeared to be contrary to the conclusion of Mr. c, and so I took the conclusion back to Mr. C and he looked it over and said, “this is a county matter not a statewide matter; if I get a planner at the county to affirm my position in writing, will you go along with me?”  I said that I would so long as the position was clear.  About a week later, Mr. C forwarded an e-mail to me from one of the top land planners at the county and this e-mail quite clearly stated a position in line with that put forth by Mr. C.  We went ahead and made the loan.
On a more recent occasion, we were approached by a broker representing a builder in Montana.  The builder sought funding to build a large single family spec home.  The builder looked good to us and the proposal made sense.  An appraisal was already in process, so we said that we would go forward with the loan subject to the appraisal supporting the borrower’s opinion of value.  When the appraisal was finished, everyone was a bit surprised: the appraisal came in significantly under value.  We asked the borrower for their opinion on this and they said that it was very clear to them that the appraiser had failed to adequately value the daylight basement of the subject property and that this was the reason for the reduction in value.  So we here at Fairfield read carefully through the appraisal and did some checking with realtors in the subject property area, and it was quite easy to conclude that our borrower was correct.  We re-analyzed the value, based on a sensible square foot figure for daylight basement footage, and came up with a value of our own (a bit less than what the borrower expected, but a good $30,000 more than the face value of the appraisal).  Again, we went ahead and made the loan.
The point I’m trying to make is that you need to think about private money in a different way.  The making of a private money loan is a search for the truth.  You won’t always get the answer you want from us, but I can assure you that listening, logic, and a broad understanding of the facts will ultimately determine our conclusion.

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

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

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Posted in General perspective, Private money loan examples | No Comments »

The language of private money

July 20th, 2010

Clay Sparkman
Most of you are probably familiar with the nomenclature of private money lending, but from time to time, I find myself clarifying the meaning of one or more of the essential words, acronyms or phrases.  And so I shall publish here a brief glossary of such terms for your reading enjoyment.  Consider this to be a bit of continuing education, either in the interest of enlightening you, reminding you, or just plain boring you—however that may be.
Collection account charges
Lenders may do the collection and accounting of their own loans, ask our office to administer their loans, or ask another third-party to perform this service. If our office does the loan collection and accounting (which is generally the case), the collection account charges will be as specified in our page entitled Collection Account Services. The borrower is expected to pay the collection account charges.
Combined Loan-To-Value ratio (CLTV)
This is the total amount of all debt secured by the security as a percentage of the total estimated value of the security. So, for example, if the loan is a first position loan for $60,000, and the seller is carrying back a second position note for $20,000, behind the private-money lender, and the property is deemed to be valued at $100,000, then the LTV is 60% and the CLTV is 80%. The acceptable CLTV will vary based on the lender and the situation, but may in fact, under the right circumstances, exceed 100%.
Instrument of security
Also known as “paper,” this is the legal documentation that provides the framework for the relationship between the borrower, the lender, and the security. The instrument of security may be a note and trust deed, a land sale contract, a mortgage, a lien holder title (with manufactured homes or floating homes, for example), or some other trust deed style instruments utilized only in certain states.
Late charge
This is the additional amount due to a lender when a payment is not paid by the borrower within the agreed upon grace period. Typically the late charge amount will be a percentage of the late payment amount and will become due after a certain grace period has passed.
Loan costs
These are the costs associated with putting together a loan. They are paid at the time loan funds are disbursed (though commission arrangements may vary) and are generally paid by the borrower, though they are often paid from the proceeds of the loan. They include: the lender, any commission that is paid to the Loan Broker(s), the cost of title insurance (see our article, Why Title Insurance?), the cost of closing a deal through escrow at a title company, and the cost of recording official documents. For our loans, they include a document preparation fee, a property inspection fee, and an account setup fee (for servicing the loan).
Loan-To-Value ratio (LTV)
With regard to a first position loan, this is the total amount of the loan as a percentage of the total estimated value of the security. With regard to a subordinate position loan (a second or third, for example), this is the total amount of the loan added to the total amount of all superior liens as a percentage of the total estimated value of the security. The acceptable LTV will vary based on the lender and the situation, but generally up to 75% is considered acceptable, depending on the loan particulars, the borrower particulars, and the type and quality of the security.
Position
The position defines the order in which claims against the security will be satisfied in the event of a foreclosure. Most lenders prefer to lend only in the first position, but some lenders will go in a “subordinate” position (second, third, etc.) in exchange for a higher rate of return.
Pre-payment penalty
This is the penalty (if any) that a borrower must pay to a lender if a loan is repaid “early.” Most loans placed through our office do not have a pre-payment penalty in the traditional sense, though from time to time, we may have a minimum interest clause. This means that the borrower must pay at least x months (x being the stipulated minimum) of interest over the life of the loan. For example, if a loan has a 6-month minimum interest, then if it is repaid in six months or more, no penalty is assessed. However, if such a loan is repaid in less than six months, the penalty is equal to six months interest less the interest already paid.
Private money lending
Also commonly referred to as “hard money lending,” this terminology describes situations in which private individuals (as opposed to financial institutions) lend money to other individuals (or businesses) in exchange for a fair rate of return on the use of the funds.

Rate
The percentage compensation to be paid by the borrower to the lender at fixed intervals (usually monthly). Rates are quoted as annual charges. Interest rates vary with both the state of the economy and the perceived risk involved with a particular loan. Most first position loans placed by our office during the past few years involved rates ranging between 11% and 15%.
Security
Although almost anything may be used as security, or collateral, to effectively secure a loan, our office generally only places loans that are secured by real estate (with the exceptions being floating homes, manufactured homes, and occasionally stock shares).
Term
This refers to the length of a loan and the amortization. Most loans placed by our office are 1-3 year loans with interest only payments (and thus no amortization).
Value
There are different ways to establish the value of a security, and one or more may be used in any given situation. Among these are the following: (1) previous transfer price(s) for the property, (2) tax assessed value, (3) appraised value, as assigned by a paid and impartial licensed appraiser, (4) a Market Value Analysis (MVA) or Broker Price Opinion (BPO) provided by a Realtor, (5) transfer prices for comparable properties, (6) an income analysis, or (7) an evaluation of the cost basis for the property.
That’s about all I’ve got.  If anyone out there has other terms which they wish to offer up, either with a definition or in search of one, please step forward.  Don’t be shy.  I need all the help I can get.

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

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

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Posted in Fundamentals | 2 Comments »

The infinite universe of private money

July 16th, 2010

Clay Sparkman and Richard Sundvall
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 problem 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 an 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 a private money outfit such as ours and find out that we will loan 65% LTV against the value of this property.   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 costs) to the table to make this loan work, and so you are thinking that you’ve reached a dead end.
Well, 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 true value of the property.  If he can demonstrate that he is buying well, and that the true value is higher than the purchase price, then some private money lenders will be willing to base their LTV on the true value of the property.  In this case, if there is a strong case to be made that the property is actually worth 1.2MM, then a private money lender may be able to arrange to loan enough to cover most of the purchase of the property plus closing costs.  Depending on the overall “strength” of the borrower, he may be able to buy the property with a relatively minimal down payment.  Or he may choose to bring in his full down payment anyway and get a reduction in his interest rate due to the stronger LTV position.
Solution #2:  The borrower may borrow based on the projected value of the property. Say that he needs an additional $100,000 to complete the construction on the building, but that the building will be valued at $1.2M upon completion, then certain private money lenders would be willing to arrange a loan of up to $880,000 to cover both the purchase price and establish a construction fund.  The construction funds would then most likely be held in a trust fund and disbursed as the work is completed on the project.
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 $500,000 loan arranged by say Fairfield.  In this case, we may be willing to move forward with a low down payment loan.  We would, for example, be willing to make a loan for $500,000, of which $100,000 would go into a construction account for improvements and something like $30,000 would go toward loan fees and closing-costs, and the buyer would only need to come in with the $30,000 needed to cover loan fees and closing costs.
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. Private money lenders are almost always willing to consider additional collateral, to make a transaction come together.  Say the borrower has another commercial building, this one in Lincoln City, Oregon, and that it is worth 1.6M with $750,000 owed against it.  The lender would quite possibly be willing to make the loan, with the borrower bringing in $80,000 cash and the Lincoln City 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, then it should be possible to negotiate and write into the loan a specific release clause provision stating that we are willing to release the Lincoln City property as security in exchange for a principal reduction, for example in this case, of $200,000.
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 sequence of boxes–and then leave the loans which must be hand-built one by one to people like us.  So come join us for some loan building 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

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Posted in Fundamentals, Private money loan examples, Rehab and constuction loans | 3 Comments »

Sunshine and hard money

July 11th, 2010

Clay Sparkman
It is summer at last!
In the Pacific Northwest, that means it is time to play–or for those who are investing in real estate projects, perhaps the reprieve from the rain means that it’s time to get to work on purchase and rehab projects. As much as 80% of the loans that we do are loans to builders, developers, rehabbers, and quick-flip artists. We have creative funding for all types of projects.
As an example: we had a borrower approach us about obtaining the funds to purchase and rehab three little mill houses in a small town east of Salem. The real estate market in this town has fallen flat and so the borrower was able to tie these properties up for the amazing price of $32,500 each (mind you these are small but respectable little houses). Though his credit was rough (due to some bad breaks with the sale of a business venture), he had an excellent plan for rehabbing and marketing these properties to Salem residents looking for bedroom community tranquility. What’s more, the borrower was able to offer some additional collateral in the form of a second against a small commercial building that he owned and leased for a tidy profit.
We were able to loan him 100% of the purchase money, 100% of his rehab money, and 100% of the closing costs. The loan of $145,000 was closed in less than ten days (well before his purchase agreement expired), and the borrower–though paying a 5% commission and 15% interest–was not particularly concerned about these costs, as he was able to get in and out of the loan in just a few months time; and with no prepayment penalty, he turned a handsome profit on this venture.
These are the types of things that private money was made for.  When done right, private money is a win-win-win business (with a few extra wins thrown in on most transactions).
As a broker in a tough market, you should not only be looking for these types of transactions, but you should be going out and getting them.  Don’t sit and wait for the business to come to you, go get it!
If you need guidance on how to market private money loans to builders, developers, rehabbers, and quick-flip artists–give Fairfield Financial a call.  That is what we are about.  That is what we do.  And we can’t do it without you.

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

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

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Posted in Private money loan examples, Rehab and constuction loans | 3 Comments »

Web based resources for the private money professional

July 1st, 2010

Clay Sparkman
Today I will focus on a few web based tools that I have found to be useful in the business.
Let’s start locally (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:
Oregon mortgage broker licenses
It is also frequently useful to lookup the license status of a given contractor, which you may do in Oregon at:
Oregon contractor licenses
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 a 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—something I would think you would want to do these days before making just about any loan—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.scotsmanguide.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 lender looking directly for commercial loans to fund, you may sign up as a lender and create an account that allows you to specify detailed criteria regarding the specific loans that you would be interested in.  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
If you are aware of any sites that I didn’t mention which might be useful to the subscribers to this blog, please take a moment to respond via comment or send an e-mail.  Either way, I will make sure that any useful information is shared.

— 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 Oregon and Washington, with potential to loan in:  AK, CA, CO, ID, FL, GA, ID, MT, NV, NY, OK and TX.  To submit a loan to Fairfield for consideration: http://www.privatemoneysource.com/loanproposal.php

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Top ten clues that you should probably re-consider using a particular private money lender

June 29th, 2010

Clay Sparkman
I remember when I first came into this business 15 years ago, the general attitude toward private money–and private money lenders and brokers–was quite negative.  And to a certain extent, the reputation was not completely unearned.  It was an industry that seemed to harbor a small handful of crooks and a great many more just plain unprofessional “business people.”  And yet, what many people didn’t understand is that there were also a good many honest, professional individuals and entities offering a legitimate, useful, and important product.
As time went by, the rap on private money lenders improved significantly, and it almost got to the point over the years where you might say that private money was a bit “sexy.”  Everyone wanted to have a piece of that market.  Most of the players these days are honest, in my opinion, and many are highly professional, but still I think I’d like to have a go at those still in the market who are either dishonest or unprofessional or both.  Some private money lenders quite simply don’t belong in the business.  If not dishonest, they are paranoid and distrustful of every borrower that comes to them, and as such, they tend to go too far in trying to protect their investment.  This TOP TEN LIST is dedicated to those folks.  (They know who they are.)
Drum roll please…
Top ten clues that you should probably withdraw your loan request from a particular private money lender:
10. One number and two words:  $25,000 non-refundable deposit.
9. The investor insists on moving in with the borrower to “keep an eye on” his investment.
8. The investor insists on language in the loan agreement to the effect that: borrower will not eat junk food during the term of the loan, you will not engage in bar fights, will certainly not smoke any sort of substance, and will not jump out of airplanes or otherwise engage in so-called extreme sports.
7. The lender requires a lien against borrower’s pet corgi Noodles as additional collateral to secure the loan.
6. Lender keeps referring to the subject property as “my property.”
5. Rates are by the day (uhhh … you know, like car title loans)
4. Lender keeps saying ka-ching at the end of every phone conversation.
3. The product on offer involves a one week term with a one week extension option.
2. The investor wants to become a co-signer on the borrower’s checking account.
1. The investor requests a perpetual easement to ride his ATV on borrower’s property—and the borrower’s lot is only 4,000 square feet.

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

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

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Twenty-five questions you must ask

June 27th, 2010

Clay Sparkman
I originally published this article in September of 2009 on my other blog—The Private Money Investor.  One of the greatest challenges for private money brokers and borrowers is to understand the thinking process of the private money investor.  Once you are able to get into the mind of the investor, it becomes much easier to submit loan requests to private money lenders and sources and to anticipate questions and issues and follow-up on inquiries with greater accuracy and efficiency.  You will have a much better chance of closing your deal and getting it done quickly; or at least you will get to “no” quicker—and you will make better choices about which loan proposals to submit in the first place.  In the general sense, it is very simple.  Private money investors want to invest their money with a fair return and to minimize their risk (and hassle) while doing so.  So far, we are talking about every investor in every type of investment, right?  So lets go a bit deeper.  one must ask, what are the essential questions that astute private money investors attempt to answer, or at least touch on, when assessing the risk of any given potential investment?  So in order to get you thinking like a private money investor, here is my article originally published for investors, Twenty-five questions you must ask.
I’m going to make a list today of twenty-five important questions that I believe an investor must ask prior to funding any private money loan transaction.  I’m not going to elaborate much on each particular item here, but will drill down on each of the individual items in future posts.  For the sake of simplifying this discussion to a reasonable level, I’d like to start with several assumptions: (1) we are only talking about loans secured by real property, (2) we are only talking about first position loans, and (3) we are not talking about land development or raw land loans.  (Each of these exceptions, if removed, would be good for another whole list of special questions; we’ll save those particular scenarios for future discussion.)
(1) What is the Loan to Value (LTV) ratio of the loan you are considering and how does that fit with your own risk limits regarding this particular loan and property type?
(2) If this is a value-added loan (construction, rehab, or development), what is the front-end LTV?  Font-end LTV refers to the LTV immediately after the close of escrow but prior to any construction/development or disbursement of construction holdback funds.  (I generally reference this as FLTV, and it is understood that LTV, for a project actually refers to the LTV upon completion of the construction/development and full disbursement of any/all hold-back funds.)
(3) How confident are you of the value?  The “L” part in LTV is easy.  It is the “V” part that can be quite difficult to accurately determine, and in fact it must be understood that any such determination (no matter how good) is only an estimate.
(4) What are the recent market trends for the area in which the property is located?  Given the real estate market of the past two years, this question is particularly relevant.
(5) How is the borrower’s credit?  What is the mid-score, what are the issues, if any, and what is the trend?
(6) If the loan is a refi: how is the borrower’s pay history on the existing loan?
(7) How much “skin” will the borrower have in the game at the close of escrow?  In other words, how much cash or additional collateral is the borrower bringing to the table?
(8) If this is a real estate development or investment loan or a loan to a business owner occupying his own property: what is the relevant experience and background of this borrower?
(9) What is the purpose of the loan and how will the funds be utilized?
(10) What is the term of the loan?
(11) Can the borrower afford to make payments OR does the loan scenario otherwise involve an adequate interest reserve?
(12) What is the borrower’s plan/exit strategy, and how likely is the borrower of success?
(13) What is the borrower’s net worth and how liquid are the borrower’s assets?
(14) If there are one or more structures on the property, will you be listed as loss payee on a hazard insurance policy at the close of escrow (or prior to the beginning of construction if new construction is being funded)?
(15) If there is a construction hold-back, who is administering this and do you trust them to do so effectively?
(16) Have you reviewed the operative preliminary title insurance policy and approved any liens that your title insurance policy will be listing as exceptions to your position?
(17) Is your loan compliant with all state and federal disclosure and usury laws?
(18) Will all taxes be paid current at closing?
(19) What is the likelihood that there are any serious hazardous waste issues associated with the property?
(20) What is the likelihood that there are any wetland issues associated with the property?
(21) If relevant: what is the status of all required permits, entitlements, or other government approvals?
(22) What is the likelihood of one or more construction labor/materials liens taking precedent over your lien position?
(23) Does the loan size/amount, location, type etc. allow you to obtain optimal diversification?
(24) What is your plan for servicing the loan?
(25) If the loan involves a fractional interest, how comfortable are you joining with the other lenders involved in the loan?
So that’s my list for now.  There is nothing special about the number twenty-five, and I may well have left off some very important items, so please provide feedback as to which items you agree with, which ones you don’t, and what other items you might feel absolutely must be on a list of this sort.

— Clay (clay@privatemoneysource.com)

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


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Rehab and construction loan FAQ

June 18th, 2010

Clay Sparkman
One of the most promising areas at the moment for real estate investors and brokers, by all indications, is REO, rehab, and quick flip of properties.  The opportunity to buy distressed properties at a low price point is evident in many markets.  And yet it is difficult for most end-buyers (with a non-profit initiative) to take advantage of these opportunities, as they are not prepared to deal with the financing challenges or the rehab work involved when buying one of these properties.  Thus comes a wonderful opportunity for those real estate investors who can size up a market effectively, move to buy challenged properties at below value prices, rehab them quickly, and get them back onto  the market at a slightly below market price.
Another point in favor of this brand of real estate buying/investing:  Real estate investors who either (a) buy and sell quickly or (b) hold for the long haul are not as likely to get hurt by falling market values.  It is those who are planning to hold a property for 1-5 years that are in the most danger.
And as we know, what is good for the borrower in this business is generally good for the lender as well;  these types of loans may be some of the best that private money lenders can expect to see for the next year or two and thus the easiest to get funded.
With these thoughts in mind, it seemed appropriate to duplicate here the Rehab and Construction loan FAQ that I publish on my company website.
We tend to receive an endless parade of questions from lenders, brokers and borrowers as to how to best structure these types of loans, so here is an example (representative I think) of how one organization goes about it.

REHAB AND CONSTRUCTION LOAN FAQ

What is your maximum LTV ratio for rehab and construction loans?
Well, it is important to talk about front-end and back-end LTV. Our maximum back-end LTV is 75% and our maximum front-end LTV is about the same (with a little more flexibility), though in the present market we try to keep that closer to 70%.
What do you mean by “back-end LTV”?
By back-end LTV, I mean the LTV at the completion of the project. For example: let’s say a borrower needs $100,000 for the acquisition of a property and $20,000 for construction funds and thus wishes to borrow $120,000. If the completion value of the property is conservatively figured at $185,000 based on comps provided by the borrower, the back-end LTV will be 120/185 or 65%.
Okay, so then what is “front-end” LTV?
Front-end LTV is the LTV immediately upon the closing of escrow but prior to any construction. In the example above, it is a little tricky to talk about the current value of the property since it is a fixer (and fixers are tough to comp directly), but if we determine that the AS IS value of the property is $135,000 then the front-end LTV is 100/135 or 74%. Generally with rehab projects, if the back-end LTV is in-line then the front-end LTV will be in-line also. This is because with rehab projects, the profit is made in the buy, not in the construction.
With construction loans, on the other hand, it is usually the other way around. The profit is made in the construction and generally not in the acquisition of the land. So with construction loans, we need to work a little harder to make sure that the front-end LTV is in order.
Do you require an appraisal?
For rehab projects, rarely ever do we ask for an appraisal. We know that professional investors must move quickly and that they are frequently the best source for data regarding the projected value of their project. If an investor tells me that he expects to sell a property for $200,000 upon completion, I say, “Show me how you have come to this conclusion.” A good set of comps is frequently enough.
With construction projects, it is a little tougher sometimes to get a handle on the completed project, so on occasions, we will ask for an appraisal.
Are you able to loan 100% of hard costs?
Yes, and sometimes we are able to finance the soft costs as well. Our very strong repeat borrowers are sometimes able to leverage 100% and are not required to bring any money into the project. It really depends on two factors: (1) How strong is the borrower? And (2) How well is he buying?
How does the construction money get disbursed?
From time to time, as a borrower completes the construction of a project, the borrower will submit a draw request to Fairfield Financial. Fairfield will review this request and, upon approval, release funds either directly to the subs/suppliers (if requested to do so) or to the borrower (if the borrower has already paid the subs/suppliers). Fairfield is responsible for ensuring that (a) the work is completed to an appropriate quality standard, (b) the project is on-budget (or if not on-budget, appropriate adjustments are made), and (c) that all subs and suppliers get paid for their work on the project. Borrowers are encouraged to make as many draw requests as they require, and if a request is complete and valid, we can generally disburse funds within 48 hours.
How much experience do you require from the borrower?
Well, it is nice to see a borrower come in with a little experience, but I have learned over the years that success in this business isn’t as much about experience as it is about common sense and the willingness and the ability to work tenaciously toward the completion of a project. So if you don’t have experience but you can show me that you have the drive, the discipline, and the common sense, I’ll give you a chance.
What sort of credit and financial stability do you require from the borrower?
We don’t have specific underwriting guidelines. As far as credit, I am not looking for a perfect credit score (though we do have quite a few borrowers with credit scores in the 700s). I am looking at a pattern of payment over time. If a person has had a few bumps in the road or even a BK, for example, along the way, this doesn’t bother me. What concerns me is the borrower who has consistently shown a disregard for debt obligations over a period of time. I probably won’t want to get into a project relationship with this person.
Regarding financial strength (net worth and income), my primary concern is seeing that the borrower has either enough income (stated) or enough cash or liquid assets (stated) to get through the project (even if setbacks occur). That means showing the capacity to (a) make payments for the duration of the project (if an interest reserve account has not been set up) and (b) weather a few bumps in the road if the project doesn’t go exactly as planned. Beyond that, we don’t expect our borrowers to have any great wealth. We know that they are in the process of attempting to build something, and sometimes that starts from practically nothing.
What is the term of your loan and how are the payments handled?
The term of the loan is generally one year, though if a project is expected to require longer, we can make a loan for two years or more. Payments are made monthly and are interest-only. If there is enough equity in a project, we can arrange to have some number of payments held in reserve and applied to the loan for the initial period of the project.
What are your rates?
For this sort of thing, rates generally range from 11-14%. The rate is determined by (a) the LTV, (b) the strength of the borrower, (c) the amount of leverage involved, (d) the merits of the overall project, and (e) the perceived volatility of the local market.
Does the borrower pay interest on the full amount of the loan or only on the funds that have been disbursed?
The borrower must pay interest on the full amount of the loan for the duration of the loan. The funds are being held in trust by Fairfield Financial on behalf of the borrower. As such, the funds are not available to the lender throughout the duration of the loan and thus the lender has committed these funds and cannot utilize them in any way or earn interest.
What fees are involved?
We charge a loan fee equal to 5% of the gross amount of the loan. We also charge a doc prep fee (generally $500) and a collection account setup fee which is based on the size of the loan and averages about $120. There are no hidden junk fees.
Can the fees be paid from the proceeds of the loan?
Yes, if there is enough equity in the project. This is frequently the case.
Is there a pre-payment penalty?
Typically there is no pre-payment penalty.
What happens if there is money left in the construction account upon completion of the project?
Once the borrower has demonstrated that the project is 100% complete, we will disburse any remaining funds in the construction account to the borrower. Otherwise, these funds will be credited to the borrower at the closing of escrow.
What is the approval process?
There are basically four steps.

  1. The borrower (or a representative for the borrower) runs the project concept by us. If we like the project concept and feel that the numbers are acceptable, we proceed to the next step.
  2. We review a complete loan packet. We ask that this be sent via overnight mail or delivered to the office (fax copy is not acceptable). The packet should include the following items:
    1. 1003 for each borrower/personal guarantor
    2. Credit (tri-merge) for each borrower/personal guarantor (or permission to pull credit)
    3. Company financials if the borrower is an entity (2 years)
    4. A privacy notice signed by the borrower
    5. A purchase agreement (when property acquisition is involved)
    6. A preliminary title report (if available)
    7. A detailed line-item budget for all construction work to be done on the project
    8. Plans (for all construction loans, and for rehab loans that involve changes in the basic floor plan)
    9. Borrower’s estimate of the completion value of the project, and comps (or other value analysis) to support this estimate
    10. Photos of the subject property
    11. Borrower credentials
    12. A copy of contractor license, bond, and insurance (for all construction loans)
  3. If all this checks out, we ask the borrower for a deposit (generally somewhere between $500 and $2000). This should be in the form of a cashier’s check or money order. We provide a conditional loan commitment letter at this time.
  4. If the property checks out, we draw up the documents and close the loan through escrow.

Is the deposit check refundable?
If we close the loan through escrow, the deposit is applied as a credit to the loan fees. If we don’t close the loan because (a) the borrower does not or cannot perform or (b) the project upon inspection is significantly different than as represented, we keep the deposit to reimburse us for our costs. Otherwise, if Fairfield fails to perform for any reason, we return the deposit to the borrower.
How long does it take to put the loan together?
We generally ask for a minimum of two weeks from the time we review a project packet until closing.
– Clay (clay@privatemoneysource.com)
Vice President of Fairfield Financial, lending since 1964.  Currently targeting loans in Oregon and Washington, with potential to loan in:  AK, CA, CO, ID, FL, GA, ID, MT, NV, NY, OK and TX.  To submit a loan to Fairfield Financial for consideration: http://www.privatemoneysource.com/loanproposal.php

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The private money broker blog

June 15th, 2010

Clay Sparkman
You are receiving this e-mail because you previously subscribed to our Private Money Newsletter for brokers and borrowers.  We recently made the decision to convert this newsletter to a blog format.  In doing so, it is our hope to: (a) reach more interested parties, (b) provide a community forum for discussion of issues related to private money brokering and borrowing, (c) provide a permanent record of our postings which can easily be accessed on-line at any time by category, post date, search keywords and such, and (d) provide access to other relevant and hopefully useful resources.
We also feel that it is appropriate–with this transformation–to make the postings more general to the topic of private money brokering and borrowing and less about directly promoting the products and services of my company.  I am a firm believer that if we provide a high quality educational resource, you will utilize it, and ultimately be inclined to come to us first when you feel that you might need access to the products and services that we provide.
If there is anything I have learned in my 17+ years in the private money investment field it is that there is a thirst out there for more high quality, well organized information regarding this type of loans.  Many people want to participate or get more involved, but don’t know where to go to learn about it.  To this day, I am personally astounded by the lack of quality resources on this topic.  So my goal with this blog is to help fill the void–to provide a quality forum in which interested parties can discuss and learn more about the many intricacies of private money brokering and borrowing.
Collectively we are Fairfield Financial Services, Inc.  My name is Clay Sparkman, and two of my colleagues, Richard Sundvall and Kris Gilmore, have been providing material for the newsletter for some time now, and will continue to provide semi-regular postings for the new blog.
I’d like to start by asking if anyone would be willing to share information regarding quality resources that already exist regarding private money brokering and borrowing.
Oh, and by the way: I already host a blog—The Private Money Investor—specifically targeted toward those who invest in private money loans and trust deed positions.  (It is really the flip side to the conversation we will have here.)  If you are interested in checking that out, you will find it at http://privatemoneysource.com/blog/

— Clay (clay@privatemoneysource.com)

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