Clay Sparkman
I like to post our general FAQ from time to time.
Private money is often misunderstood. Many industry professionals know very little about it, and fallacies and misconceptions tend to dominate the collective wisdom. I have made it my mission to try to educate professionals regarding the realities of private money. In this capacity, I spend a lot of time answering questions about private money. I figured it was about time to prepare a FAQ on private money and share it with this group. So here you go.
-What is private money used for?
Private money is generally used as a bridge: a way to get from point A to point
B. It is generally a short to medium term solution (1-3 years), and there is
nearly always an exit strategy going in. It is used for all types of real
estate secured financing: commercial retail, restaurants, hotels/motels,
marinas, elder care facilities, industrial, agricultural, raw land, land
development, construction, rehab, multi-family, single family homes,
manufactured homes, and floating homes. For a list of our private money
loan programs, click here.
-What are the interest rates?
Private money rates generally range from 8 to 13% (typically 11%). The rate is
determined by looking at a combination of factors: (a) LTV ratio, (b) strength
of borrower, (c) condition/desirability of property, (d) actual cash-in or real
equity contributed by borrower. A list of our loan
guidelines may be found here.
-What fees are involved?
We charge a loan fee which varies depending on the
particulars of the loan between 3-5% of the gross amount of the loan. We also
charge a doc prep fee ($675 or more, depending on the size of the loan), a
property inspection fee ($500 or more, depending on the location of the
property), and a collection account setup fee ($470 or more, depending on the
size of the loan). That is all the charges you will ever see. We have 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 generally the case.
-Is there a pre-payment penalty?
Most of our loans have no pre-payment penalty.
-Why would anyone pay those kinds of rates and fees for a
loan?
There are many reasons why a borrower would choose to use private money over a
cheaper institutional option. For example, professional real estate investors
like to use private money when buying because they are able to make offers
which are not constrained by long timelines and numerous rigid conditions.
Often times speed is a very significant factor in completing a profitable
transaction and in those cases it often makes sense to pay for a short-term
private money option rather than loose the deal. Frequently the condition of a
property won’t allow for the initial financing with conventional money, and in
those cases private money may be used. Often the type of property is a factor:
banks don’t like lending on raw land and lots, but private money lenders are
more inclined to do so. Cash leverage is another factor. Fairfield Financial,
for example, loans based on the true value of a property, not the purchase
price, so sometimes we lend most of the acquisition cost for a property.. The
structure of the deal may be a factor. Most private money lenders allow the
buyer to establish their equity through the mechanism of a seller carry back;
banks won’t do this. The list goes on and on.
-What is the most common use for private money?
Our most common loans are probably construction, rehab, and land development
loans. We have an entire FAQ devoted to such loans at: http://www.privatemoneysource.com/articles/rehabfaq.php
-How fast can private money loans close?
We have been known to close loans in a matter of a few days, but more
typically, you should figure on 10-15 business days. (Keep in mind that it is
only possible for us to move quickly if the borrower, broker and other third
parties are moving quickly as well.)
-is an appraisal required?
Some private money lenders require them. We don’t. Evidence of value is a
critical part of the private money loan process. However, it is our opinion
that a good set of comps is just as effective in establishing value as a good
appraisal. Many of our borrowers are professional investors, and we feel that
they are qualified to perform the value analysis. This allows us to streamline
the process. However, it is important to note that putting together a god set
of comps is hard work. See the following article on our website for a detailed
description of how to prepare a proper value analysis: http://www.privatemoneysource.com/articles/comps.php
-As a mainstream mortgage broker, I don’t see much of this
type of thing. Why should I be interested in private money?
To be perfectly frank, it is my belief that mainstream mortgage brokers are
gradually being squeezed out of the industry. Lenders are ramping up their
operations to better provide online loan sourcing directly to borrowers. We saw
a similar thing in the travel industry. The travel agents that have survived,
and even thrived, are the ones who effectively established niches within the
industry. It is my belief that the same will ultimately be true for mortgage
brokers. Plain vanilla loans can be easily processed in an assembly line
fashion which easily translates to the world of the novice and a web browser.
Niche lending, on the other hand, tends to be a hand-crafting of sorts, and
cannot be easily automated. Look at private money. There are no absolute rules.
Many factors must be considered in making a decision and frequently those
factors are intangible. Ultimately a high degree of thought work and common
sense is involved. Private money will always be a people process. At the very
least, it allows you to broaden your offerings and make yourself more
attractive to borrowers who may need different kinds of lending. So, if you
tell me, I am not interested in private money because I don’t do unusual loans,
I say to you, you might want to reconsider.
-As a mortgage broker bringing you this transaction, how do
I get paid?
It is simple. You bring us a borrower. We price the loan to you. (Think of
yourself as a wholesale buyer.) You price the loan to your client, adding your
fees as appropriate. You stay involved in the loan (or not) as you choose, and
prior to closing, you submit a fee demand to escrow and receive a check
directly from the title company. For more information on this topic, see: http://www.privatemoneysource.com/brokers.php
-Why do they call it hard money?
It is difficult to find an answer to this question. I’ve heard plenty of
speculation. Some people say that it’s because the money is used for hard to do
loans. Others say it is because the loans are hard to get or hard to pay. It is
my belief that it is called hard money because traditionally it has been real
money in the sense that it is not borrowed. Institutions loan borrowed money,
and in this sense, they loan soft money. However, I must point out that things
have changed a bit over the years, and these days a good deal of hard money is
in fact borrowed.
-How do I go
about doing a private money loan with Fairfield Financial?
There are basically seven steps.
(1) First, run the concept by us. The best way to get started is to provide us
with a high-level summary of the loan. You may e-mail a summary, or you may use
our online submission engine, which will walk you through the process. It is
quite simple to use. You will find that at: http://www.privatemoneysource.com/loanproposal.php
(2) If we
like the project concept and feel that the numbers are acceptable, we provide
you with a rough quote.
(3) Once you approve the rough quote, we provide you with a
list of items that we need to receive and review in packet form.
(4) We then review this loan packet. We ask that this be sent via overnight
mail or send via e-email, as a single Adobe or Word attachment.
(5) If all this checks out we ask the borrower for a deposit (average amount =
$1,000). This should be in the form of a cashier’s check or money order. We
provide a conditional loan commitment letter at this time, and the deposit is
fully refundable (as described below).
(6) We send someone out to inspect the property.
(7) If the property checks out, we draw up the documents and close the loan
through escrow.
-Is the deposit check refundable?
If we close the loan through escrow, the deposit is applied as a credit to the
loan fees. If we don’t close the loan because (a) the borrower does not or
cannot perform or (b) the project upon inspection is “significantly”
different than as represented, we keep the deposit to reimburse us for our
costs. Otherwise, if Fairfield fails to perform for any reason, we return the
deposit to the borrower.
-What needs to be included in a private money loan package?
As I said, we provide a list specific to your loan scenario. However, if for a
list of our general packaging guidelines, please see the following: http://www.privatemoneysource.com/packaging.php
– Clay (clay@privatemoneysource.com, 503-476-2909)
Clay is Vice President of
Fairfield Financial, a primary source for private money since 1964. Fairfield
is currently targeting loans in OR, WA, CO, ID, ID, MT, and NV. To submit
a loan to Fairfield for consideration: http://www.privatemoneysource.com/loanproposal.php
