{"id":53,"date":"2010-06-27T14:21:48","date_gmt":"2010-06-27T21:21:48","guid":{"rendered":"http:\/\/privatemoneysource.com\/broker-blog\/?p=53"},"modified":"2010-06-27T14:21:48","modified_gmt":"2010-06-27T21:21:48","slug":"twenty-five-questions-you-must-ask","status":"publish","type":"post","link":"https:\/\/privatemoneysource.com\/broker-blog\/?p=53","title":{"rendered":"Twenty-five questions you must ask"},"content":{"rendered":"

Clay Sparkman<\/em>
\nI originally published this article in September of 2009 on my other blog\u2014The Private Money Investor.\u00a0 One of the greatest challenges for private money brokers and borrowers is to understand the thinking process of the private money investor.\u00a0 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.\u00a0 You will have a much better chance of closing your deal and getting it done quickly; or at least you will get to \u201cno\u201d quicker\u2014and you will make better choices about which loan proposals to submit in the first place.\u00a0 In the general sense, it is very simple.\u00a0 Private money investors want to invest their money with a fair return and to minimize their risk (and hassle) while doing so.\u00a0 So far, we are talking about every investor in every type of investment, right?\u00a0 So lets go a bit deeper.\u00a0 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?\u00a0 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.<\/a><\/em>
\nI\u2019m 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.\u00a0 I\u2019m not going to elaborate much on each particular item here, but will drill down on each of the individual items in future posts.\u00a0 For the sake of simplifying this discussion to a reasonable level, I\u2019d 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.\u00a0 (Each of these exceptions, if removed, would be good for another whole list of special questions; we\u2019ll save those particular scenarios for future discussion.)
\n(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?
\n(2) If this is a value-added loan (construction, rehab, or development), what is the front-end LTV?\u00a0 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.\u00a0 (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.)
\n(3) How confident are you of the value?\u00a0 The \u201cL\u201d part in LTV is easy.\u00a0 It is the \u201cV\u201d 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.
\n(4) What are the recent market trends for the area in which the property is located?\u00a0 Given the real estate market of the past two years, this question is particularly relevant.
\n(5) How is the borrower\u2019s credit?\u00a0 What is the mid-score, what are the issues, if any, and what is the trend?
\n(6) If the loan is a refi: how is the borrower\u2019s pay history on the existing loan?
\n(7) How much \u201cskin\u201d will the borrower have in the game at the close of escrow?\u00a0 In other words, how much cash or additional collateral is the borrower bringing to the table?
\n(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?
\n(9) What is the purpose of the loan and how will the funds be utilized?
\n(10) What is the term of the loan?
\n(11) Can the borrower afford to make payments OR does the loan scenario otherwise involve an adequate interest reserve?
\n(12) What is the borrower\u2019s plan\/exit strategy, and how likely is the borrower of success?
\n(13) What is the borrower\u2019s net worth and how liquid are the borrower\u2019s assets?
\n(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)?
\n(15) If there is a construction hold-back, who is administering this and do you trust them to do so effectively?
\n(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?
\n(17) Is your loan compliant with all state and federal disclosure and usury laws?
\n(18) Will all taxes be paid current at closing?
\n(19) What is the likelihood that there are any serious hazardous waste issues associated with the property?
\n(20) What is the likelihood that there are any wetland issues associated with the property?
\n(21) If relevant: what is the status of all required permits, entitlements, or other government approvals?
\n(22) What is the likelihood of one or more construction labor\/materials liens taking precedent over your lien position?
\n(23) Does the loan size\/amount, location, type etc. allow you to obtain optimal diversification?
\n(24) What is your plan for servicing the loan?
\n(25) If the loan involves a fractional interest, how comfortable are you joining with the other lenders involved in the loan?
\nSo that\u2019s my list for now.\u00a0 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\u2019t, and what other items you might feel absolutely must be on a list of this sort.<\/p>\n

— Clay (clay@privatemoneysource.com<\/a>)<\/p>\n

Clay is Vice President of Fairfield Financial, a primary source for private money since 1964.\u00a0 Currently targeting loans in Oregon and Washington, with potential to loan in:\u00a0 AK, CA, CO, ID, FL, GA, ID, MT, NV, NY, OK and TX.\u00a0 To submit a loan to Fairfield Financial for consideration: <\/em>http:\/\/www.privatemoneysource.com\/loanproposal.php<\/a><\/p>\n


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Clay Sparkman I originally published this article in September of 2009 on my other blog\u2014The Private Money Investor.\u00a0 One of the greatest challenges for private money brokers and borrowers is to understand the thinking process of the private money investor.\u00a0 Once you are able to get into the mind of the investor, it becomes much […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_s2mail":""},"categories":[12],"tags":[38,42,43,45,46,54,55,57,58,63],"_links":{"self":[{"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/posts\/53"}],"collection":[{"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=53"}],"version-history":[{"count":0,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/posts\/53\/revisions"}],"wp:attachment":[{"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=53"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=53"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=53"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}