{"id":913,"date":"2014-11-05T11:41:31","date_gmt":"2014-11-05T18:41:31","guid":{"rendered":"http:\/\/privatemoneysource.com\/broker-blog\/?p=913"},"modified":"2014-11-05T11:41:31","modified_gmt":"2014-11-05T18:41:31","slug":"flexibility-and-creativity-the-beauty-of-private-money-loans-2","status":"publish","type":"post","link":"https:\/\/privatemoneysource.com\/broker-blog\/?p=913","title":{"rendered":"Flexibility and creativity: the beauty of private money loans"},"content":{"rendered":"

Clay Sparkman<\/em>
\nThis post was first published on this site on July 6th<\/sup>. 2010.
\n<\/em>
\nOur private money lending programs tend to be fairly rigid with regard to LTV requirements but quite forgiving with regard to other issues.\u00a0 \u00a0One of the nice things about private money is that it allows for creative problem solving.\u00a0 \u00a0I have put many transactions together, that initially didn’t appear to be doable, simply by seeking out a creative way to bridge the gap.
\nLet me give you an example.\u00a0 \u00a0Say that you have a client come to your office and they want to buy a commercial building in Seattle and they need financing.\u00a0 \u00a0The 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.\u00a0 \u00a0So 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.\u00a0 \u00a0You check with a private money outfit such as ours and find out that we will loan 65% LTV against the value of this property.\u00a0 \u00a0Now 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.\u00a0 \u00a0At 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.
\nWell, that’s where the flexibility angle kicks in.\u00a0 \u00a0There are at least four ways that you can meet the equity requirements without the buyer bringing additional cash to the table.\u00a0 \u00a0Study these because if you are going to work with private money you should know them by heart.
\nSolution #1:<\/strong> The borrower may borrow based on the true value of the property<\/strong>.
\nIf 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.\u00a0 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 much of the purchase of the property (how much, of course, depending on the overall \u201cstrength\u201d of the borrower).
\nSolution #2:\u00a0 The borrower may borrow based on the projected value of the property.<\/strong>
\nSay 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.\u00a0 The construction funds would then most likely be held in a trust fund and disbursed as the work is completed on the project.
\nSolution #3: The borrower may be able to persuade his seller to carry back a portion of the sales price as short-term debt.<\/strong>
\nParticularly if the seller is in a distress situation, he may be willing to negotiate on this point.\u00a0 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.\u00a0 In this case, we may be willing to move forward with a low down payment loan.\u00a0 With a strong borrower, 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.
\nSolution #4: \u00a0It 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.<\/strong>
\nPrivate money lenders are almost always willing to consider additional collateral, to make a transaction come together.\u00a0 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.\u00a0 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.\u00a0 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.
\nKeep 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.\u00a0 Private money is flexible and creative and for this reason often takes up where the other options leave off.\u00a0 (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.\u00a0 The banks are not interested in creative problem solving because it requires too much special handling.\u00a0 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.\u00a0 So come join us for some loan building and some creative problem solving.\u00a0 It is not only lucrative but it is fun.
\n\u2013 Clay (clay@privatemoneysource.com, 503-476-2909)
\nClay is Vice President of Fairfield Financial, a primary source for private money since 1964.\u00a0 Fairfield is currently targeting loans in OR, WA, AK, CA, CO, ID, FL, GA, ID, MT, NV, NY, OK and TX.\u00a0 To submit a loan to Fairfield for consideration: <\/em>http:\/\/www.privatemoneysource.com\/loanproposal.php<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Clay Sparkman This post was first published on this site on July 6th. 2010. Our private money lending programs tend to be fairly rigid with regard to LTV requirements but quite forgiving with regard to other issues.\u00a0 \u00a0One of the nice things about private money is that it allows for creative problem solving.\u00a0 \u00a0I have […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_s2mail":""},"categories":[4,5,6,9,15,19,25],"tags":[38,42,43,46,50,54,55,58,59,62,63,64,65],"_links":{"self":[{"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/posts\/913"}],"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=913"}],"version-history":[{"count":1,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/posts\/913\/revisions"}],"predecessor-version":[{"id":1245,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/posts\/913\/revisions\/1245"}],"wp:attachment":[{"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=913"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=913"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=913"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}