Clay Sparkman
In the spirit of learning by example, I’d like to take the opportunity to describe an interesting scenario that we put together.
They say that when it rains, it pours. Well, for our borrower it had been pouring for a long time. A long run of bad luck had left him in a difficult situation, and he needed a good luck charm.
SCENARIO: About a year previous, the Borrower had purchased a house for his own residence. During the first weeks of living there, he discovered that watering his lawn also resulted in watering the contents of his basement–the foundation was bad, and had to be replaced completely. Not to be discouraged, he contracted to have the house lifted and a proper foundation installed. It was a small bump in the road, but everything seemed to be manageable.
But when the house was raised and waiting for the foundation, a hydraulic jack failed, and dropped the structure 18 inches. The operation was supposed to have had no impact on the cosmetics and structure of the house, but the fall had reduced it to what the bank lender of record called a “shack.” Consequently, the bank called the loan due.
What’s more, it soon became clear that the insurance and bond information provided by the contractor was false, and that he was in fact uninsured. Before long he was in bankruptcy, and the borrower had a dozen other aggrieved parties ahead of him in line for a civil suit, with no possibility of recovering damages.
The Borrower persisted. Out of pocket, he had the house put on a proper foundation and began repairing the damage, completing much of the work himself. But finally, with a remaining balance on his contract of sale, an outstanding rehab loan, a significant amount remaining in repairs to finish the house, and no additional funds of his own available, he was unable to move forward.
PROBLEM: Because the house was, in the bank’s evaluation, a shack, they had called the loan due, and no other conventional source could be found that would lend on the property given its status. Additionally, the Borrower had been the victim of identity theft, and although he had documented this well, filed reports with the police, and notified all three credit bureaus of the status of the accounts appearing on his credit report, he was still, in the end, left with a mid-score in the low 500s.
ANALYSIS: Thanks to the detailed plans and photos provided by the Borrower and our own inspection of the property, we were able to clearly see what the house would be when it was finished. And thanks to the good comparable sales analysis he had assembled, we were also able to see what it would be worth. Given this projected value, the amounts currently owed on the property, the amount needed to finish construction, fees and closing costs, our LTV was 73%. We had a Borrower who had already invested a large amount of money out-of-pocket and countless hours of work into the project, so he was plainly 100% committed to the project. According to his credit report, service of his own debts (not those resulting from the identity theft) had been good. His income appeared to be sufficient to service the loan.
SOLUTION: Despite these positive elements, the LTV was still a bit high for under the circumstances. So, we decided to carry our fees as a second position lien, reducing the LTV of the first position lien to 69%. We were able to pay off all existing debt on the property, and the funds required to finish the house were deposited into a construction account, to be drawn upon as work was completed.
– 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 loans, private money borrowing, private money brokering, private money loans, rehab loans
