Don't Believe Everything You Hear About Private Money

Don't Believe Everything You Hear About Private Money

This week I'd like to address some myths about private money, and hopefully correct some common misconceptions that seem to exist with regard to private money lending as an alternative mechanism for funding the refinance and acquisition of real estate.

Myth: As a broker, I should first try to use conventional bank financing, and if that doesn't work, then I should try to use some of the institutional non-conforming lenders, and if they won't do my loan, it must be so screwed up that I will--as a last resort--try to fund it using private money.

Fact: It is really a matter of recognizing the type of transaction that you are trying to finance. If you have a loan that fits within the typical parameters of your conventional or non-conforming sources, then these sources may well be your best option, but keep in mind that private money is not usually a last ditch effort, but rather an rather an alternative that may be the primary option if you recognize your loan scenario as a good fit for private money.

Many times, a transaction will involve a strong borrower and good property, but for some reason or other it doesn't fit neatly within the box with regard to an institutional analysis. I have always said that if the banks ever developed an imagination, I would be out of business. But that won't happen. The banks don't want to develop an imagination. They want to handle loans that can be mass processed and the only way to do that is to make loans that can be analyzed looking at very narrow and specifically defined criteria. That is why, for example, we love to do raw land loans, while the banks won't generally touch them. They require too much hands-on analysis.

When we make a loan, we roll up our sleeves and get involved. We meet the borrower and look at the property and speak to various parties to determine if the loan makes sense from a security point of view. And always keep in mind that our primary-though not our only-criteria is equity. We are an equity lender. If the equity is there, almost any other shortcoming can be overlooked.

Myth: Private money lenders always require appraisals.

Fact: Fairfield Financial almost never requires an appraisal (though on a few occasions we do). We look at all of the available data (cost basis, assessed value, comparables, income, etc.) and attempt to arrive at a value conclusion on our own. This not only knocks off a good $3,000-$5,000 from our commercial loans, but short-cuts the process by a good 2-3 weeks.

Myth: Private money lenders always require income verification.

Fact: Fairfield never asks for tax returns to verify income for private individuals who are a party to the transaction (though we generally need to see financials when an ongoing business is involved). We merely ask the individuals to state their incomes.

Myth: No lender will loan 100% of purchase price for a commercial property.

Fact: Fairfield has done just that on many occasions. We recognize that true value is sometimes quite different than the purchase price for a property, particularly when a real estate investor is making the buy. We will loan based on value and not get stuck on purchase price, so that on many occasions we have arranged for 100% financing not only of the acquisition price of the property, but also to cover the loan fees, closing costs, and a construction fund for deferred maintenance or renovation costs associated with the property.

Myth: No lender will loan on a property that is in very poor condition.

Fact: Fairfield often loans on properties that in very bad condition. This is often where the opportunities lie. Sometimes the construction fund exceeds the acquisition cost. If a project makes sense and there is sufficient equity, we will do it.

Myth: No lender can fund in less than a week.

Fact: We can and we do. However, it only happens if the borrower/broker is very organized and when we are able to get their full support and cooperation. Typically we fund in two weeks.

Myth: It is very difficult for a first-time builder to get construction funding.

Fact: Fairfield has made many loans to first-time builders, developers, and real estate investors buying and rehabbing properties for a profit. We like to work with people who are just breaking into the business. Of course they must exhibit the basic characteristics that will allow one to do well in this realm: good supporting contacts, common sense, and the willingness to work hard. We have seen many of our inexperienced builders and investors not only succeed but excel, and that is satisfying for everyone.

Myth: No lender will loan 75% LTV on raw land.

Fact: Fairfield will provide up to 75% LTV funding on raw land refinances and acquisitions. To get to 75% we need to feel good about the borrower and good about the property, but we have done so on a number of occasions.

Myth: There are no alternatives to the few bank options that exist for financing floating homes.

Fact: Fairfield has developed a reputation for funding floating home loans. I lived on floating homes for nearly eight years and I love them, and Portland has more floating homes per capita than any other city in the nation. Bring us your floating homes loans. I'll go one step further. Bring us your floating home construction and renovation loans. We have frequently funded the expansion of a floating home (many people like to add a second story or fill in the boat well to create additional living space) or otherwise funded loans, for example, for the rebuilding of the logs and the stringers (the foundation on which floating homes float).

Myth: Agriculture loans and restaurant loans are almost impossible to do unless they meet strict conventional lending criteria. They are simply considered to be too risky.

Fact: Fairfield has done many restaurant loans. We will fund up to 75% in Oregon, Washington, and Idaho. Fairfield will also fund up to 75% on ag loans if the circumstances are right. However, note that we only fund ag loans in Oregon an Idaho.