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P r i va t e L e n d e r O f f i c i a l

E z i n e

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A . A . P. L .

The Journal of the American Association of Private Lenders Volume 3 - Issue 9

Insight & Assesments - A fresh look into the world of Private Lending.

U.S. Economic Outlook - Christorpher Thornberg, PhD

The APP as a Business Tool - A.J. Poulin

Honoring Life and Living Well - Larry Muck


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C on te n ts : In This Issue: Viewpoint Honoring Life - and living well - Larry Muck (pg.3)

Legal Navigating the Private Lending Laws

Special Report

- Kim Lisa Taylor (pg.29)

The Post Dodd-Frank Era - Robert Cox & David R. Ambrose (pg. 7)

Business The APP as a Business Tool

Industry

- A.J. Poulin (pg.34)

How Much Should You Make as a P.L.?

U.S. Economic Outlook

- Paul Yevzikov (pg.37)

- Christopher Thornberg, PhD (pg.16)

Bolster Your Investment Power

Membership

- Kent Kinzer (pg.21)

3 Ingredients to Launch a Fund

2013 Membership Directory

- Matt Burk (pg.24)

- Board of Advisors and Founders - Active Lender Directory - Member Service Provider Directory (pg.47-53)

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V iewp o i n t : Honoring life and living well - Larry Muck

D

efining the name Pullen – fearless, selfless, brilliant, impish – best friend to others and lover of life. The text came at 11:30 a.m. on a Friday during the second day of our Thought Leadership Forum, an event that pulled together unsung industry leaders who share our passion for improving transparency and integrity in the residential real estate community.

Chris was larger than life. One of the most physically fit humans you could ever know. He started running when he was five and never slowed down. I referred to him as Superman. One day when Chris was five, he slipped away from a care-giver to surprise his mom at church. Given that the church was three miles away, characterizing her reaction as “surprised” would be an understatement. Another time, a neighbor reported to his parents that she felt certain that she had witnessed Chris rappelling down the side of their house with a garden hose.

The text read, “Don’t know if you heard yet or not, but Chris Pullen was in a terrible motorcycle accident in Santa Monica this morning, please pray for him.” At 2:30 that afternoon, my wife got the call from her sobbing 27-year-old son, Chip, that Chris had died. It is always shocking when a 27-year-old loses his/her life, doubly so when it is without warning. But in Chris’s case, it was a shot to the gut of the order of magnitude of a hundred fold.

Running was his passion. He was on the cross-country team at Central High School for all four years, a period during which his team took no less than fourth place at the State meet. Teammates were more than just co-competitors. During practice, Chris was known to drop back alongside a struggling runner and encourage them to fight through the pain and finish strong.

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He had the gifts of encouragement and compassion for others at a very deep level. In his senior year, Chris went to his coach and told him that he did not care about individual honors and that he wanted to do whatever it took to help the team finish strong. They took second in State that year. Chris was an Eagle Scout, an incredible achievement in today’s distracted environment that our youth face. The camping skills came in handy when he and his buddies would venture out at 16 to spend the night enjoying the fruits of the field that were enhanced by malt and hops. He was known as the saran wrap and maple syrup guy, the instigator of several late night car

wrapping incidents. His strong arm came in handy while decorating many homes with toilet paper during his career of mischief. He never, ever lacked for energy nor leadership. The bond that Chris formed with others was incredibly tight. At his funeral, there were many who called him “best friend”. But his bond with Chip and their close friend Brent goes beyond description. I never understood how Chip thought it was okay to get in a car after college and drive to LA with no place to stay, no job, and just find a way to make it on his own. Really, it remained a mystery, until I discovered Chris’s zest for life and his gift of encouragement. During a period of doubt, Chris flew Chip to Minnesota for a weekend to

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help strengthen his resolve. By staying on course, Chip was able to turn Craig’s List jobs into a position with Saatchi and Saatchi, one of the leading LA ad firms. Chris had a Masters in Accountancy and was one of the top graduates at the University of Missouri. After initially starting with Price Waterhouse in Minnesota, he was able to make a career move to LA and roomed with three others including Chip. It was in LA that Chris talked them into going skydiving. Chip described the situation as follows: “Chris was so disturbed by the thought of parachuting with an instructor strapped to his back that he convinced us to take an additional hour of training that would allow us to solo on the first jump. I found myself 6000 feet in the air in a barely airworthy plane, standing at a doorway by myself, and the only word that came to mind was ‘PULLEN’.” On a separate occasion we received a call from Chip about 8 months ago. He informed his mother that Chris had talked him into journeying to South Africa to go shark diving. Mary went through the roof and told him that was the stupidest thing she had ever heard and that she could not believe he would do something that foolish. When Chip explained that they were going to be in shark cages, she said, “Oh, so you are a wimp,” and hung up on him. He called back and the mother/son bonding continued. Unbeknownst to us, two days before the call that rocked our world, Chip totaled his motorcycle. When he arrived here to help put together the funeral, he had a splint on his little finger; the only visible manifestation of his brush with death. When we talked with Chip about the funeral ser-

vice and what Chris would want, he told us that Chris would really like a parade. Surprisingly, on that Saturday, the local university was celebrating homecoming. The parade route went directly by the church where the service was being held full of the cacophony that you would expect. Chris got his parade. So, what is the point Larry? This is a magazine about Private Lending. Here it is – I have searched for meaning in this incident. How could someone who loved life as much as Chris, and who lived every day to support those around him while achieving incredible results be taken from us? The lesson is self-evident. He is a measuring stick for each of us. In our world of Private Lending, we have an opportunity and an obligation to continue to grow and to adapt. People standing on the sidelines poaching will not change our neighborhoods and our country for the better. It is only through our united effort to strive for integrity, honesty, and an awareness of our direct impact on our “eco-system” that we will “be the change that we seek in the rest of the world”. Do not be daunted by the continued challenges created by our political and regulatory environment. We are nimble…together we will continue to find ways to make the loans that are needed by our neighbors that others will not.

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Keep up the good fight and live life to the fullest. If you care to comment, please e-mail at lmuck@aaplonline.com Thank you for reading.

P r i va t e L e n d e r O f f i c i a l

E z i n e

o f

A . A . P. L .

On behalf of our active founders: Anthony Geraci and Jack Rollins And our Board of Advisors: Josh Fischer, David Owen, David Williams, Mike Wrenn, and Haider Nazar, Bob Cox, Vincent Spreuwenberg. We say thank you for your continued support. I look forward to building this association with you and for you. Larry Muck Chairman

If you are interested in becoming an AAPL Partner please contact Linda Hyde at

913-888-1250 or lmuck@aaplonline.com or visit www.aaplonline.com

Contribute Content AAPL is always looking for writers with interesting and relevant viewpoints. If you have an article you would like to see in Private Lender contact us! Authors for AAPL receive a combination of free advertising and notoriety from being published. Contact Dan Porrevecchio to submit an article: dan@nreinsurance.com


S p ecia l R e p o r t : The post Dodd-Frank era

Understanding Private Residential Lending in the Post Dodd Frank/CFPB Era

- Robert Cox and David R. Ambrose1

A

lot has happened in the private lending world as of late, especially when it comes to lending secured by residential properties. Because of the complexities of the laws involved, there is much confusion and misinformation out there, even among some attorneys. The amount of misinformation is understandable, yet never ceases to amaze me. This confusion and the potential penalties for violations are causing many private moneylenders to make it a policy to avoid funding those loans. Loans that they believe will be subject to the new rules and regulations implemented as a result of the passage of the Dodd Frank legislation, and may end up funding loans under the mistaken belief that the new rules and regulations will not apply. This article will attempt to provide some clarity as to these new regulations and highlight some of the most important changes affected by Dodd Frank.2

The discussion will begin with an assessment of what is a loan, which will be subject to the conditions and limitations of the Truth In Lending Act (TILA), and the Real Estate Settlement Procedures Act (RESPA), as the pertinent provisions of Dodd Frank amended both TILA and RESPA. For purposes of this article, the term “subject transaction� will be subject to one

or more of the regulations of TILA or RESPA, as amended by Dodd Frank. Most of the changes are limited to collateral securing the loan, which is the primary dwelling of the borrower (owner occupied property). However, there are other significant provisions that apply as well to either vacation or second homes of the borrower (vacation property), such as the ability to repay rule. While these new rules and regulations may appear to present a landmine standing in the way of making subject transaction loans, I believe that if you understand the regulations, you can operate in this world with little or no competition! With that being said, let us try to understand the actual facts of what exactly a subject transaction is. The majority of the regulations do not take effect until January 10, 2014 (although there are a few regulations which took effect in June 2013). The regulations established by Dodd Frank have done little or nothing to change some of the most basic provisions of TILA and RESPA, which determine whether any transaction is subject to those legislative measures.

. David R. Ambrose, a founding attorney with Ambrose Law Group, LLC, in Portland, Oregon provided assistance to Bob Cox on this article.

1

. This article is only a summary of the changes effected by Dodd Frank, and dicsusses those changes, which the author believes will have greatest impact on private moneylenders. A discussion of the entirety of the changes are beyond the scope of this article. This article does not constitute legal advice, and any private moneylender venturing into this field should tread with caution, and obtain guidance from competent real estate finance counsel. 2


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Here are some of the basics: First: At least one of the properties being provid-

ed as collateral must be comprised of a one to four unit residential structure. For example, a four-plex meets this requirement, but a five-plex does not, even if the borrower occupied one of the units as the borrower’s primary dwelling or used it as a second home.3

Second: The purpose of the loan must be pri-

marily for personal, family, or household purposes. Therefore, if the loan is a purchase transaction, then the borrower’s intent must be to either occupy the property as the primary dwelling, or as a vacation or second home. If you are dealing with a cash-out refinance, then the property itself must be the primary dwelling, vacation or second home of the borrower. Furthermore, the intended use of the funds must be primarily for personal, family, or household purposes. For example, if a borrower came to you requesting a cash out refinance to be secured by the borrower’s primary dwelling, and the stated purpose for the transaction was to inject working capital into the borrower’s business, then the loan should be characterized as one primarily for business purposes, and would not be subject to RESPA and TILA.4 You would be wise to document in detail the intended loan purpose in your loan documentation, including an affidavit of the borrower representing the exact purpose of the loan funds.

Third:

Who is the borrower? If you are lending to a natural person, then it could be a subject transaction. However, if the borrower is an entity (i.e. a business, trust, LLC, or corporation) then it would be exempt from coverage under TILA and RESPA, without regard to the nature of the collateral or the intended use of the funds.5 It would become an exempt transaction, regardless of property type or use of funds.

Fourth: Does the creditor regularly extend consumer credit? This is a defined term. A lender will be deemed to regularly extend consumer credit if it does more than five transactions secured by a dwelling in a calendar year (assuming the other three criteria are met) and there is a look back provision. If the lender met the minimum number for the prior calendar year, then it applies to the current year. If it did not, then the current year is the measurement. Examples include: (a) lender does four transactions in 2013 and six in 2014 - the lender will be subject to TILA and RESPA for the transactions done only in 2014; (b) lender does six transactions in 2013 and four in 2014 - the lender will be subject to TILA and RESPA in both 2013 and 2014. The minimum transaction conditions change substantially if a loan or loans are done, which are characterized as high cost mortgages. First, the focus is not on the calendar year, but any 12-month period of time, and this is a rolling concept. Second, a lender is deemed to regularly extend consumer credit if the lender does at least two transactions in a 12-month period of time, which are high cost mortgages, or does even just one transaction in a 12-month period of time if a mortgage broker is involved. Examples include: (A) lender, in the period of June 1, 2013, through March 1, 2014, does three non-high cost mortgage loans secured by a dwelling, and then in April, 2014 does one high cost mortgage loan through a mortgage broker. The lender will be deemed to have regularly extended consumer credit for all four transactions. This is the “gotcha” provision. The lender may have done those first three transactions without any thought that it had to comply with TILA or RESPA, and then does that fourth high cost mortgage loan, then potentially things get messy. The 12-month period of time also works forward, so any loans done by the lender within 12 months of the date the high cost mortgage loan is done will be subject to TILA and RESPA.

. The purchase of a rental property is treated somewhat uniquely by the regulatory authorities. While the purchase of a rental property could be argued to be for personal, family or household purposes, the regulatory authorities treat such a purchase as being primarily for business purposes and thus not subject to TILA or RESPA.

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. However, a revocable living trust as the borrower and grantor under a trust deed has been determined by a number of federal courts to be subject to TILA and RESPA.

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. While it is technically possible for a high cost mortgage loan to not be a higher priced mortgage loan, for all practical purposes one should conclude that all high cost mortgage loans are also higher priced mortgage loans.

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Here is a recap of the basics: If any of the four basic criteria above are not met, the transaction should not be subject to TILA or RESPA, and any changes effected by Dodd Frank would be irrelevant. However, if the property being given as collateral is one to four unit residential in nature, the purpose of the loan is primarily for personal, family or household use, the borrower is a natural person, and the requisite minimum number of transactions occur then watch out! Within the context of what is a subject transaction, there are effectively three different loan categories:

A. High Cost Mortgage Loans (previously covered

by HOEPA): These are loans which meet one of the three criteria (above a certain specified annual percentage rate, or above a specified amount of fees and costs, or with prepayment penalty terms beyond what is permitted), and must be secured by the borrower’s primary dwelling (vacation or second homes do not count). Provisions below applicable to these high cost mortgages will be referred to by the initials “HCM.”

B. Higher Priced Mortgage Loans: These are loans

which meet the criteria of having a percentage rate higher than a certain designated rate (but this is substantially below what is required to be a high cost mortgage loan) and must be secured by the borrower’s primary dwelling. Provisions below applicable to these higher priced mortgage loans will be referred to by the initials “HPM”.6

C. Residential Dwelling Loans: These are neither loans that are not higher priced mortgage loans or high cost mortgage loans, but are still subject to certain changes to TILA and RESPA affected by Dodd Frank. These loans do not have to be secured by the primary dwelling of the borrower, but do need to be secured by a dwelling (i.e., one to four unit residential properties). Provisions below applicable to these Residential Dwelling Loans will be referred to by the initials “RD”.

The following are some of the current or new provisions, which I believe are most relevant to private moneylenders (unless otherwise specified, the change is effective January 10, 2014):

1.

Ability to Repay – You must document and verify (through third parties), the borrower’s ability to repay. It currently would be a violation of existing law to make a High Cost Mortgage loan (HCM), a Higher Priced Mortgage Loan (HPML) or Residential Dwelling Loan (RD) if the loan was funded based solely upon the equity in the collateral (so called “equity loans”), without engaging in a reasonable, good faith determination of the borrower’s ability to repay the loan. The regulations coming into play on January 10, 2014, are, however, far stricter than what currently exists. Applies to: HCM, HPML and RD.

2.

Balloon Loan Restrictions - In the case of an HCM, balloons are effectively prohibited (subject to the exception identified below): they must be fully amortized! You may recall the old HOEPA loans could be done with a balloon payment as long as the initial term was at least five years. That is gone and in my opinion, this is one of the most challenging changes to the involvement of private money lenders in the residential, consumer purpose field. While balloon loans on HPML’S are permitted, it will be necessary in each case for the lender to reconstruct and fully amortize the loan, including the balloon payment, over the loan term in order to determine the borrower’s ability to repay. This will have a practical effect of precluding short term HPML’s. Applies to: HCM, HPML. EXCEPTION: By definition, an HCM does not include a loan to finance initial construction, and even if an HCM, a balloon payment is permitted if the loan is a temporary or bridge loan with term of 12 months or less and is for the acquisition or construction of the borrower’s principal dwelling. Such a loan is also exempt from the ability to repay requirements.

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3. Prepayment Penalties Abolished – While pre-

payment penalties may be assessed on Residential Dwelling Loans, the terms are restrictive, and are banned for high cost mortgage loans and higher priced mortgage loans. Interestingly, one of the criteria determining whether a loan is a high cost mortgage loan is if the loan terms include a prepayment penalty, which is more than or longer than the permitted terms. If this is the case, the loan is treated as a high cost mortgage loan, which bans prepayment penalties! Applies to HCM and HPM.

4. Restriction on Late Fees Provisions – Maximum of 4% of the missed payment, which must be more than 15 days past due. Applies to HCM.

5.

Pre-loan Counseling – Regardless of how many properties your borrower has purchased or refi-

nanced in the past, they will be required to obtain pre-loan counseling and receive a certification from a counselor that is approved by the Secretary of HUD. Applies to HCM.

6.

Restrictions on Financing of Closing Costs – Borrowers for the most part will not be allowed to finance their closing costs into the transaction. Those will have to be paid for in cash, which will undoubtedly significantly and adversely affect a borrower’s ability to close a private money loan. Those points and fees you used to roll into the principal of the loan are no longer permitted. Applies to HCM.

7.

Appraisals Required – Subject to certain limitations, an appraisal is required, and the appraisal must be a physical appraisal of the property, both of the inside and the outside. In the event there is evidence of flipping, there is a requirement for a second independent appraisal. Applies to HPM and likely HCM.

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8.

Escrow Account Required (went into effect as of June 1, 2013) – Opening of an escrow account is required for reserves for property taxes and insurance. This is limited to first liens. Applies to HPM and likely HCM.

One Other Significant Change from the Past: High cost mortgage loan conditions now apply to purchase transactions as well as refinance transactions. Under prior HOEPA law, these conditions were limited to refinance transactions. However, for both high cost mortgage loans and higher priced mortgage loans, there are some exceptions, which generally fall within the concepts of initial construction loans for the primary dwelling of the borrower, and less than 12 month term bridge loans. The definitions vary for each of the different categories of loans. It almost seems like the CFPB is hurting the very consumers they thought they were protecting, does it not? After writing, then re-reading this, we can see why most private lenders are getting out of doing a subject transaction, but should you? Here is what we are seeing. Never before since the Great Depression, have there been so many just slightly damaged, “A” paper borrowers. There are currently no manual override provisions with the Fannie/Freddie underwriting system to make justified exceptions for these people, and there is tremendous pent up demand. Even if you require, as we do, 40% cash down plus closing costs, we still have plenty of scenarios to review! With the Qualified Mortgage definition including, among other requirements, a maximum debt to income ratio of 43%, and with Fannie/Freddie making it clear already that they will not purchase/guarantee loans that do not meet the Qualified Mortgage defi-

nition, the market will likely become even tighter in 2014. This will create many opportunities for private moneylenders, if they are only willing to work their way through the maze of the new regulations, ensure they are in compliance and provide borrowers with a product that will still enable them to purchase the “American Dream.” So here is the crux of the situation. In regards to the ability to repay, that is already the law! You have to be doing that, documenting/verifying and keeping records of your findings. The real issue for most lenders then becomes the “No Balloon Payments” provision. That being said, in my way of thinking, if you have a highly qualified buyer who just put 40% plus closing costs into a purchase, they are going to be looking for a conventional refinance as soon as possible. That could be anywhere from 1-3 years depending on their personal situation. (If they could qualify in less than 1 year, then I feel they should be advised to wait). It is highly unlikely that they will keep their private mortgage when a lower rate option is available, even if the Fannie/Freddie rates get to 7%. Part of your pre-qualification process should be to help determine their refinance or “exit strategy” intentions. However, if you have a borrower who is unlikely to qualify for conventional financing within 3 years, then I would pass on that scenario. Totally a judgment call, but the more residential mortgages you turn down, the more opportunities we get to make excellent well secured loans to highly qualified borrowers! Bob Cox, MLO# 254993 Senior Mortgage Banker/Private Lending Specialist Pacific Residential Mortgage – Medford Branch 502 W. Main Street, Suite 103 Medford, OR 97501 (541) 773-3131 x: 222 (541) 773-4981 Fax

bob.cox@pacresmortgage.com “Bob Cox has specialized in Private Money Lending for over 21 years. He is a recognized expert in Private Lending Law and the Dodd Frank Financial Reform Act, lecturing and teaching through-out the State of Oregon. In his time in the business he has facilitated over 800 private transactions and placed nearly 80 million dollars in private loans.”

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I n dus tr y : U.S. economic outlook - Christopher Thornberg, PhD ‘We have met the enemy and he is us’ –Pogo. On one level, it may be comforting that a half-century-old cartoon character’s remark can so accurately describe the current path of the U.S. economy. But on another level it is frustrating to realize that massive advances in our understanding of the inner workings of the economy remain so far removed from the political debates in Washington DC. The U.S. economy is trying to get out of its own way, but our elected leaders seem to have other plans. The fiscal cliff negotiations during the last weeks of 2012 led to sharp cuts in Federal spending and a big jump in taxes—completely unnecessary shocks to the nation’s fragile recovery. Yes—the deficit has to be closed, but closing it should be done over a number of years with the tax increases and spending cuts done logically and announced far ahead of time. Yet the economy managed to bounce back for 2 plus percent GDP growth in the second and third quarter of 2013. This mini-recovery came under threat again because of the recent Federal government shut down and the potential hit from running into the debt ceiling. They did come up with another last minute compromise—but only until next February. In the

meantime businesses are wondering if they should bother investing under this ongoing cloud of budget uncertainty. The economy can grow, but only if our elected leaders start doing the things they should— and stop doing the things they should not. Consumer spending has bounced back since the fiscal cliff ’s $200 billion personal tax increase at the start of the year—with auto sales close to their longterm normal 16 million-unit annual sales in the third quarter of 2013. Retail sales have also been moving forward, with faster growth in recent months than earlier in the year. While some have worried about slower growth—any growth at all is positive given the tax hikes. The improving recovery in the labor markets is partially responsible for the bounce in consumer spending. The nation has added more than 2 million jobs in the past year—with private sector employment up 2% from August 2012 to August 2013. The unemployment rate for those with a bachelor’s degree or higher is below 4%, leading incomes to rise at a faster pace. Unemployment for the lowest skilled workers has also fallen sharply. The number of long term unemployed is still too high, but finally started to fall two years ago.

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Financially the nation is doing better. The banking sector has almost returned to normal from a distress perspective and businesses are making record profits. Corporate profits are now 25% higher than their pre-recession peak. It is little wonder that the stock market has bounced back so nicely. Outside of residual issues from the housing collapse, consumer debt is seeing record low delinquency levels. The housing market continues to recover despite the modest hike in interest rates over the past 6 months that slowed growth a bit—but only to a more sustainable level. By Beacon Economics’ calculations, for the first time in 7 years, there was an increase in the number of owner occupied housing units in the United States between 2012 and 2013. Furthermore, the Federal Reserve seems to be managing the money supply fine. They need to deal with unwinding quantitative easing, but there is little chance of inflation since most of the cash injected into the system is sitting in banks in the form of excess reserves. And with bank lending activity still weak, that money will stay there for a while. They have plenty of time to unwind these programs and it looks like they will use it. Because most of the declines in rates occurred prior to the recession, Beacon Economics does not expect rates to shoot back up when these programs end. With plenty of liquidity in the world markets and weak demand for capital, expect low interest rates for some time. Europe, China, and Japan are all showing modestly positive signs, which bodes well for U.S. exports in 2014 given that the dollar is still 25% cheaper than it was a decade ago. This makes U.S. products extremely competitive in world markets. Overall, there are plenty of reasons to look for better times ahead. Still, despite all of the good news, consumers are still wary of borrowing and their confidence is waning. Business investment remains low despite growing profits and housing construction is still close to rock bottom. Why? Those 435 people we collectively refer to as the U.S. Congress.

Public spending in the nation continues to contract. Combined, direct spending at the federal, state, and local level is 5% lower today than when President Obama took office. Fans of small government may hear this as good news, but the time to pursue such policies is not during economic recessions and weak recoveries, but during periods of expansion when the economy can handle the negative impact of the contraction. The deficit has become Washington’s defining policy issue and it has led to two major policy crises. The fiscal cliff was averted but still resulted in a $200 billion tax increase and automatic spending cuts— leading growth to weaken dramatically. Unfortunately this happened at a time when the deficit had been closing on its own as stimulus-spending plans expired and revenues were rising with the growing economy. World lending markets were still willing to lend to the U.S. on a long-term basis at very low rates. Net national debt levels are still below 80% of GDP. There was no need for a painful solution to a problem that did not exist. Still, the economy has pulled through with 2.5% growth in the second quarter of 2013 and likely 2% or more growth in the third quarter. The recent government shut down and continued looming debt ceiling issue make the fourth quarter uncertain. The issue this time is Obamacare, which some in DC feel is such a threat to the future of the U.S. economy that they are willing to push the economy back into a recession to try to delay or kill it. This is a lightning rod issue, and the program has its flaws, but it is a logical first step (one of many) towards fixing massive problems in the system. It is certainly not worth playing fiscal chicken over, particularly when the economy is on shaky legs. A deal was ultimately reached before the standoff led to broad economic consequences, but not before the nation suffered real reputational damage in the eyes of the world and investors. Moreover, the uneasy specter of the next ideologically driven confrontation continues to loom.

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      


The problem is not only on one side of the aisle. While direct spending is trending down, indirect spending is up and likely to continue growing as boomers head into retirement. The major public social insurance programs are fine for now, but we will be heading in to crisis territory in 10 to 25 years if nothing is done to curb that spending. This is where the true crisis is and many leaders are not even broaching the issue. Ultimately, any long-term deal that is struck should take pressure off the budget in the short run and restrict spending in the long run. Instead our leaders are pursuing ideological agendas that threaten the fragile, but real gains being made. It is almost enough to make you want to quit economics and draw cartoons for a living. Christopher Thornberg PhD is an economist and founding partner of Beacon Economics LLC. Learn more at www.BeaconEcon.com.

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hris Hively, owner of a packaging company near Los Angeles, has grown tired of gambling with his life savings in the stock market.

I doing this with my IRA? I need to find something that is not influenced by emotion and factors that I cannot control.”

“We are kind of playing along in a game that we have no control or understanding of,” Hively said. “There is so much information out there that if you are not plugged in to the market day in and day out, you are rolling the dice.”

Hively was contemplating better ways to grow his retirement savings when one day he heard an ad on a local radio station that caught his attention. A man in the Phoenix market bought foreclosed properties in bulk, rehabbed them and sold discounted notes for the properties to investors like Hively while making a $5,000-10,000 premium on them.

After risking his savings for years, he had to ask himself a sobering question. “I said to myself, this is ridiculous,” he recalls. “Why am I putting my money into something I have zero control over? I do not do that with my business, I would not do that with my personal stuff; why am

Leery at first, Hively did his research on the investor and decided to give it a try. He bought a note with a face value of $98,000 at the discounted price of $66,000. The property’s tenant agreed to pay Hively at a 9% interest-only rate over three years, with a balloon payment at the end of the term.

21


On the note alone, he stands to make a 48-percent profit over three years (an annualized return-on-investment of nearly 17 percent). In addition to the value of the note, he receives $735 per month in interest payments.

Best-kept secret with big potential Hively bought his note with a funding source that most investors likely have not even considered as an option – his IRA. Recent estimates place more than $5 trillion within IRAs, 401(k)s and other qualified programs across the country, which, if used in the right type of plan, could be tapped into for funding a myriad of investment types. Lending and borrowing from a retirement account is only possible through what is known as a self-directed account. Established through a qualified custodian such as Equity Trust Company, self-directed IRAs, 401(k)s and other types of accounts open the investor up to a range of investment options not possible with a traditional IRA.

• Tax lien certificates • Foreign currencies • Oil and gas investments • Publicly traded stocks, bonds, mutual funds (see our brokerage information) • Private stock offerings, private placements • Judgments/structured settlements • Gold bullion • Car paper In addition to the flexibility of the self-directed IRA, investors also benefit from the fact that the profits from their transactions grow tax-free or tax-deferred. Like any IRS-administered account, self-directed accounts are accompanied by rules that must be followed in order to avoid unnecessary taxes or penalties. Any profits that are made from the IRA investment must go back into the account. Also, self-directed investors are prohibited from doing deals with direct-line family members, such as parents, grandparents, children or grandchildren. The complete details on self-directed IRA rules can be found in IRS Publication 590.

Investments permitted with self-directed IRAs include, but are not limited to: • Residential real estate—including apartments, single family homes and duplexes • Commercial real estate • Undeveloped or raw land • Private limited partnerships, limited liability com panies, and C corporations

Opportunities for lenders and borrowers Lending and borrowing with IRA money is nothing new. Equity Trust founder Dick Desich, one of the pioneers of the industry, realized nearly 40 years ago that retirement funds could be used to invest in assets other than stocks and bonds.

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In 1983, Desich bought a drug store just west of Cleveland, Ohio, making it one of the first non-traditional assets bought using IRA money. In his decades-long career, Desich has raised more than $100 million in IRA funds for various investments. Today his company services more than $12 billion in retirement account assets for approximately 130,000 clients nationwide. Steve Underation is another self-directed IRA borrowing success story. An investor in the Akron, Ohio, area, Underation commonly borrows from other investors’ IRAs to raise capital for his real estate investments. He also uses his own IRA funds to purchase, rehab and sell real estate. Using your IRA money as a private bank can be just as lucrative – and safe – as lending and borrowing outside of an IRA, as long as you follow common-sense guidelines to protect your assets, Underation says. Due diligence is always a good idea before entering into any deal, but some other precautions Underation follows includes:

what went wrong,” Hively said. “It is logical, there is accountability and it makes sense.” Hively acknowledges that the terms of his deal might be more favorable than some investors will experience, but insists there are still ways to replicate his deal and achieve a favorable rate of return. “I do not know if you will find the kind of face value discount I got because the market has kind of come back a bit, but they are out there still,” Hively added. Even more satisfying than the discount he received on the note is the feeling that he is helping not one, but two families’ financial futures. “The best thing about this,” Hively states, “Is that I am helping someone own a home, and profiting at the same time.” Equity Trust is a passive custodian and does not give investment advice. For more details, visit www. TrustETC.com or call 888-382-4727.

• Check out your potential business partner. Ask an unbiased third party about his or her track record. • Keep the loan to less than the asset value. • Close real estate deals through title agencies. • Have a mentor or expert review the transaction. Underation meets other IRA investors – and prospective lenders – by networking at industry events, such as his local Real Estate Investors Association meetings and self-directed IRA education events.

Logical investment choice Another benefit to private lending within an IRA, according to Hively, is that it feels safer than other forms of investing. “With a self-directed IRA, I can take an active controlling interest in all my investments, and if I make a bad decision it is on me, but at least I can point to

23


3 ingredients to launch a fund - Matt Burk

I

n dealing with originators and dealmakers all around the United States, I frequently get asked some version of the following question:

“Do you think I have what is necessary to start a fund?� We meet a lot of people who have considered starting their own 506 Reg D mortgage pool fund, discounted note fund, real property fund, or other such small balance real estate asset based fund, but are not sure if they have the necessary background, track record, skill set, know-how and overall combination of factors to successfully launch one. In response to this seemingly ubiquitous query, I have formulated some thoughts that have crystal-

lized over time into what I think is the most accurate answer I can give to the question. To my mind there are three core ingredients that must be present in order to have a legitimate shot at getting a fund off the ground and enabling it to successfully grow. - A quality and reliable origination platform and capacity - The ability to successfully underwrite deals that will perform over time - Some level of experience in raising capital (even if in a one-off or syndication format) and a game plan (even if a little vague) for doing so once the fund is launched. If any of these components are missing, the success of the endeavor is very likely to be compromised, so

24


it is important to fully understand each part. Let us take a closer look at these elements in sequence. First, and it may sound obvious, but you must have reliable and quality deal flow. There are many different strategies and platforms in terms of how people can source their assets. Some are more sustainable than others. Some are more cost effective than others. Some are more susceptible to fraudulent deals than others. We have seen dozens of ways in which people expect to be able to consistently derive their deal flow. We have even tried many ourselves at various points in time over the past 21 years. Not everything works and everything has its pluses and minuses. Presumably if you are considering a fund in the first place you have been around awhile and have developed some level of capacity and track record of doing deals. But if you are going to actually start and operate a fund, you better have access to enough quality deal flow to be able to deploy investor capital (assuming you can raise it). What can happen if you have good capital access and not enough deal flow is that managers tend to start settling and compromising investment quality, which brings us to our second ingredient. I have written about this extensively in other blogs and believe it to be the single most important component to long-term success as a fund manager. You simply have to know how to pick deals that will perform over time as markets cycle up and down. More importantly, you have to have the discipline to not allow your desire for growth and money cause you to compromise your decision-making. When markets get hot it is very easy and common for people to loosen their standards in order to gain market share. Simply put, lack of discipline or competence in underwriting deals is the surest way for a fund to eventually implode and leave a trail of destruction in your wake. No one wants that to happen, yet it does repeatedly.

Developing deep underwriting competence and exercising serious underwriting discipline can be very challenging, and is the rarest quality to find in a manager. This is true because it requires short-term sacrifice for long-term gain. This of course is something that many people struggle with in all aspects of life, not just in managing a fund. As Brian Tracy puts it, the most successful people make current decisions with the longest time horizon in mind. Cultivate these habits and over time you will be among the best managers in the industry. Finally, you must have at least some idea about how and where you will raise your capital. Virtually no new fund manager knows where ALL of their capital will come from (we certainly did not) but at least has a solid idea where SOME of the initial capital is likely to be sourced. If some of the first dollars are your own, that will only improve your situation. Investors like to see that you have some of your own capital invested, even if it is a modest amount. If you have been raising money to do deals one at a time or on a syndication basis, often these investors will not want to convert to a model where they are completely abdicating control of the asset level decisions to you. Some may but many will not. This has been my consistent experience over our own funds, as well as what I have seen with clients. So where do you think your investors will come from and how do you expect to raise the money? This is often the single biggest fear of the would-be fund manager and the most likely of my three factors to be lacking (on average.) However if you have raised money successfully syndicating, you can be successful raising capital in a fund format. There is much more to this process including proper fund structure, alignment, having a strategic capital plan, etc. The key is to recognize and appreciate the importance of this aspect of the business and to have a solid starting point that you can rely upon to get you off the ground. The first dollars are the hardest to come by, so make sure you have a strategy and a

26


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plan going in. This analysis is a little bit of an oversimplification as there are other important aspects to successfully running a fund. For example, you must be able to manage your assets effectively and well. You will want to make sure you have accurate and timely administration capability. But these functions can either be outsourced and/or developed internally. The above three capacities to me get to the heart of the matter and describe what I believe are the most important ingredients required for a successful recipe. It does not mean the dish will turn out perfectly every time, but not putting one or more of these critical ingredients into the mix will very likely cause the formula to flop. Matt Burk is CEO of Fairway America, a boutique real estate finance advisory and investment firm providing strategic business planning services nationwide to select private money lenders around the structure, architecture, and administration of proprietary mortgage pool funds. He is the founder of Fairway America who has funded more than $200,000,000 in private money trust deed investments with both individual trust deed investors and in six proprietary mortgage pool funds. He is also the Chief Investment Officer and Manager of Fairway America Fund VI, LLC, a nationwide real estate based mortgage pool fund.

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This publication is created to provide information to the private lending industry. The American Association of Private Lenders is not engaged in rendering legal, financial, accounting, tax or other professional service. The views expressed herein may not be those of AAPL. No part of this publication may be duplicated in any way without the explicit written authorization of AAPL. COPYRIGHT Š 2012 American Association of Private Lenders.

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L e g al : Navigating the private lending laws - Kim Lisa Taylor QUESTION: What laws apply if you are raising funds from private lenders to: a) fund your real estate investing or private lending business, or b) if you are loaning their funds to others?

A. When Securities Laws Apply If you are borrowing or pooling funds from private investors who are not in the business of lending money (such as hard money lenders), you are either issuing promissory notes (“Notes”) or “investment contracts”i. In either case, you are probably selling securities, which means you will need to comply with federal and/or state securities laws. Securities laws are designed to protect investors from fraudulent claims made by promoters and require that an investor be given all of the material information they need to make informed consent, prior to making their investment decision. Thus, government regulations require that the offer or sale of securities (also known as a “securities offering”) must be registered with a regulatory agency (as in a public offering) and sold by licensed securities broker/dealers, unless the “issuer” of the securities qualifies for an exemption from registration. There are many exemp-

tions (both state and federal), but the most commonly used are some form of “private offering” or “private placement” exemption that allows an issuer to borrow or pool money from multiple investors. To use a state exemption, all participants (issuer and investors) and the assets must be in one state, or you must qualify for a separate exemption in each state where you will issue securities to investors. Regulation D, Rule 506 is the most commonly used federal securities exemption because it pre-empts state securities laws (also known as “Blue Sky” laws), allowing issuers to raise money from investors in any state without regard for determining additional state securities requirements, although filing a notice with the SEC and in the states where your investors claim their primary residence is generally still required. As of September 23, 2013, as a result of the JOBS Act, Rule 506 now has 2 subpart exemptions, one that allows advertising and the original rule that does not, and one new provision: • Rule 506(b) allows an issuer to raise an unlimited amount of money from an unlimited number of accredited investors, and up to 35 sophisticated investorsii. Investors may self-certify their qualifications. However, if you include sophisticated investors,

29


you must provide a disclosure document (private placement memorandum) and you are prohibited from engaging in any form of advertising or general solicitation. • Rule 506(c) allows an Issuer to raise an unlimited amount of money from an unlimited number of accredited investors and you can advertise the offering, but you must take reasonable steps to assure that all of your investors are accredited (and no sophisticated investors are allowed). There are additional rules pending that might require additional filings, disclosures, and submission of ads to the SEC prior to use. • Rule 506(d), also enacted on September 23, 2013 under the JOBS Act, prohibits certain “Bad Actors” who have been the subject of certain regulatory or financial disciplinary actions (“Disqualifying Events”) from participating in any Rule 506 Offering as a manager, director, officer or employee, or as an owner of ≥20% of the voting interests (“Covered Persons”).

B.

When Other Laws Apply

On the flip side of the private lending business, if you are loaning money to others, your lending activities will likely be regulated under a myriad of state and federal laws including: • Licensing laws • Real estate or mortgage laws • Usury/loan sharking laws • Foreclosure laws Determining what state’s laws apply to your private lending business may be a challenge; is it the state where your borrower maintains their primary residence or legal entity, where the property is located, or both? You will need to consult a real estate lawyer in your state to navigate this minefield. This article focuses on the securities laws related to borrowing or pooling private funds and leaves the discussion of the legal aspects of lending the money to others.

B. How Will You Raise Money From Private Investors?

1. Borrowing Money; Issuing Promissory Notes Notes are included in the definition of “securities” under federal securities laws and most state securities laws. Certain notes with maturity dates of less than 9 months are exempt from regulation under federal securities lawsiii, but the states are allowed to impose their own regulations on the issuance of notes to private investors. In Reves v. Ernst & Young, 110 S. Ct. 945 (1990), the US Supreme Court determined that notes sold to raise capital, where purchasers buy them to earn a profit (in the form of interest or shared profits), will be conceived as investments in a business enterprise, and thus, will be deemed securities. Many states already have existing regulations and a strict enforcement policy for those who offer, sell, or advertise promissory notes to private investors. There is no consistency among state Blue Sky Laws, so the only way to know if you are on solid ground is to examine the Blue Sky Laws in each state where you will make offers to private investors, before you offer notes to them. Alternatively, you could follow the rules for a Regulation D, Rule 506 Securities exemption, and pre-empt the state law requirements. 2. Pooling Money From Private Investors Another method of raising money from private investors for a private lending business is to pool passive investor funds in a single entity, such as a manager-managed limited liability company (LLC). The manager issues LLC interests to passive, private investors, who “capitalize” the company. The LLC will either invest the company funds directly into real property, notes secured by real property, or it may act as a private lender or hard money lender to originate its own loans to other real estate investors/ entrepreneurs according to the company objectives described in the LLC’s business plan, and under control of the manager.

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Profits the LLC earns from all of its investments are usually split between the manager and his/her investors in some pre-defined way. So instead of borrowing money and issuing individual or fractionalized promissory notes as in the previous example, the LLC will have an operating agreement describing the rights and duties of the members and the manager, including what fees, if any, the manager will earn, how profits and losses will be allocated, and how/ when the investors will get their initial capital contribution back. Other items included are how and when the fund will liquidate, whether investors can seek a return of their funds before dissolution of the LLC and how disputes will be handled. Regardless of the entity used (could be a limited partnership, corporation, trust, etc.), the above description is a classic example of a securities offering and will require that the issuer of the securities (i.e., the manager) comply with federal and/or state securities laws. As in the previous note example, if the manager, all investors, and the assets the LLC will acquire are within a single state, a state securities exemption can be used. Thus, the only way to truly protect yourself if you are crossing state lines is to conduct your offering in compliance with Rule 506 of the federal securities laws so you do not get stuck trying to figure out each state’s compliance requirements. However, even that may not be enough if you start raising money in a big way, engaging in successive funds, or if your company has more than 100 investors. In those events, you will need qualified securities counsel to help you determine: a) whether you may need to obtain a securities license to sell the securities, or b) if your company will be classified as an investment company under the Investment Company Act of 1940.

C. Taking Your Business To The Next Level Regardless of whether you are borrowing money from one investor at a time, issuing single investor notes, issuing a series of notes of equal or successive

priority, or fractionalizing notes, if you are repeatedly borrowing money from private investors from multiple states, you are in the borrowing business and under federal law your notes will be considered securities. It is imperative that you comply with federal securities laws, unless there is a specific state exemption that will allow you to do this where all of your activities are contained in one state. If you are pooling passive investors’ funds in an entity such as an LLC, you are also selling securities, and you must comply with securities laws or risk prosecution. You will need to select an appropriate state or federal securities exemption for your private offering (with the assistance of qualified securities counsel), and strictly adhere to its rules. If your investors or the assets you plan to invest in may be from multiple states, then you should consider doing a Rule 506 securities offering. Kim Lisa Taylor is a California and Florida licensed Attorney and partner in the Private Money and Real Estate Securities Law Firm of Trowbridge & Taylor LLP. She and her law partner Gene Trowbridge, have written more than 135 Private Placement Offerings (most under Rule 506) for private equity and real estate funds, allowing entrepreneurs to raise over $350 Million Dollars. Kim is a nationally recognized speaker and author. She routinely counsels clients who are raising money from private investors on compliance with Securities laws, structuring and forming their investment companies, and her law firm drafts their securities offering documents. If you have a question, you can call Kim at (904) 584-4055 or email her at Kim@SyndicationLawyers.com. Our law firm has multiple articles on Private Money and Real Estate Securities Laws available for free at our website at www.SyndicationLawyers.com.

. SEC v. Howey Co., 328 U.S. 293, 328 (1946), which defined an investment contract as “an investment of money in a common enterprise, with profits to come solely from the efforts of others.”

i

. A Sophisticated Investor is one who, alone or with the help of a purchaser representative, or by reason of their educational, business, or financial experience, can be reasonably assumed to have the capacity to understand the fundamental aspects and merits of an investment in the Company. ii

iii

. See The Securities Act of 1933, section 2(1), 3(a)(3); see also Securities Exchange Act of 1934 § 3(a)(10)


B us i n e s s : The APP as a business tool

Loan Servicing Software and App Development

- A.J. Poulin

I

n the last three years, mobile advertising spending has almost doubled, and mobile app development is growing right along with it. In this case study, Applied Business Software, Inc., the developers of The Mortgage Office™, shares their experience and discusses the idea behind their free iPad app – and what they have dubbed as game-changing technology.

Why did Applied Business Software, Inc. develop an iPad app? In any successful business you need to listen to your customers. That has been a long-standing business practice, and is the cornerstone of our success. If you really want to impress your customers, try to anticipate what they want before they even ask. This is especially true for technology companies. To be the market leader, you need to be ahead of the curve, which is what we do here at Applied Business Software, Inc. Our iPad app is an example of how we help to build innovation within the private lending industry for the benefit of our customers.

Was it difficult to develop the iPad app?

Any time a team of programmers has to learn a completely new programming language, with its own tricks, nuances, and table set, it is inevitable that challenges will arise. It was an arduous process of getting approved with Apple, but our experience in learning new technologies allowed us to quickly learn the ins and outs of the new platform. Our programmers are extremely detailed and fast, but even then it took months of programming and testing to achieve the desired functionality and ease of use.

So what does the iPad app do? This is an intuitive and clever product that works seamlessly with our loan servicing software. It allows an investor to use their iPad to see anything related to their portfolio including payments, loans, delinquencies, returns, investment offerings and much more. The app has been a huge hit with investors.

Your customers are private lenders, and they manage loans and investors with your software The Mortgage Office™. How do your customers actually use this app? Actually, this app is not really designed for OUR

34


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customers; it is designed for THEIR customers. This app is transparent and behind the scenes. As long as a customer is using the Web publishing feature, the information within the app is updated automatically. The users themselves do not have to do anything to have it run behind the scenes. Investors simply download the app from the iTunes store and run it from their iPad whenever they wish. Investors travel frequently, and instead of taking a bulky laptop on a trip, many are opting to simply take their iPad.

How do YOUR customers benefit? In private lending, if you do not have any investors, then you cannot fund any loans. If you do have investors, then it is essential that you keep them happy so that they will continue to provide you with a stream of funds to invest. That is really the best part – it satisfies the investors’ inherent quest for information and control of their investments. Say an investor is on a flight to Europe, and wants

to see if a loan paid off, if a borrower paid on time, or wants to see the latest investment offerings - they can do all of this right on their iPad. The simplicity and the smoothness of the application is incredible, making it super easy for any investor to use.

So how do your customers attract more investors with this app? The answer to this is easy – transparency. There is a saying in the lending industry – investors like to count their money. That has been true since the beginning of time. But keep in mind that three massive tidal waves hit the industry in the past few years: The real estate meltdown, the economic downturn, and the Bernie Madoff scandal. Since then, investors have wanted better access to information, and they want this information to be up-to-the-minute and instantly accessible. Our app puts everything they need at their fingertips.


These days if an investor cannot get access to information, they are probably not going to invest.

Has something like this happened to some of your customers? Things like this happen all the time to our customers. Just think about it – who would you rather invest with, the company that manages millions in investments with spreadsheets or the company that will give you access to an exclusive iPad app for online access 24 hours a day, seven days a week? It is just a no-brainer for investors today.

How can you justify putting so much effort into developing this app, and not charge for it? Our average customers’ portfolio and investor base grew substantially since rolling this out. They benefited tremendously, and we love that. Moreover, we strive to provide our customers with benefits that allow them to be more competitive in the marketplace because let’s face it, the better they do, the better we do. For us, as cutting edge as this app is, at the end of the day it is one in a long line of enhancements that we have developed over the past 36 years. Advances like this have enabled us to become the most powerful loan servicing system on the market. That is the reputation we have earned, and it is well deserved. Substantial market share, or market dominance, leads to sales growth. That is our mantra. Our objective is to have the best product so companies will continue to buy it. That is how we justify putting so much effort into developing this app, and why we do not charge for it.

In the world of technology, if you are standing still, you will get run over. The pace of change with software is exceptionally fast. We have always worked to stay ahead of change and try to anticipate change before it happens. We have had this mentality since the day the company was founded 36 years ago. For example, our customers were electronically depositing funds into investor bank accounts long before their employers or banks were even considering doing this. The biggest recipients of our innovation over the years have always been our customers. If they are happy, we are happy.

What is your advice to the readers of this article? Keep your customers happy. Provide a great product and great service; give customers what they need to make them successful and you will be in business for life. By; A.J. Poulin “The Mortgage Office” Contact: aj@absnetwork.com / 800-833-3343 x118

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How important is state-of-the-art technology? • Real Estate Loans • High Yield Mortgage Fund • Trust Deed Investments Locally owned since 2008 • PacificPrivateMoney.com 1604 Grant Avenue • Novato CA 94945 • 415.883.2150 Real Estate Broker CA DRE Lic 1897444 • CA Finance Lender 6054605


How much should you make as a Private Lender? An intro to rates and investing options

- Paul Yevzikov

Y

ou may have heard that private lenders make anywhere from 8% to 30% or more on their money. How much should YOU be making? The answer depends on the type of lending you want to do. This article will summarize the world of private money for 1-4 family residential private loans, and trends in rates and returns as of Q4 2013, which I recently researched and compiled while assembling some online courses. You will also find a table detailing how several variables typically affect your rates and returns on private loans.

Key Points as of Q4 2013: • Active/Professional lenders typically see rates of 12-16% and 3-5 points (making an annualized rate of 15% to 21% return) – although rates as high as 18% and 5-7 points (making a 25% annualized return) are certainly possible in some specialty scenarios. • Less sophisticated or 100% passive investors typically get 0-2 points and 8-12% (making an annualized rate of 10% to 14% return) • The actual return depends on lending style, type of loan and details of the transaction. • The effect on rates due to certain variables is

37


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Step 1: Active vs. Passive Lending?

- New construction – build to flip or hold This loan is made when a property is being built from the ground up – whether it is to live in, rent out, or flip to somebody else. Usually this involves many other variables and more risk than the typical renovation of an existing property, and that is reflected in higher rates. Typically new lenders may want to stay away from these due to the increased exposure from increased rehab cost, time horizon, and market variables.

The first question is whether you want to be an active or a passive private lender. The active lender is someone who is involved with the loan from day one of origination, including underwriting and screening all the parts of the deal, all the way through closing and collections. The passive investor on the other hand, is one who writes a check to the active investor (the operator) while the operator handles all the details of the deal. The active lender will typically get higher rates of return to reflect the work they perform in originating and servicing (managing the process of) the private loan. Overall, on average the active lenders will typically see rates of 12-16% and 3-5 points on the front end (making an annualized rate of 15% to 21%), while the passive investor will usually see 0-2 points and 8-12% (making an annualized rate of 10% to 14%). These are all interest only loans with a balloon payment due typically in 12 months, though ranges of 6-18 months are also common depending on the project.

Step 2: WHICH TYPE OF LOAN? The next factor is what type of loan is being made. In the 1-4 family world, here are the most common reasons borrowers need your money: - Rehab - flip or hold The traditional and most famous type, where the borrower needs cash to quickly purchase, renovate and re-sell an existing property. The other scenario is the borrower will hold the property for himself by refinancing after the project is

- Bridge loan to refinance This common loan type is when the borrower needs money to close on a property in good or rent-ready condition, but just needs to buy time temporarily to complete the refinance process. This is typically considered less risky than rehabs or new construction, and the rates generally reflect that by being lower. - Transactional aka “flash cash” Borrowers who just need funds to close on a property and hold it anywhere from 1-90 days to complete a flip to the other buyer, who is already lined up and sometimes fully funded. An example is a borrower has a property under contract for say $100,000, and already has another buyer lined up for $125,000 ready to buy. This is technically a bridge loan, but we will consider it different because of the very short duration and structure of these loans, which are usually just a fixed number of points, with extension penalties. Typically new lenders might want to stay away from these due to the increased loan to value ratios (often as high as 80-90%) and the complexity of underwriting two simultaneous or concurrent transactions. SO HOW MUCH SHOULD YOU CHARGE?

39


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For Rehab/Flip Loans – Let us take a look at the most common type of loan to fix up a property as a baseline indication of where the private lending market is generally at. Note that there is a big difference between the rates of returns for professional lenders, and those of 100% passive, unsophisticated or casual lenders. This does not suggest at all that 100% passive lenders are not sophisticated, but the end result is that both 100% passive lenders and less sophisticated ones end up getting similar rates of return. The main difference between a 100% passive lender and an unsophisticated private lender is that the 100% passive lender follows the same underwriting criteria and loan terms the professional lenders do, except they give their money to someone else to take care of the process for them. Their reduced profits compared to the active lender is because they need to split the pie with the operator doing all the work. The big difference with an unsophisticated private lender is that their reduced rate of return is usually due more from a lack of knowledge about true market rates.

TABLE: Current average market rates for typical private rehab loans: Here is a general summary of what the overall market rates are at the time of writing this article:

40


From the table above you might notice there are two glaring differences between professional and less sophisticated or passive parties – the annualized rates and the loan to value. The latter will often typically find themselves in situations funding up to 100% of the purchase and renovations. This is not necessarily bad or wrong, it just reflects the fact that these individuals are very often brought in as passive partners in lending scenarios where the borrower is a highly skilled professional investor that makes the lender comfortable, and is also looking for better terms than they can get with professional hard money, which almost always requires some skin in the game. The unspoken market rate to borrow money

from a 100% passive investor who is not highly sophisticated is around 8-12% with maybe up to 2 points, making an annualized rate of 10% 14%. This situation is often seen when rehabbers are borrowing money from friends or family, and often funding up to 100% of the purchase price. Funding 100% of the project and sometimes at high loan-to-value ratios is often due to either the lender’s complete trust in the borrower, or in other scenarios it could be due to simply not knowing how to maintain proper safety margins, or not having the means to verify or underwrite the actual loan to value ratio. The irony is that while a professional lender would increase rates and points for the increased lending risk that comes with higher loan to value ratios, and reduced borrower skin in the game, the typical unsophisticated private lender does not.


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National Real Estate Insurance Group / Affinity Group Management – is a nationwide Insurance Program specifically tailored to the unique needs of Property Investors. American Association of Private Lenders – Represents the private and peerto-peer lending industry by raising the standards of the industry through three pillars to success: “Excellence – Ethics – Education” LoanMLS – Gives you the power to connect with over 20,000 loan professionals and investors - all interested in buying, selling and investing in existing loans, pools or new loan originations.

PMLG

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Private Money Lending Guide – Online guide that helps private investors and borrowers get a better understanding of the requirements for private investing. It is also a resource to help you find quality private lenders and investment opportunities. RentFax – Is the bridge between data and decisions. With simple input, industry leading data and analytics, we provide unbiased feedback to guide your residential real estate investment options. Community Buying Group – Allows individual investors to leverage the buying power of a group through supplier incentives and discounts. It is also a means for members to increase business opportunities. RateTenants - Lets you rate tenants and perform unlimited searches on tenants as posted by Property Managers and Landlords. Coast to Coast REIA - Focused on providing opportunity, forging education, and connecting our members with multiple strategic partnerships in the Real Estate Industry to catapult their investing career.

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Step 3: EFFECT OF VARIOUS FACTORS ON RATES: How do the rates change depending on the deal? Using the above standard for the most common type of private loans, let us see how some variables might affect market rates. NOTE: The following is just a guideline for effects on rates caused by certain factors with all other things being equal in the loan. This is a chart of how a lender may deviate from their typical rates, whatever they may be. Also note these variables generally do not stack or add on top of each other in favor of the borrower, meaning if a private hard money lender’s typical rate is 14% and 3 points, and a borrower comes with excellent credit, an excellent property in excellent condition and great area, it does not mean (according to the chart) that their loan will only be 7% and 0 points. However they commonly DO stack AGAINST the borrower, meaning someone with bad financials, track records, and a tough property in a tough area, may find themselves looking at rates of 18% and 6 points!

OTHER PROFIT CONSIDERATIONS FOR LENDERS: A brief note on rates: Private lenders are only able to charge what the market is willing to pay for loans. While occasionally we hear of outrageously high or low rates for money, those are typically not a good indication of the overall market for private money. Lenders may charge very high rates when borrowers are either not sophisticated enough to shop around, or are in a crunch or special situation where nobody else

wants to make the loan for them, hence their market for money is limited. It can also occur when somebody is a specialty lender, or just does not make that many loans each year and cherry picks a small handful of high rate opportunities to lend on. On the other hand, private lenders who charge very low rates, or fund up to 100% or more of the purchase price, may do because of a special trust relationship with the borrower, or lack of sophistication or time commitment of the private lender in exploring other lending opportunities. To get an idea of specifically how much YOU


can make as a private lender, it would be a good idea to first narrow down what type of loans you are comfortable being involved in, (whether actively or 100% passively), and then just start surveying your local marketplace and interviewing other lenders to see what they charge. You will very quickly get an idea of what the local market rates are for private money in your target areas. -- PAUL YEVZIKOV – [New York City -- Contact: paul@paulyevzikov.com -Tel (212) 390-1582]. Paul heads a boutique investment consulting firm, which researches and analyzes trends in passive real estate investment strategies for high net-worth individuals. Paul graduated from Carnegie Mellon with honors, and completed his first distressed property investment at the age of 23.

RentFax bridges the gap between data and decisions. With simple input, industry leading data and analytics, we provide unbiased feedback to guide your residential real estate investment options.

www.rentfaxpro.com 800-5551212


2013 AAPL Vegas Wrap UP

Conference

Impressive show! Learned a lot, feel inspired, and meet some amazing people. Thanks AAPL - Nationwide Mortgage

Jason Cupp doing his thing! Great presentation! - Michelle Mangen Great show! -The Mortgage Office

Love the conference so far! I’m only half way done but learning so much and meeting a lot of people. - Rocky Butani


Speakers from all over the country invaded Las Vegas to join together as one and speak on the biggest issues in our industry.

Private Lending done differently.

Two days of learning, networking, and growth!

There is no other event like the annual AAPL conference in Las Vegas. This is the place to be every fall!

Attendees and sponsors walked away with expert knowledge and the type of connections that produce real deals.

A big thanks to everyone who made this conference possible!


M embe r s h i p : 2013 Member Directory AAPL Lenders are established, proven Private Lenders in the private lending industry. They are able to display the AAPL logo in their promotional materials as a symbol of their commitment to quality and

Does your lender belong to the AAPL and adhere to a code of ethics? Learn more about our membership requirements.

excellence.

NOT A MEMBER? JOIN NOW! Click here to go directly to the AAPL website directory.

Board of Advisors and Founders Company Name

Contact Name

City

State

Membership Level

Affinity Group Management, Inc

Michael Wrenn

Kansas City

MO

Board of Advisors

Geraci Law Firm

Anthony Geraci

Irvine

CA

Board of Advisors/Founder

Investors Choice Funding

David Williams

Louisville CO

Board of Advisors

Pacific Residential Mortgage, LLC

Bob Cox

Medford

OR

Board of Advisors

Pride of Austin Capital Partners, LLC

David Owen

Austin

TX

Board of Advisors

Rollins Consulting Group, LLC

Jack Rollins

Ponce Inlet

FL

Board of Advisors/Founder

Sterling Pacific Financial

Joshua Fisher

Watsonville CA

Board of Advisors

1839Asset Management

Vincent Spreuwenberg

New York

NY

Board of Advisors

Full Throttle Ventures

Haider Nazar

San Francisco

CA

Board of Advisors

47


Active Lender Directory Company Name

Contact Name

5 Arch Funding Corp

Gene Clark

Newport Beach

CA

Associate

Alpha Funding Solutions

David Hansel

Marlboro NJ

Associate

Anderson Legal, Business & Tax Advisors Clint Coons

Tacoma WA

Corporate

Arizona Private Lenders Association

Byron Allen

Mesa AZ

Associate

Asset Ventures LLC

Tom Bourne

Redondo Beach

CA

Associate

Asset Ventures LLC

Tony Martinez

Redondo Beach

CA

Associate

Avana Capital

Sundip Patel

Peoria AZ

Associate

Bay Mountain Capital

Dean Lontos

Dallas TX

Associate

Bay Mountain Capital

Wayne Corley

Dallas TX

Associate

Bennu Funding

Court Trevillyan

Portland OR

Corporate

Bennu Funding

Demian Heald

Portland OR

Corporate

Blue Ocean Mortgage

Jim Sexton

Roanoke VA

Associate

BofI Federal Bank

Joel Kodish

San Diego

CA

Corporate

BofI Federal Bank

Salvatore Salzillo

San Diego

CA

Corporate

BofI Federal Bank

Taylor Osborn

San Diego

CA

Corporate

Bolour Associates

Elliot Shirwo

Beverly Hills

CA

Associate

BuySellInvest Properties LLC

Norma Skeete

Arlington VA

Associate

Capital Benefit

Marcel Bruetsch

Newport Beach

CA

Premier

Colorado Federal Savings Bank

Jonathan Banks

Greenwood Village

CO

Associate

Colorado Federal Savings Bank

Randy Ilich

Greenwood Village

CO

Associate

Connvisions Capital Group

Alex Arriaga

Associate Raleigh NC

Control Capital Group

Blair Kenny

Calabasas CA

Associate

CPR Pacific

Cecil Chan

Brisbane CA

Associate

Credit Circle formally Debt Dog Inc

Perikles Konstantinides

Salt Lake City

Corporate

City

48

State

UT

Membership Level


Active Lender Directory Company Name

Contact Name

City

State

Membership Level

CSRE Investments LLC

Marifrances Kudla

Glendale

CA

Premier

Dalin Financial, LLC

David Morgan

Philadelphia PA

Associate

Dusek Network, Inc

Brenda Dusek

Orchard Lake

MI

Premier

Dusek Network, Inc

Rich Dusek

Orchard Lake

MI

Premier

Elares Capital Partners, LLC

Robert Woodcock

San Diego

CA

Associate

Elite Mortgage Loans

Tom Jarrell

Fresno

CA

Premier

Equity Trust Company

John Bowens

Elyria

OH

Associate

Fairway America, LLC

Darris Cassidy

Portland

OR

Corporate

Fairway America, LLC

Lance Pederson

Portland

OR

Corporate

Fairway America, LLC

Matt Burk

Portland

OR

Corporate

FCI Lender Services

Gordon Albrecht

Anaheim Hills

CA

Corporate

Financial Momentum

Carmen Fields

Chicago

IL

Associate

Financial Momentum

John Hayes

Chicago

IL

Associate

Four Corner Capital

Andrew Dinsky

Los Angeles

CA

Associate

FutureGen Capital

Lawrence Schmidt

Washington DC

Corporate

Gemini Capital Managers

Jack Krupey

New York

NY

Associate

Genesis Capital Partners

Trixy Weiss

Los Angles

CA

Associate

GMA Factor

Jacob Sacks

Pittsburgh PA

Associate

Harbinger Funding

Chris Jones

Cordova

Associate

Heilstein Lending, LLC

Kimberly Palmer

Fayetteville NC

Premier

Heritage Capital

Ryan Parson

Glenwood Springs CO

Corporate

IRA Services Trust Company

Belinda Savage

San Carlos

CA

Premier

JCDannenfeldt

Chris Dannenfeldt

Addison

TX

Corporate

JCDannenfeldt

Theresa Krafcheck

Addison

TX

Corporate

49

CA


Active Lender Directory Cont. Company Name

Contact Name

City

Jeff Smallowitz

Jeff Smallowitz

Redondo Beach CA

Associate

JG Funding

Jeremy Goldzal

Staten Island

NY

Associate

JG Invests LLC

Jonathan Gould

New York

NY

Associate

LaMaison Properties

Charles Campagnet

Alameda CA

Associate

Live Dream Lending

Brian Derisay

Carlsbad

CA

Corporate

LoanMLS

Robin Aldridge

San Diego

CA

Associate

Main Street

Krissie Jones

Fair Oaks

CA

Corporate

Mardavsco, LLC

Alan Weinstock

Northridge CA

Premier

Metro Street Capital

Mark Nagy

Southfield MI

Associate

MICON Properties LLC

Michael Vavricek

El Dorado Hills CA

Premier

MidAtlanticIRA

Jack Kiley

Frederick MD

Corporate

MidAtlanticIRA

Scott Blair

Frederick MD

Corporate

Nemo-A Investment Corp

Annie Liu

Seattle

WA

Associate

Northern Atlantic

John Quartararo

Bronxville NY

Associate

NoteSchool

Eddie Speed

Southlake TX

Corporate

Pacific Private Money

Lisa Hanf

Novato

CA

Associate

Pacific Private Money

Mark Hanf

Novato

CA

Corporate

Peak Management

JonPaul Sauer

Lenexa

KS

Associate

Peak Management

Paul Sauer

Lenexa

KS

Associate

Peak Management

Shane Sauer

Lenexa

KS

Corporate

Premier Mortgage Lending

Rick Piette

Las Vegas

NV

Premier

Pride of Austin Capital Partners, LLC

James Rincon

Austin

TX

Associate

Private Lender

Donald Burdick

Lake Oswego

OR

Associate

Private Lender 4 U

Steven Nye

Flushing

NY

Premier

50

State

Membership Level


Active Lender Directory Cont. Company Name

Contact Name

City

Private Lender Pro

Michael Emens

Private Loan Store

Scott Ferguson

State

Membership Level

CA

Premier

AZ

Associate

Private Mortgage Financing & Investments Michael Vicknair

AZ

Associate

PrivateLenderLink.com

Rocky Butani

CA

Associate

Rain City Capital, LLC

Fred Rea

WA

Corporate

Rama Capital Partners, LLC

Alim Kassam

CA

Associate

Rama Capital Partners, LLC

EJ Chanin

CA

Corporate

RealInvestors, LLC

Sherman Ragland

MD

Associate

ReCap Advisors

Aaron Chan

CA

Associate

Red Cardinal Capital Asset Management

Marucia Rella

NY

Premier

Redemption Company LLC

Michael Rosenberg

CO

Associate

RevitaLending, LLC

William Lansing

DC

Premier

Richard Urias

Richard Urias

CA

Premier

SBS Trust Deed Network

Rory Cambra

CA

Associate

Secured Investment Corp

Dean Hutchins

ID

Associate

Silver Arrow Investments

Damon Prouty

CA

Premier

Silverado Funding, LLC

David Scott

OR

Associate

SMCC Capital LLC

Steve McCondichie

GA

Associate

Specialty Lending Group

Jeff Levin

MD

Associate

Spinnaker Loans Inc

Guillermo Nunez

CA

Corporate

Spinnaker Loans Inc

Juan Carlos Quiroz-Zolezzi

CA

Corporate

Spinnaker Loans Inc

Raul Ramirez

CA

Corporate

Spotlight Lending

David Bacon

CA

Premier

Steal Water Holdings, LLC

Layna Haitsch Palumbo

CT

Premier

51


Individual Active Lender Directory Cont. Company Name

Contact Name

City

State

Membership Level

Tempo Funding, LLC

Yuriy Novodvorskiy

San Francisco

CA

Associate

The Aclaime Group

Justin Luettgerodt

Sandy

UT

Corporate

The Aclaime Group

Keith Crandall

Sandy

UT

Corporate

The Binstead Institute

JT Binstead

Narberth PA

Associate

TIC Investments

Terry Moore

Charleston WV

Premier

B2R Finance

Tim Herriage

Garland

TX

Associate

Trilion Capital

David Weiner

San Diego

CA

Corporate

Trust Deed Capital, INC

Ken Meyer

Irvine

CA

Associate

USMortgage Resolution

Joe Downs

King of Prussia PA

Corporate

US Mortgage Resolution

Rob Hytha

King of Prussia PA

Corporate

US Mortgage Resolution

Tom Dunkel

King of Prussia PA

Corporate

US Mortgage Resolution

Walt Breslin

King of Prussia PA

Corporate

US Private Lenders

Cynthia Wall

Odessa

TX

Premier

Valley Song Capital Management, Inc

Meg Winberg

Charlotte NC

Premier

Wallace Capital

Robert Wallace

Boston

MA

Corporate

Washington Capital Partners

Daniel Huertas

Falls Church

VA

Associate

WDB Funding LLC

Aaron Garcia

West Valley City UT

Associate

WDB Funding LLC

Jennifer Watkins

West Valley City UT

Corporate

Wealth Classes

Dave Griswold

Castle Rock

CO

Premier

Christina Dangler

Dunn Loring

VA

Associate

Glenn Froehlich

Bellevue

WA

Premier

Steve Thomas

Sarasota

FL

Associate

52


Active Service Provider Directory Company Name

Contact Name

City

State

Membership Level

Applied Business Software

AJ Poulin

Long Beach

CA

Corporate

Armanino McKenna, LLP

Josh Nevarez

San Ramon

CA

Corporate

Armanino McKenna, LLP

Jason Gilbert

San Ramon

CA

Corporate

Biddle Lawyers

Russell Biddle

Victoria Point

Queensland Corporate

Biddle Lawyers

Stacey Davidson

Brisbane

Queensland Corporate

DLM Family Investments, LP

David Fenoglio

Montague

TX

Hill Law PC

Jeff Hill

Portland OR

Kate Southard Real Estate

Kate Southard

Albuquerque

NM

Associate

The Norris Group

Aaron Norris

Riverside

CA

Associate

Trowbridge & Taylor LLP

Kim Lisa Taylor

St. Augustine

FL

Associate

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Private Lender: Insight & Assesments  

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November/December Issue

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