S.E.C. Real Estate Observer

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I have been originating short term mortgage notes for about twelve years. I have never purchased “paper.” Admittedly, the reasons listed below are those of a biased author.

First and foremost, I am a short term lender (one year or less) rather than a long term lender. I associate “time” with risk. The longer the maturity of the loan, the more things that can take place to cause a deterioration in the loan. In these days of an ever-changing world, a person’s (read borrower) life can change quickly and dramatically due to:

1. Change in personal health status
2. Change in marital status
3. Change in financial status
4. Change in employment status
5. Change in the immediate area where the security for the loan is located
6. Change in the economic condition of the security itself
7. Change in the overall economy
8. Change in interest rates

Obviously, the probability of any of the above changes taking place over a one year period is considerably lower than over several years.

Of course, as a result of “investing short” I necessarily accept a greater challenge of having to continually reinvest the proceeds of the loans that are maturing at a much faster pace than those of a long term lender.

Having discussed the implications of short term versus long term loans (the above are just a sample of them) we can turn to the two primary reasons why I prefer to lend short rather than long.

I. NATURE OF THE RELATIONSHIPS BETWEEN THE LENDER (MYSELF) AND THE BORROWERS.

My portfolio is made up of a relatively few borrowers who have multiple loans outstanding rather than many loans with individual borrowers associated with each loan.

I seek out borrowers with the following characteristics:

1. They are experienced rehabbers of primarily single family dwellings.

2. They do what they do on a full time basis, completing several projects per year.

3. As a result of the above, they are totally involved and knowledgeable in all phases of their business including:

* Buying at the right price
* Costing out the rehab
* Marketing or tenanting the property upon the completion of the rehab.
* Dealing only with parties with the above characteristics gives me two notable advantages.

First and most important, I form long lasting, deep relationships with entrepreneurs (the borrowers) who, with me, develop a strong day-to-day working relationship. After a relatively short period of time we each know how the other operates and work efficiently with each other as each project arises.

Secondly, this method of doing business with a few reduces substantially the time involved in credit checking each lender. Rather than having to do a full credit check on each borrower related to each loan, which can be time consuming, I already know the credit status of my clients who are requesting their third, fourth or fifth loan from me. In one instance I have completed over sixty transactions with one of my clients over an eight year period!

II. RISK CONTROL – CONTROLLING THE DOCUMENTATION

In my business I create the underlying mortgage documents associated with each transaction. I have spent considerable time over the years with my attorney creating a working document which provides me with strong, precise parameters which describe every facet of the loan while it is outstanding.

Conversely, a lender/investor who buys paper must accept the documentation that accompanies each loan that he/she buys. Each document may be structured differently, providing various shades of protection to the lender. Although it is possible to renegotiate terms with the current debtor, it is very difficult.

In summary, I hope I have shed some light on my philosophy of mortgage lending. As I mentioned above, it is only one of many ways of generating a steady, high, and safe return by originating short term mortgages.