Weighing Risk Of course, sometimes things don’t work out for even the most careful lender. If you lend money, you have to be willing to risk losing it. Managing that risk requires more than just deep pockets. It also requires the ability to accurately judge someone’s creditworthiness and the willingness to be creative when borrowers get into financial trouble.
Although some of the founders of Custom Funding had the advantage of a banking background, Simone says that’s not a prerequisite. What is needed is an understanding of credit ratings and property values before and after improvement, and the ability to judge buyer character. Even with those qualifications CDC has still had to take some losses. “Not everyone is going to pay. Things that could cause a loss or default include local market conditions, employment loss.”
Which begs a question: What’s the chance of recovering your investment if the first-lien holder forecloses? Simone says it’s a real concern. “If you really want to protect your interest, you might have to show up at the public auction with enough cash to buy the house.” He says that’s another reason you need three to five times monthly volume in cash on hand if you want to play this game.
Surprisingly, making in-house financing a realistic option may not require as much sales volume as some might think. “There’s no real minimum,” Simone says. “For me, it’s really an exit strategy: When I’m done [with the business], I know I’ll have no less than 72 months of income stream that can be sold or retained.”
One other benefit of legally separating the construction and finance activities is that the remodeling company is less tempted to lose its focus. In fact, Ricciott says that the company’s primary motivation for doing its own financing has always been to improve customer service. “We’re a design/build remodeling company. Our intent is to be a one-stop shop, providing everything from design to construction. That includes offering financing where appropriate.”