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