Folsom Fix & Flip

George says, “This is going to be a handsome home in a very nice area. Old Town Folsom is not as nice as Carmel, downtown Los Gatos, or downtown Los Altos; but it is the Central Valley (far less expensive) near-equivalent. We have a borrower with an excellent income and excellent credit. Being both a State-certified general inspector and a general contractor, he is very qualified. But just a 6% yield? Do you know any other 9-month (likely term) investments offering a 6% annual rate. Are you wise enough to choose a quality deal over some high-yield speculation? I hope so. I recommend this deal highly.”

Blackburne & Sons is pleased to present this first trust deed secured by a 1,450SF single-family residence on a 9,800SF parcel located in Folsom, California, within the County of Sacramento. The purpose of this loan is to provide the final funds necessary to complete a full renovation, including the addition of a master bedroom and bath to the subject property. The borrower is an experienced general contractor, who typically specializes in commercial builds but is doing this fix & flip project.

Sacramento County is located in the middle of the Central Valley. It extends from the low delta lands, to about ten miles beyond the State Capitol, to the east to the foothills of the Sierra Nevada Mountains. Sacramento is the core cultural and economic center of four-county metropolitan areas (El Dorado, Placer, Sacramento and Yolo counties) and is the fourth-largest metropolitan area in California. There are 19 major public and private colleges, and universities within the counties, including California State University, Sacramento and University of California, Davis.

The City of Folsom is probably most known for Folsom Prison and Folsom Lake. You may also recall the song “Folsom Prison Blues” that was made famous by Johnny Cash during a concert for prisoners at Folsom Prison in 1968. Folsom can also be known for Historic Sutter Street, with its desirable restaurants and night-life it has to offer residents and visitors. And if you are someone who enjoys a hike or biking, Folsom also has that to offer. Please visit the City of Folsom’s website for more information on the city and its history.

The subject property is located in the desirable area referred to as Old Folsom and is in the Folsom Historic register. Given this, in the opinion of the appraiser, there is added-value given this unique location. Our borrower purchased the property in 2017 for $325,000 but is in the process of renovating the property to add additional square footage to the house, a garage and landscaping updates. A pool already existed but was completely resurfaced and new concrete poured. Total renovations completed (or to be completed) is estimated to be $300,000.

The original square footage of the subject was 1,039SF, which included 3 bedrooms and 2 baths. After completion, the total square footage will be 1,450SF, not including the garage which includes an applicable electrical outlet for charging of an electric car. Full plans of the renovation and addition were provided and available upon request.

Title is held by an unmarried man, who is a general contractor for almost 35 years, as well a licensed California State certified general inspector. Borrower owns and operates his own construction business, with personal taxable income in 2017 and 2018 of $137,009 and $232,781, respectively. He has a 742 mid- credit score and a stated net worth of $1,560,318.

This loan will pay off a current loan of about $310,000, and provide funds to complete the renovations. Of the funds for the renovation, a hold back approximately $100,000 to $150,000 (final amount to be determined) in a construction management account for the final construction/renovations of the subject property. Draws from this construction holdback account will be handled by a 3^rd party construction management firm. Each draw will require a draw request and inspection (to confirm work), before disbursement. The borrower does believe he will be able to complete much of the work in the near future so is only anticipating maybe two or three draws from this account.

We engaged a local appraiser who valued this property “ARV” at $705,000. A detailed list of renovations and the addition are included in appraisal. Per the appraiser, no 'as is' value is given because “the property is in stages of completion, and there are no specific comps that could be used for a property under construction. This appraisal estimate of value is given as subject to a satisfactory completion.”

At a 6.0% yield, 64.5% LTV (ARV Value) this appears to be a very reasonable investment. Investing in any first deed trust involves substantial risk. A large and prolonged decline in real estate values is possible. Be sure to read the Risk Factors section of the Offering Circular carefully before investing. Foreclosed property almost always needs to be renovated before it can be leased or sold, so be sure to maintain some liquidity.

You should spread your mortgage investment portfolio out among lots of different deals. If you have $300,000 to invest, you should invest $10,000 to $20,000 in 15 to 20 different fractionalized first trust deeds. For example, if the deal is a $300,000 first trust deed on an office building in Boise, with a $15,000 investment you would own 5% of the loan. By spreading your money out into a bunch of different deals, you are achieving the diversity of a fund without the failed fund sponsor problem. If you are extremely wealthy, you could double (or even triple) my suggested investment amounts, but be careful about pouring too much money into a single deal. We once had a whole building fall into an old coal mine. Ouch.
Be wise and resist investing in any first trust deed yielding more than 9%. I would personally never invest in a first trust deed with a double-digit yield. The payments slowly grind the borrowers into the dust.
Blackburne’s Law theorizes that a portfolio of 8% and 9% first trust deeds will outperform a portfolio of 11% and 12% first trust deeds over a seven-year term. Only our wisest (and eventually the happiest) investors listen to me.
You can also buy some of our smaller deals in their entirety, but I only recommend this if you are richer than Crassus.
It is very easy to lose money in hard money first mortgages, so fight-fight-fight against the temptation to invest in high-yield deals. As Nancy Reagan used to say, “Just say no.” But if you choose 7% to 9% first mortgages, I predict that you will be very, very pleased.

Blackburne & Sons Realty Capital Corporation--For more information, contact George Blackburne IV
4811 Chippendale Drive, Suite 101, Sacramento, CA 95841
Telephone: (916) 338-3232 * Fax: (916) 338-2328
Real Estate Broker -- California Bureau of Real Estate -- License Number 829677
Publicly advertised to California residents only under California Department of Corporations business plan permit.
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