MAKING CONTACT WITH A POTENTIAL PRIVATE MONEY LENDER

[Willie Banks]

Should I come up with a outlined Business Plan and explain to my Private Lender how I plan to use there Money or can anyone give Insight to a better approach???

[Bill Gulley]

Very, very, very bad idea with a "private lender" "private investor".

A great idea going into to see a bank, a credit union, a mortgage broker or a hard money lender.

Welcome to BP, Nicholas.

Definitions are important in RE and in finance. A "private lender" is someone you have a personal or past business relationship with, they are not in the business of lending money.

A hard money lender is often an individual who loans money and does so as a business. Many call themselves "private lenders" purely from a marketing stand point, "hard money lender" has had a poor reputation in past decades but they are cleaning up that industry, somewhat at least as companies go.

Now, the reason a detailed slick presentation is not a good idea with a private investor or lender. These people are not in the business, they may or may not be accredited investors as defined under SEC, and that makes a big legal difference to you, soliciting money from them.

Never title your work as an "Investment Analysis" that is a prospectus! Don't even use the word "investment" say opportunity, your participation, our partnership arrangement, anything but calling your deal an "investment".

What you are doing is providing that person with an investment prospectus of an unregulated security, you are showing your intentions which may be construed as being relied upon for their investment. If you show interest rates to them, that is a representation, if you show profits that to can be a representation they rely on for your success and ability to pay them.

Dealing with some individual to give you a loan is a solicitation to a non-regulated lender or investor. You don't want to go there, in that respect.

Private investors should be known to you or introduced to you keeping with the nature of a private business relationship, you don't go out and solicit them.

Nothing should be in writing or in any presentation that could reasonably be relied upon in them making a lending decision. You can bet, that someone with money knows how to keep their money, or they wouldn't have it. They deal with stock brokers and others in investing circles and they know that if they are shown a deal with numbers, interest rates, profits, expectations of a pro forma accounting summary that the information you hold out is the deal, it is the representation.

Problem is, investors can get stuck with a property, you can have cost overruns, you can fall behind due to weather or a number of issues, you can lose a buyer, deals don't close, I could go on, but you get it. When things happen and you can't meet your deadline or commitment as you laid it out, they can and do demand their money. If you can't pay it, they will usually at some point see an attorney who won't seem very polite. If that investor is given some slick presentation, it goes to that attorney and they will use that information against you as your representations made on that investment.

If you fail, even with good intentions, and that attorney has proof of what you "promised" that can lead to claims of fraud, baiting an investor into some deal that didn't materialize as you showed it.

If that investor is not an accredited investor, and you probably won't know nor can you really qualify them, you can get stuck with unregistered securities violations. If funds were deposited and sent to a closing, another favorite thing to hang on someone is wire fraud.

All this can, has and will happen again with individuals investing in real estate deals.

You won't have these issues with a regulated, registered lender, even a hard money lender who is set up properly. You may not have these issues with, what I call "back alley lenders" individual hard money lenders who are actually in the business but who are not operating in compliance, for many reasons. You can have these issues with an individual who is not in the lending business and acts on your deal as an investment opportunity, which is what a private investor/lender is.

So, how do you talk to them? You can explain what you do, what opportunities exist if additional capital were available, show past successes, deals done, display your knowledge, build their confidence in you, but all of this is touchy as you can not make representations of future performance and you sure don't hand them anything in writing that they might rely on. You can explain that they will get a note and be in a secured position, you can certainly tell them of your ability to pay as agreed, how the note can be structured, the terms you propose, but you better stop there.

What can you show? Your personal financial statement, your tax returns, (I know, if you had that in good standing you'd go to the bank) if you're a flipper, pictures of your work, you could show a contract pending or completed. These are factual historical documents, not estimates of some future deal. But, along those lines, you could show a contract to buy, show comparable sales and the ARV, what the marketing time is expected to be without saying it will be sold in 90 days! Your building plans and spec sheets.

Frankly, if you have no experience, you really need to stay away from individual investors unless you are related to them, IMO, if Uncle Ben is willing to loan you money, go for it.

If you have no experience, you'll need to let them know you know what you're doing, how you do that might be hard, but try to put that person in a position of control as much as you can is my advice. Use them as a transactional lender, where there is no risk of losing their money, fund the deal at closing and repay them with the buyers funds that are already at closing. If you're borrowing construction funds, get an amount up front then show receipts and lien waivers for future advances, escrow services provide construction disbursement services, protect your investor. You can change things up later on as both of you get more experience.

Now, if what you meant to say was how to approach a hard money lender, then by all means, go with the ideas mentioned above, your business plan, pro-forma analysis, estimates, etc. :)