Approaching family members for private money

[Amber Butler]

Hello all. Newbie here.

I have a question regarding approaching family members about private money. I am originally from California, but looking to do business in Philadelphia. Well I am going back to California very soon to discuss the possibility of some family members becoming private money lenders. I have most of my presentation together, but I am wanting to be fully prepared with any questions they might ask. Currently, these are the topics my presentation consists of:

I go over my personal background as well as the background of my husband and our coach. (Whom is Peter Giardini)

The current market in Philadelphia where we will be rehabbing

A little about how we analyze whether the property is a deal or not

How we pre-screen contractors and select them

The liability and insurance we will be purchasing for the property

Our marketing strategy

Our exit strategy

Terms and Conditions of the loan including interest rates

And pictures of potential properties we will be rehabbing (including the example scope of work, our deal analyzer, and repair cost estimation if wanted for additional information)

I am wondering if there is anything I have left out. Considering I have never approached someone regarding funding for private money what type of typical questions or objections do individuals have that I have not addressed in my presentation? One thing I am wondering about is the fact that the lender will not be within the same city where I will be performing the rehab. How will I be able to overcome this objection? Also what will be the best way to present to family members that will get them to say yes?

[Jon Holdman]

Think of this like going to a bank. A bank would expect to see three months of bank statements, a 1003 loan application, pay stubs, mortgage statements and would pull a full credit report. A credit score is just a number on a slide, and is inaccurate unless its from an actual credit report. Those credit score reporting sites give you an approximate number, but its not the real algorithm.

Its worse than a bank or hard money lender because they will just take the house if you default. Maybe they will go after you for the shortage. With family, you run the risk of destroying a relationship. That could mean being excluded from family events or given the cold shoulder if the deal goes badly. Less risk of bad things happening if you're borrowing $100K from a wealthy relative that had $2 million in liquid assets. Much more risk if you're convincing to take $100K out of their one and only IRA to do your deal. Even more risk if they're going to take a loan out on their house to give you the money. Only do this if you are absolutely certain you will pay the money back no matter how the deal goes.

As a lender, I would want to see you have some cash in the game. And I want your money in up front. If the loan is $100K and you're putting in $10K, I want you to bring that money to closing. I'm going to bring just enough to close the purchase. I'm going to only give you the rehab money as the work is accomplished. That means you're going to have to have the capacity to get the work in progress before you get the money from the lender. And there's going to be some increment of cash you don't get until the house is completely rehabbed. And I want to see you have some cash to handle the overages and surprises.

I would want to see a good deal. Now, your relatives may not really understand the rehabbing business. But I know if you buy a house for $70K and put $20K into fixing it up and expect to turn a profit if you sell for $100K that you're fooling yourself. You're going to break even even before you pay me interest on the loan. I also know that if you think you're going to buy a house for $40K, put $10K into it and sell for $100K you're deluding yourself. Deals like that are extremely rare and the odds of you finding one right out the gate are very slim. Further, your end buyer will have a hard time getting a loan because no appraiser will believe you have really added that much value. So I expect to see a realistic evaluation of the deal that supports me getting my interest and my money back and that give you enough profit potential that you won't give up with the going gets rough.