When to Say "No" to Private Money

Gulp...

I thought I was going to collapse. My knees went wobbly...

Not good.

I couldn't believe I was turning down a private investor. My eyes didn't blink for at least 5 minutes.

And just like that, the meeting was over.

What had I done?! Pangs of regret filled me. "That was real money," I thought to myself. Maybe I was having an out of body experience or aliens were controlling me. Should I go to the doctor?

Here's what happened:

When I first started raising private money, I was beating the drum hard. Every day in every way talking to investors and doing whatever I could to get the cash. Some things worked, some things didn't. Fortunately I've been able to figure out which since then.

A few months into my big push (with a few private money deals under my belt) I began talks with a guy who wanted to place funds with me. Actually, it was kind of weird. He approached me to invest money.

Was he a hard money lender?

No.

Was he a loan shark?

No.

He was just a regular guy looking to get a return on his money. "Ok," I thought, "this is a good thing." I set up a meeting with him and eagerly prepared.

During the meeting, things went well until...we got to two thorny issues: sourcing his funds and his desired ROI.

One was a "red flag" the other was not. Can you guess which? No? Well, here it is: it's important to know the source of your investors funds when working with private money. This goes back to my whole "ready, willing and able" mantra, where "able" means the investor has liquid funds that can be invested in a 1-2 week period. If the source of your private investors funds are in doubt (like they have to refinance their house to get the money or borrow it from somebody else) it's not a good sign.

Let' s press on...

During our meeting, this investor really started to dig his heels in when we discussed rate of return. He wanted a rate far in excess of what my other private investors were getting (not a good precedent) and he also wanted to structure the rehab money in the form of draws - all facilitated by a lawyer or title company.

Ouch. This was starting to feel more like a construction (hard money) loan to me. Had I misjudged this guy? Did I not ask the right questions at the beginning?

Well, I found out the answers were: yes and yes. As the meeting went on, things became more tenuous between Mr. investor and me and we parted ways without any solid commitment to do anything.

Waste of time?

At the time, I thought it was. 2 hours of my day were gone and more than that in preparation time ahead of the meeting. But now, in hindsight, I look back on this as a good experience and a priceless lesson. Here's a big lesson I learned:

There is good money and there is bad money.

You're not supposed to turn down private money, right? Private money is the holy grail of real estate investing and we're supposed to drink from it - big gulps.

NOT always.

You see, investors who want unreasonable rates of return, unreasonable terms, or otherwise try to tip the scales so that the deal is more "heads they win, tails you lose" type situation - this is bad money.

Bad money will cause you to compromise your business plan, your deal profits and possibly induce you into making bad decisions that will negatively impact you.

Sometimes you have to follow Nancy Reagan's advice and "just say no."