"Predatory "Private Lenders?"”

 

Sometimes stuff just comes out of left field. You don't see it coming - but it blindsides you nonetheless.

 

When you're first raising private money to fund your real estate deals, it's pretty tempting to grab at anything when someone says they're interested in placing funds with you.

 

After all, you've spent some time, paid some dues and...Finally...someone says "yes" I'm ready to invest. But, then some interesting facts come out of the woodwork...

 

This "investor" needs to close really fast. They can only invest money for a short period of time (like 6 months). And, they want 20% on their money - flat rate (not annualized).

 

You're stuck between a rock and a hard place: should you work with this person or not?

 

Before I answer that question, let's look at what your ideal target investor should be like:

 

    * Ready, willing and able to place funds

    * Has seasoned funds to invest

    * Does not have unreasonable expectations for rate of return

    * Is an individual person or couple, not a professional investment company

    * Is someone you don't mind doing business with

 

I know this may seem like a high standard...but...being an entrepreneur and in business for yourself means YOU determine the terms and conditions which you want to do business. This means, thankfully, that you can choose to signal out and pursue the right people to develop relationships with. Relationships that is mutually beneficial.

 

If the 5 factors above do not line up with your prospective private lender, then something is off and you may end up regretting doing the deal with them.

 

Let's break it down one-by-one:

 

The prospective private lender is not: "ready, willing and able"

 

Hopefully this one is easy. If the person you are talking to or corresponding with b/c they got in your marketing pipeline is not ready to invest, willing to invest with YOU nor has the funds to invest - it's not a good recipe for success.

 

The prospective private lender doesn't have seasoned funds to invest

 

In general, it's not a good idea for you to have someone invest in a deal with borrowed money. Doing this introduces too many variables into the equation. You have to pay the investor who has to pay their lender. If something ever happens in the deal where payments to the lender must be delayed - such as a postponed sale closing, or if the interest rates on the lenders funds increase, you could be in for trouble.

 

The prospective private lender has unreasonable expectations for rate of return

 

If your lender wants to earn rates of return that are "out of this world" - such as those norths of 14-15% or so, then I would be leery. Even though you may have a project that is profitable enough to pay these returns, there's no need to pay them when you can get money for cheaper. It's just more cash out of your pocket then you need to give. This is also a dead-giveaway that the other person has to crack a certain number, like if they are getting the funds from another source.

 

The prospective private lender is not an individual person or couple

 

Why should you rule out getting money from an institution? Maybe a private equity company? Simply put, these professional investors will dictate the terms and rules of the deal, and you'll most often be put in the passenger seat - working for them. It's just the facts. Put yourself in their shoes: what would you want? Most private money loans will come from those people who are happy to place funds in an effort to achieve good returns, diversify their portfolios and invest in someone they like and trust. This isn't just a "homespun" thing either - Warren Buffet uses this strategy to this day, and he started it over 50 years ago.

 

The prospective private lender is not someone you would like to do business with

 

I can tell you from personal experience, no amount of money is worth a toxic business relationship. You don't want to be constantly fighting or distracted from your chief focus because of a bad choice in private money lenders. You'll have to use your gut instincts on this - but if the person gives you reason to pause or worry, or throws off the wrong signals, then you should think twice.

 

 

Now that we've laid down some ground rules, let's go back to what we were discussing at the beginning: predatory private lenders.

 

These "private lenders" (in form, but not in substance) are looking for easy, targets to push high interest, short term money to. They are really hard money lenders in disguise. I often discuss at length the differences between private money and hard money. Please refer to my other writings on that subject.

 

If you stick to the ground rules that we just laid out, you won't have to worry about predatory investors. You won't have to worry about taking the wrong kind of money. You'll get to do business on your own terms and with people that align with you.

 

It's much better - and at least 10 time more profitable to do business this way.

 

-Happy Investing!