Raising Private Money FAILED

25 Replies

Hello BiggerPocket Family,

I just wanted to present to you guys a package that I put together to raise private money for a deal that I was working on but unfortunately I failed. I just wanted to see if I did something wrong or is there something essential that I missed to implement. Please all criticisms all welcome.

couple things either the investors don't like the area and don't agree with your numbers.. or they don't have confidence in your ability to execute.

And or your not paying enough for the capital if you can't pull this off you should offer up a 50 /50 or 70/30 to the money so you at least get a deal.. and start to build your experience bucket.

Its one thing I see most that are starting out do that is in my mind a critical error.. they think they should be able to borrow private money and get as cheap as money as possible.. when in fact starting out it should be the opposite ... they should be looking for someone who will take a flyer with them since they have no money or real experience and will mitigate a potential loss with a very big upside.

Once you get a few of these under your belt and have track record and maybe a little jingle in your pocket you can go HML route with no partner or your current partners will have enough trust and faith to give you bonus or better returns.

those starting out need to get deals done no shop for the cheapest money waste a ton of time on the front end finding the deals and then lose them because they could not get them funded.

If you made 10k on this deal and the investor made 40k at least you got something instead of having to make this post that your deal failed.

Think about it.

Even after 40 years in this business I know my competition for investor dollars is always trying to find cheapest money... I do the opposite I ALWAYS pay the money more than myself  ALWAYS.   Ergo I have more money coming my way than I really know what to do with.. And for my own deals because I have extensive track record and I am making money because I attract investor capital, I can do my own deals with BANK money at 1 point and 5 or 6% like most just dream of....

So that's one side of the coin ... I know probably not a popular one with many of you out there in BP land who think you bring the value to the equation and the money should just roll over for your deals.... :)

Look at the section labelled "Notes". You correctly show that the loan is for 40% of the ARV but you state this is "4 cents to the dollar". No, it isn't. It is 40 cents to the dollar. Frankly, even if your math was correct this section looks patronizing to me. I would probably be done reading once I reached this point since it seems clear you are asking for 100% financing but have not indicated if you have ever done a rehab before. If your target audience is people who are not familiar with real estate or who have not loaned money before it may play a bit better but if you don't convince the person you are approaching that you know how to manage the project successfully you are unlikely to find the funds. Worse, you may poison your circle of contacts if you present a glossy flyer with obvious math errors. I may look at your first flyer for a couple minutes as a courtesy. If you make a poor impression you won't have that long the next time if I even open your e-mail.

Originally posted by @Jay Hinrichs :

couple things either the investors don't like the area and don't agree with your numbers.. or they don't have confidence in your ability to execute.

And or your not paying enough for the capital if you can't pull this off you should offer up a 50 /50 or 70/30 to the money so you at least get a deal.. and start to build your experience bucket.

Its one thing I see most that are starting out do that is in my mind a critical error.. they think they should be able to borrow private money and get as cheap as money as possible.. when in fact starting out it should be the opposite ... they should be looking for someone who will take a flyer with them since they have no money or real experience and will mitigate a potential loss with a very big upside.

Once you get a few of these under your belt and have track record and maybe a little jingle in your pocket you can go HML route with no partner or your current partners will have enough trust and faith to give you bonus or better returns.

those starting out need to get deals done no shop for the cheapest money waste a ton of time on the front end finding the deals and then lose them because they could not get them funded.

If you made 10k on this deal and the investor made 40k at least you got something instead of having to make this post that your deal failed.

Think about it.

Even after 40 years in this business I know my competition for investor dollars is always trying to find cheapest money... I do the opposite I ALWAYS pay the money more than myself  ALWAYS.   Ergo I have more money coming my way than I really know what to do with.. And for my own deals because I have extensive track record and I am making money because I attract investor capital, I can do my own deals with BANK money at 1 point and 5 or 6% like most just dream of....

So that's one side of the coin ... I know probably not a popular one with many of you out there in BP land who think you bring the value to the equation and the money should just roll over for your deals.... :)

 Thank you very much for your input.

@Ray Jimenez   your welcome I hope it resonates.. as much for you but also for all those trying to break into the business...

I know there is a saying that if the deal is good enough the money is the easy part.. well I don't necessarily subscribe to that.. maybe for some with experience but just starting out you need both..  the deal and give the investor a reason to do it with you.

there are plenty of expeirnced folks offering the same returns if not higher.

Is what you posted is exactly how you presented it to potential lenders? I would spell check and check it for grammatical errors before submitting. If I was a lender, I'd question it just on that alone. In my opinion, things with those types of errors look very unprofessional. 

@Ray Jimenez you need to include all of the holding costs (taxes, utilities etc) as well as the realtor commissions and excise taxes once you sell it. There will not be as much "cushion" as you think there is. The whole verbiage about holding it for a year to receive capital gains benefit is also a bit strange. Most flippers want to get in and out as quick as possible to minimize the amount of holding costs. Seems like a strange strategy and not what most investors are used to. If you were actually able to buy it at that price, rehab it and sell it for the price you are predicting it would actually be a good deal. You just need to make sure you have all of the numbers included and clean it up a bit. The hard part is convincing people that you can pull it off as a first timer. Everyone starts somewhere so the more professional you appear in the beginning by having all of the correct numbers and figures, the more likely someone would be willing to work with you. If it looks thrown together half heartedly, which it does, nobody will take you seriously. Good luck

Originally posted by @Jay Hinrichs :

Its one thing I see most that are starting out do that is in my mind a critical error.. they think they should be able to borrow private money and get as cheap as money as possible.. when in fact starting out it should be the opposite ... they should be looking for someone who will take a flyer with them since they have no money or real experience and will mitigate a potential loss with a very big upside.

Jay seems to post this advice every four days - really. This should be a sticky. 

Even after 40 years in this business I know my competition for investor dollars is always trying to find cheapest money... I do the opposite I ALWAYS pay the money more than myself ALWAYS. Ergo I have more money coming my way than I really know what to do with.. I can do my own deals with BANK money at 1 point and 5 or 6% like most just dream of....

These are the clear and simple instructions. Read them and profit! No magic, no tricks. 

Originally posted by @Julian Buick :

@Ray Jimenez you need to include all of the holding costs (taxes, utilities etc) as well as the realtor commissions and excise taxes once you sell it. There will not be as much "cushion" as you think there is. The whole verbiage about holding it for a year to receive capital gains benefit is also a bit strange. Most flippers want to get in and out as quick as possible to minimize the amount of holding costs. Seems like a strange strategy and not what most investors are used to. If you were actually able to buy it at that price, rehab it and sell it for the price you are predicting it would actually be a good deal. You just need to make sure you have all of the numbers included and clean it up a bit. The hard part is convincing people that you can pull it off as a first timer. Everyone starts somewhere so the more professional you appear in the beginning by having all of the correct numbers and figures, the more likely someone would be willing to work with you. If it looks thrown together half heartedly, which it does, nobody will take you seriously. Good luck

Julian, I forgot to mention on the post but I also had a separate package that I made with BiggerPockets software that included all the holding cost and exactly the specific of the rehab cost. Also I am Realtor, so the  commission will be low since it's my properties. Not trying to go against your comment but I just really want to know what I can improve on for next time? 

Red flags;

4/40 cents on the dollar is an amateurish term, it is 40% LTV.

You're putting no money into it, you have no skin in the game.

You plan to have it vacant for a year to try and get cap gains.  You need to sell it as soon as it's ready, avoid risks, vandalism, etc.  Also, holding a "flip" for a year doesn't get you cap gains tax, since the intent was to flip, not rent it out as a long term investment.

Originally posted by @Wayne Brooks :

Red flags;

4/40 cents on the dollar is an amateurish term, it is 40% LTV.

You're putting no money into it, you have no skin in the game.

You plan to have it vacant for a year to try and get cap gains.  You need to sell it as soon as it's ready, avoid risks, vandalism, etc.  Also, holding a "flip" for a year doesn't get you cap gains tax, since the intent was to flip, not rent it out as a long term investment.

 Wayne, where in the world did you get that the property was being vacant from.....It clearly states Rent Income NET is 1,020. And yes there was a minor typo on the report for 4 cents to the dollar.

yeah, I didn't notice the rent income either. What do you mean by rent income net? And what is the amount of cash flow? Also if you have another package that has more of the data that people need to know to decide whether to invest, why are you having us look at this one? We're trying to help you here. 

Great question. More newbies should reach out and learn how to do better like you are doing. You have received some quality feedback thus far.

Here is my take.

Reading the memorandum I can tell that you are pretty green or new to the industry. That alone is going to turn some investors away. Just part of the game. Money is at risk so people will want to work with those who have experience if all else is equal.

Other major issues I noticed.

  • There is no scope of work for the repairs.
  • What exactly is your role? 
  • Who is performing the repairs? 
  • Who is selling the house? 
  • Who is managing the tenants?

I also feel like it's important to come outright with a decision to flip or rent. Holding a property for one year and selling can cause issues. Well, not cause issues, but allow for unforeseen issues to arise. You should pitch this as either a flip, which you will sell as soon as it's renovated, or as a bridge loan from it's current distressed state to a renovated, bank mortgaged, rental. 

Holding for a year could cut down on taxes but there is a ton of discussion about flippers paying SET, not capital gains, and being taxed on income. This is something you should look further into. Also, paying 17% interest for 10 months to hopefully reduce your income taxes by 18% may not produce as much of a difference as you're expecting.

Also, what happens when your tenants move out and further renovation is needed? Or if the market dips? There's a reason why you use comps sold within the last 3- 6 months to produce your ARV.

@Ray Jimenez You came here asking the volunteer contributors here to give you feedback on your "investment" proposal and now you're arguing with the responses you receive.

You have little experience, credit or money. Why should anyone trust you? 

Get some of your own experience the hard way, with your own money, then you'll understand all of the little things in your proposal that are turn offs to those who already possess credit, money and experience. 

I just did my first deal with private money and the deal came to me because I have been doing fix and flips successfully for 10 years.  The investor came to me with cash.  I found the right property and we did the deal. In the primary negotiation I offered the investor a 50/50 split.  This was fair to me because they were putting up all the money and me the expertise. As an investor I would be deeply concerned this being your first deal that the rehab costs were underestimated. I would also be concerned with your value estimates.  I appraised thousands of houses over the past 20 years and use the mls to determine value based on condition.  These are the 2 most important parts of the process.  cost+renovations-completed value-expenses(cost of money, realtor fees, your time)=profit.  All these numbers have to be accurate to be reliable and it takes a long time to perfect the process.  When you are trying to do a 100% financing on your first deal your only hope is family members or rich friends(if you have any willing). The odds of convincing a random investor to 100% finance are very low and any seasoned investor would not touch it with a 10' pole.  So, you have just wasted alot of your time and energy that could be spent building your business in other ways.  Wholesale!  This is the best was to get started and get experience without using and most likely losing yours or others money.   As far as the spreedsheet goes it does not contain enough information for an investor.  All deferred maintenance would typically be broken down item by item that way you and the investor could go back and see where you missed the mark.  i would also take out the back up plan that shows you do not have 100% confidence in 1st option.  I never give a back plan as I have 100% confidence in what I am doing and all houses sale it is only a matter of price.  

Now I see you were seeking 100%. If from a private lender with no prior relationship it's tough. If from private individuals maybe. 

Now let's dig deeper

First question... What are the taxes?

Second Question... What will the taxes be after the repair?

There is no accounting for taxes. This NJ the highest taxes in the country. What's the number?

You've already gotten some valuable advice. My .02$ echos much of what has been said above:

1. Grammar and spell check. An occasional typo is fine, but consistent errors in grammar makes me question what numerical or mathematical errors you have.

2. I want to see a clear breakdown of rehab costs. How did you arrive at these numbers?

3. What is your experience? Do you have a track record?

4. You have no money in the deal. I don't do anything 100% financed other than my own projects because you have no skin in the game and can walk away from a project without losing anything. And time is money.

5. Where are the holding costs? What about taxes and insurance? Where are your utility costs?

6. I usually like to see a 30, 60, 90, and 120 day rehab breakdown with newer investors. 

7. As said above, if I'm risking my money with someone less experienced, I expect a much higher ROI.


Best of luck!

Originally posted by @JR T. :

@Ray Jimenez You came here asking the volunteer contributors here to give you feedback on your "investment" proposal and now you're arguing with the responses you receive. 

 Such is the creature that is BP. (Book of LOL, 26:12)

Originally posted by @JR T. :

@Ray Jimenez You came here asking the volunteer contributors here to give you feedback on your "investment" proposal and now you're arguing with the responses you receive.

You have little experience, credit or money. Why should anyone trust you? 

Get some of your own experience the hard way, with your own money, then you'll understand all of the little things in your proposal that are turn offs to those who already possess credit, money and experience. 

 I am disagreeing because people are just reading the headline without reading the context of it. Some are good reviews but some are just plain negative. Also I don't know why people have this misconception that I am new, Ive been in the industry for almost a year who completed multiple wholesale deal and also a licensed agent, so I know i bring some sort of value to the table.

@Ray Jimenez - As far as the feedback you were looking for in the OP I believe you have received more than enough.

My question to you is this: Why are you not marketing this to Flippers at your REIA? If I had this deal under contract here is what I would do.

I would head to any function where I know other investors converge to talk shop and during the Need/Want or any other time where I could bend the ear of the "Seasoned" Flippers in the room I would say "Hey guys I have a great deal under contract that has an ARV of around 125K based on recent comps, I am willing to let it go for 32K if anyone is interested. However, I would be more interested in staying involved in the process as I would like to build my track record. Here is my analysis of the deal."

Purchase Price: 32,000

Rehab Budget: 24,000

Holding Costs: 30% or 37,500.00

Potential profit: 31,500

Saying that you will either make around 7K on assignment after you let them talk you down to 30K for the purchase or you will get the attention/mentoring time of someone like @Jeff Rabinowitz  or any of the other successful rehabbers here who have the experience doing what you want to be doing.

Instead of looking for Private Money this early in your career after most of the veterans here have all shared on the forums and in other arenas that they weren't able to successfully find private money until they were very open with their track record and most of them will tell you that instead of presenting a singular "solicitation" for private money they first gave the potential investor their 3" Ring Binder full of here's what I've done so far any questions book.

The only caveat I can see to the above would agree with the first piece of advice you were given. Give them an offer that while not being too good to be true; makes it difficult for them to pass up. 50/50 with preferred returns or 70/30 split their way. You have to remember you aren't just looking for one and done investors, you want ladies and gentlemen that will hand you their hard earned 5-6 figures and allow you to keep their money churning better than a dairy farm. 

While I only meant to leave my .02 it looks like I gave you the full nickle.

Thanks for listening!

I agree with Jeff. I believe there should be more credibility built into your presentation. In presentation looks like good looks very "heart surgeon" like.  Perhaps you will do better if you have more about yourself in the presentation and how you offer value by being a savvy investor.  I also don't understand why you're buying closing cost is over $8,000.