Choose Your Advisors Carefully - It Could Cost You a Private Lender

Any serious real estate investor that has read the Rich Dad books by Robert Kiyosaki, or many of the other quality educational materials available on real estate investing - has probably noticed a recurring theme:

Have a "Power Team" of professional advisors if you want to build a big, successful business.

Robert Kiyosaki often talks about how his Rich Dad would meet with his attorneys, accountants, insurance people, bankers and other essential business associates/service providers to help him prepare, plan and execute his vision of building wealth.

Since Rich Dad, Poor Dad came out in 2000, I've noticed an increasing trend of people of experts advocating that you have a your "team" put together. That is, in order to build a successful business, you should have on your speed dial:

• an attorney - a real estate attorney if you're a real estate investors
• a corporate/contract attorney
• a bookkeeper (to keep your records straight)
• a CPA or tax attorney
• an insurance agent/broker (to help you identify and reduce risks)
• a banker
• a mentor or advisor

There are probably some others that I'm leaving off this short list.

One big question is: is it really necessary to have this power team to build a successful business?

In short: my answer yes. Butt...

First, let me tell you the cynical side: a story about how an attorney blew up a private money deal and cost me a boatload of profits.

About two years ago, I was beating the drum and raising a ton of capital. A couple of potential private investors came into my office one day, sat down in our conference room and I laid everything out for them. These investors were already qualified and had indicated in multiple ways that they were ready to pull the trigger and just needed to see the details.

During my meeting with these investors, everything went great. Couldn't have gone better. They signed an investment commitment for and we were scheduled to close a deal the following week.

They walked out of the meeting with my company's disclosure documents, along with other required information for them to review before funding the deal. When they asked if they could have their attorney review the materials, I said: "no problem, I encourage you to do so."

Big mistake.

Flash forward to the following week, with about 72 hours before the deal was supposed to close. I called one of the two potential investors and I asked him if everything was ready to go. He hesitated for a second and then he told me that his attorney had advised him that "...this deal wasn't such a good idea."

What?!

Needless to say, I was pretty surprised by this. Shocked almost. These investors met the criterial of "accredited" by SEC definitions. They were given the proper disclosure documents, a copy of our business plan, they had seen my company's financial statements, tax returns and bank statements - along with a huge stack of profitable deals that had been closed with other private investors funds ---AND they had also been given references to other private investors who had invested with me that they could call for a reference.

I just wasn't sure where the disconnect was. What had this attorney seen that caused him to advise his clients against investing with me. The investment didn't even represent 5% of the net worth of the investors and, it was a secured mortgage loan with about a 50% LTV.

What the heck?!

I didn't want to lose my cool with the private investors, so I asked if we could do a conference call with their attorney. The call was arranged for the next day.

Dialing into the conference call, I wasn't sure what to expect. Was this attorney crazy? Did he need a reason to justify his billable hours to his clients?

I soon found out the answer.

It turned out this attorney (who'd been a member of the bar for at least 20 years) was ABSOLUTELY CLUELESS about what he was advising his clients on. During the call, I found out that this attorney didn't have any specialty or expertise in real estate, corporate or securities law. Turned out he worked in another field of law.

How could this guy possibly, in good conscience, advise these prospective investors on anything related to a real estate investment?

Well, I never did find out the answer to that question - a the conference call ended abruptly...right along with my private money deal.

Flush-right down the drain.

I'm talking about $250k in private money that was 2 inches from the goal line. At the time, that amount of capital could have generated about $100-$150k in annual gross profit for me.

And, I'm not gonna lie - that night...I came home and had a stiff drink. Johnnie Walker Black Label.

The sting wore off over the next few days and business went forward. I raised a lot of money right after that incident and, truthfully, I don't think about it all that often...Except...

...when people get on a real high horse about how important it is to have a stable of professionals on your "power team."

I still think it is a good idea to have qualified professionals who are on your 'team' -----BUT...BUT...BUT...BUT...BUT...

Be VERY VERY careful about who those professionals are. Because, the attorney in the case of the two potential investors with me, cost his clients about $30,000 per year in passive income. I know for a fact that those two investors kept their money on the sidelines and they missed out on a nice opportunity to make money with their money. Some "service" they got from their attorney.

As you may note: it's a lot easier for a professional to kill a deal like this than to advise their clients to invest in it. The professional is "safe" by saying "no" and they face the risk of losing a client if the client invests and loses money. It's a matter of incentive. Plus, the professional is going to have their guard up against anything they perceive as out of the ordinary. Strange, considering the attorney's and CPA's who happily send their clients to get slaughtered in the stock market by referring them to their financial planner buddies.

Back to the task at hand: I do think it's important that you have a GOOD and COMPETENT advisor for your particular needs. But, be extremely cautious in whom you select to advise you (or your private investors). Make sure your advisors know exactly what you do in your business and what your specific needs are. Interview many before you pay out even one red cent in a retainer.

If you think that a referral from Uncle Joe to his "tax guy" is going to fit with your real estate investment goals, better think again. After all, it's YOUR business and YOUR profits that are on the line.

And...this rings especially true with the most important aspect of law concerning raising private money: securities laws. Make sure you hire a securities attorney that has dealt with small company offerings and exempt transactions - and, for real estate in particular. Many securities attorney's know the SEC codes but they don't know much about exempt transactions for small, private companies. Most corporate attorneys are completely clueless about securities laws or they have a vague recollection of them from their law school days. Don't let any attorney tell you they can handle everything for you. They can't - it's just more billable hours. They are in business to make money as well, but you have to be your own advocate.

Here's something else...

You should encourage or at least mention, to your private investors that they can/should review your offering documents with their advisors. If a prospective private investor asks you if they can have their advisor look over the materials, your answer should be "yes." But, here's what you do when that happens. Offer to meet with the investor and their advisor or, at the very least, set up a conference call. You should be comfortable in spending at least a few minutes walking the private investors advisor through the details of your deal. It could go a long way in smoothing the way for the deal to close without snags.

Ok, there's the bell. Lesson over for today. Commence butt-kicking and, as always...

-Happy Investing