5 Solutions to the Most Common Mistakes When Raising Private Money

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Raising money from strangers is not so simple, especially when you have to deal with SEC guidelines and a real estate market that has brought about countless negative media headlines.   Despite the negative headlines, the real estate market is ripe with incredible deals — deals so good we will be talking about them for decades. 

Raising funds for these deals however is the biggest challenge for many investors.  Banks are extremely tight and cash is king; sellers flat out want cash.  Now, raising private money is not as simple as just asking family, friends and contacts.  You have to engage strangers and somehow convince them to start writing checks and wire money all while not violating SEC guidelines.  It absolutely can be done and is being done by thousands of investors.  Many struggle and make a lot of mistakes. 

Here are solutions to the most common mistakes when raising private money.

  1. Do not give up – Your success in raising private money does not hinge on your first try.  In fact, it may take 20, 100, maybe even 1000 times until you get a Yes.  Everything can snow ball in a positive direction after that first Yes.  Never give up and that next attempt could be the one that starts your lift off.  Mistake #1 is giving up too soon.
  2.  Build credibility and a track record – For most it simply comes down to trust.  Investors will step to the plate if they trust their money is going to be safe.  To build trust, investors must find you credible; you must build credibility.  If you don’t have a track record like most beginners, then partner with someone who does such as a mentor or an expert in your area.  Do this ethically, do not just steal their track record; make it a win-win and build your own track record.  Mistake #2 is the failure to establish credibility and a track record.
  3. Get them to come to you – What do you think of door to door salesman?  Especially when they sell items you don’t need?  Chasing private investors is like desperate begging.  The key is to get them to come to you.  Give out free information, use your track record and teasers to get them to come to you.  Mistake #3 is desperate chasing and begging.
  4. Prospect potential investors – You are not borrowing money, you are offering a tremendous opportunity for investors to make a great return on their money.  It is a privilege to be your private investor.  It is as much about your investors’ being a good fit as it is you and your deals being a good fit for their money.  You must ask them prospecting questions.  Find out their experience in order to confirm they are comfortable with investments backed by real estate.  Make them show proof of funds, find out their expected return, timeframe and what due diligence they need to make a decision.  Always prospect potential investors to make sure they are a fit.  Mistake #4 is not prospecting potential investors which results in a lot of wasted time.
  5. Make them commit – People flake. It happens all the time especially when it comes to money.  They say they will fund but they suddenly have questions and objections at the last minute that they clearly should have brought up a long time ago.  This can easily be avoided.  All investors must put up money before close, in fact at the beginning of the process.  Earnest money, inspection fees, entity creation, or a reserves deposit are all ways they can show commitment long before close.   Mistake #5 is waiting until close to find out that an investor is not committed.

There are many benefits to buying with cash.  You can get big discounts, buy fast and do deals not possible with conventional financing.  Cash is king and there is a lot of cash out there.  Money does not disappear, it just changes hands and right now a lot is sitting on the sidelines.  Stay persistent and implement these 5 solutions.  Raising private money could be the key to a successful real estate investing business for years to come.

About Author

Ryan is the founder of Real Return Real Estate™ , a company focused on buying property at extreme discounts, selling and renting with cash flow.

8 Comments

  1. Jimmy Oldrich on

    I would add a couple of things based on my experience actually investing in various projects: 2. Credibility. First time relationships with money are always cautious. Appropriate recourse and guarantees should be available if a deal goes south. This will go farther toward establishing credibility than any amount of relationship except possibly your nana. If you’ve really done the work you claim and have the experience you claim, you certainly can gauge whether a deal will succeed. Show your confidence in your proposal.
    3. Get them to come to you. This is smart. BP is a great forum for doing this kind of leading marketing.
    4. Qualify investors. Requiring a proof of funds at this point is going to get you laughed at. Feel free to have a go. I personally think a proof of funds is silly. If they don’t have the money, why are they talking to you? Just to jerk your chain? I can’t imagine anyone wasting their time (it’s their time as well as yours, of course), but maybe it happens.
    5. Commit. This is where the proof of funds might come in. In the absence of guarantees cited above, any requirement for earnest money is going to smell like a scam.

    I appreciate that dealmakers want to sell their deals in the most compelling way possible, incremental acceptance, in for a penny in for a pound, all the typical influence tactics that lead to successful closes. But give the person on the other side of the table some credit. It may not be their first rodeo.

  2. Good points Jimmy, thanks for the input. I fully believe an investor has to put in some money before close or they are not committed. I have received proof of funds, verbal and written commitment, then put up the earnest money and inspection fees just to have them flake at close and I lose all of that money, time and the deal. Excuses like my wife won’t let me and other objections that should have been raised earlier and would be raised if they have to pony up for the earnest money. If an investor is not willing to put up a refundable deposit then they are not comfortable with an investment backed by real estate or have objections and will most likely flake at close. The fallout when someone flakes can be devastating. You can hurt and ruin relationships with banks, sellers, agents, contractors and anyone involved in the deal. They will find you as unreliable and a time waster, all because your investor was never truly committed. But this can be avoided by getting commitment and dealing with objections up front. Make sense?

  3. Jimmy Oldrich on

    Yeah, I get it. Thanks for the insight. I can see why it’s useful to be able to consistently deliver for all parties in the transaction. That said, the various contributors are in the real estate business, too, and have seen their share of delayed closings and deals gone sideways.

    Saying it’s about preserving your rep sounds like you’re working on leading a street gang instead of a business transaction.

    The truth is every RE transaction I’ve been involved with, the earnest money was just a token and would be easy enough to walk away from if it came to that. So there’s not really a practical difference to me.

  4. I never thought of it like leading a street gang but I really like that, HaHa! We have a few banks/sellers that have recognized us as a party that will close and they are handing us deals now. These are very valuable relationships and we are on pace to do 40-50 deals this year. So you can see how these relationships along with the ones with agents, contractors, etc are important. We can’t do volume without a team. You waste your teams time with someone who flakes even when due diligence confirms a deal is a deal and your team could quickly sour. Bottom line is this is avoidable so accountability goes to the top, me. I have learned the hard way , now I prospect and get investors to commit. If I scare someone off then they would have only flaked and wasted our time anyways. If they have objections we will handle them upfront when they should be handled. Nobody messes with our gang, we run the streets, HaHa!

    By the way, every current investor has come back for a 2nd or even more deals and I prospected and got commitment from them all. Thanks again for your feedback, I’ve really enjoyed your comments Jimmy!

  5. Jimmy Oldrich on

    There was a guy I worked with in the kitchen remodeling business. He had over his desk a sign that said “This is the business we have CHOSEN.” When I laughed about it, he pulled out a sheet of paper and read the full quotation from Godfather II. It’s about bearing what must be borne to do business. That’s what deals going sideways or flaking out makes me think of. Thrill of victory, agony of defeat. All that. It is part of the emotional payoff for dealmaking, but I can see how it doesn’t scale.

    I still smile thinking about that guy.

  6. Thanks for writing this article. Indeed, raising private capital today can be difficult. Yes, there’s money on the sidelines although investing in the stock market has been more profitable for folks lately which can make private money for real estate somewhat less attractive by comparison (although still a far superior product for those of us in the know). There’s also no getting around the fact that people are generally leery of ‘new’ investment types, and this falls into that category for most folks who are brought up only knowing stocks, bonds and mutual funds. The key is Educating people and this can sometimes require multiple ‘touches’ before they warm up to the idea. Persistence is key.

  7. Thanks Michael, one thing that you mentioned is people “in the know”. That’s what I love about real estate investing is you can do due diligence and make an informed decision. The stock market and most other investing some more like a gamble.

    I totally agree that you must touch people multiple times. Often 5-10 times before you build credibility. The best private investors already have experience and are comfortable with investments backed by real estate. Beginners that you have to educate are extremely time consuming and have a high chance of flaking. As investors we must understand the risk and justify our decisions with due diligence. Experienced investors are comfortable with this, beginners it takes some time and they have to overcome some comfort barriers. Often comes down to trust.

  8. Jimmy Oldrich on

    With Ryan on this one. The “people in the know” thing is actually a credibility buster. Suggests there’s an in club and an out club. What you want to do is to point to the math and the experience. Just my .02

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