The private money world is all about trust. Private money lenders are looking to reduce their risk. Trust goes a long way towards reducing the perceived amount of risk. Yes, you can write up contracts, notes and deeds. But all those documents do when it really comes down to it is keep honest people honest.
So how do you build trust with your lenders? There are numerous ways. In this post I want to touch on some of the more important ones and build a bit upon my last post on finding and using private money.
How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
10 Smart Tips for Building Trust With Private Money Lenders
The first thing to do is simple: be trustworthy. Do what you say you will do, and live up to your commitments. By commitments, I mean both large and small, such as showing up to appointments on time, keeping all of your bills paid and following through with whatever you may promise.
All of this affects how others view you and thus your trustworthiness. Remember, any private lender is likely to ask around about your character. Be sure that people will be saying the right thing.
Document That You Are Trustworthy
If you are trustworthy, do what you say and pay your bills on time; eventually you will have the documentation to show it. Put this documentation together in a “Banker’s Book.” Get a copy of your credit report showing that you pay your bills on time all the time. Demonstrate how past real estate projects were successful and how lenders got paid back. Include a list of references.
Other lenders can make the best references, but if you are just starting out, perhaps you could list your attorney, accountant, contractors, past employers, whomever. Anyone who will vouch for your credibility will do. It is also nice to personalize these things a bit by including your resume and a list of any volunteer or charity work you might do, such as coaching soccer or being on the board of your local REIA.
Explain Things in Clear and Simple Language
Don’t try to be that person who spouts out all manner of technical banking and real estate terms (unless that is what your lender is looking for). Most folks will not understand and will get turned off or confused. Always remember that a confused mind often says no.
Instead, keep things simple. Explain what you do, where their money will go along with how and when they will get repaid. That is often really all they care about.
Know The Numbers and Be Able To Explain Them
Being clear and simple is just one side of the coin; the other is understanding the numbers of your deal inside and out. You need to be prepared to explain in detail any deal and be able to document how you arrived at the numbers you are presenting. Be prepared for the following questions: How will the investor make their money? What will they make and what will be their return? Did you get an appraisal and run comps, or are you just doing some wishful thinking?
Knowing the numbers will give you confidence, and confidence projects an air of trustworthiness.
Listen and Find Out What Your Lender Wants
A lot of what makes a successful real estate investor is being able to listen. Stop and listen to your potential private lenders. Don’t just think of yourself and your needs.
What are they looking for? What are their goals? Do they want steady income, high rates of return, to churn their money quickly? What will make them feel secure? Do they want 60% loan to value or perhaps 75% after repaired value of a profit sharing deal? Listen and find out!
Find a Deal That Meets Both Your Needs
Once you know your lender’s needs, you can then begin to search for a deal that meets both your needs. It may require you to think about or approach a deal a bit differently, but that is OK. If you can give people what they want, they are likely to give you what you want. Think of how pleased and impressed your lender will be when you find the perfect deal.
Remember that Communication is Key
Remember that communication is key. Don’t just close the deal and then close off communication. The lender will need reassurance, especially if it is the first time working with you. They need to know they did the right thing by investing with you. The best way to do that is with communication.
Document and demonstrate that you are spending the money wisely. Send email updates with pictures and other documentation of your project. Show your roofers or painters at work, for example. Keep them abreast of what is going on, and your relationship will be much smoother going down the road. Most problems that arise can often be traced back to a lack of or poor communication.
Document and Record
Let’s face it, the days of the handshake deal are generally behind us. Paperwork — often lots of it — seals the deal. Draft a solid operating agreement between you and your lender. Use a trusted closing attorney to draw up the notes and deed. Record the appropriate documents properly in the public records.
Keep Building the Relationship
Investors are going to test the waters. They will likely only lend you a small amount of what they might have available to lend. They may also charge you higher interest rates or fees at first. Trust has to be developed. But if you do what you say, the relationship will grow, as will the amount of money available. Take a higher interest rate for now. A better one may come later. Take less money now; more may come later.
Finally, Be Yourself
No one likes a smarmy salesman, and most can see right through a canned sales pitch. Just be yourself. If you don’t have much experience, don’t try to fabricate it. Be honest. Tell folks that you are just starting out and that they can get in on the ground floor of a good deal. If you have several successful deals under your belt, be modest. Nobody likes a braggart. Being yourself with prospective lenders can go a long way towards building trust and helping out your business.
Do you have anything to add to the list? What do you say, private lenders? Did I get it right?
Let us know with your comments.