If you only had 10 days to source private money to fund a deal, how would you do it?
Well, that’s exactly what a student asked me when his private lender pulled the rug out from under him at the last minute. Unfortunately, I’ve seen this happen before too, so it’s best if you’re prepared for this type of situation.
Let me give you some specifics about my student’s deal and then show you 5 options for making it work.
Deal Details:
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Less than 10 days to close
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Lots of time and money invested in the project, and the bank had another buyer
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Commercial property, well undervalued and has huge potential
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Property sold back in 2006 for $570k; 9,592-square-foot, 15-unit retail/office complex
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REO contracted for $180k, which is just $18.77 per square foot (!)
Well, 10 days certainly isn't much time, but I believe this deal can definitely still happen if my student takes massive, focused action.
First, don’t panic. And with time being of the essence, here's my private money action plan to follow…
5 Viable Options
1. Make the deal even sexier...
What are you offering your private lender?
You may want to consider offering equity in the deal since it’s such short notice to entice someone to quickly fund it. Bringing someone in as a 50/50 partner to save a deal is better than not doing the deal at all most of the time.
2. Phone a friend...
An often-overlooked source of private money is other real estate investors.
Look for any investor marketing (newspaper ads, bandit signs, etc.) and contact them. Let them know that you have a great investment opportunity for the right person and see if they (or someone they know) may be interested in funding it.
3. Spread your net, wide and fast...
Have you called everyone you know who could either possibly fund it themselves or could refer you to someone who could?
And I mean everyone.
Every mortgage broker, Realtor, neighbor, family member, people you know through church or whatever organizations you're part of?
Do it, and don't assume a negative in advance from anyone. You may be surprised at what you find in places you never expected before.
4. Re-approach...
Is there any way you can negotiate an extension on your contract?
If so, it may be worthwhile to buy some time since you have a lot of time and money invested in the deal.
And on future deals, I wouldn't advise spending any money in a property until you close on it (other than doing your due diligence).
5. Go hard...
You may consider bringing in hard money and then refinancing it with private money. Ask other real estate investors you know for referrals for hard money lenders and check the “money to lend” section of your local newspaper.
On one of my first deals, I had to come up with $112,000 in cash in about the same time frame, and we ended up door knocking on Realty and mortgage broker offices until we showed it to the right person... who jumped on it as soon as he saw the deal. He was a Realtor and investor himself, and knew it was a homerun.
Moral of the Story
Do whatever it takes to harvest the money.
Think outside the box, spread your net wide, talk to everyone you can think of and consider other, more expensive options you normally wouldn't, like a quick partnership or hard money.
There’s nothing like a great deal to force you into massive action, huh?
And one note for the future: The worst number in business is the number 1. Meaning in this case, if you ever rely on only one source of funding, the only person you can get upset with if you lose a deal is yourself.
You want (and need) multiple funding options to ensure that you NEVER lose a great deal. Always have a back-up lender in place.
Talk to Me
Got any private money tips? Join the conversation in the comments section below.
Offer a private lender equity to make the deal sexier.
Ask anyone and everyone you can think of if they’re interested in financing the deal – don’t discount anyone, you ever know who has money to invest with you.
Consider bringing in a hard money lender, and then refinancing it with private money to get the deal done.
Always have multiple funding options at the ready to avoid scary situations like this.
Patrick Riddle
has been investing in real estate ever since he got the bug in college at Clemson University and - to his parents dismay - dropped out of college to dive full-time into real estate at the age of 22 with a couple friends/partners from school.
The first few deals were rough for them, mainly using their own cash, credit, and hard money loans. But, soon he found out that was a rough and unsustainable way to build a real estate business.
After "on the job" learning through the school of hard knocks at first, he found the key that helped their company get deals done more quickly, with higher profit, less risk, without having to go to banks or use their own cash.
Fast forward to today, their company has closed over 130 real estate transactions and has put over $6 million in private money into their own transactions.