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Your Private Lender’s “Worst-Case Scenario”

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nailsA big, important piece in the game of “Courting Private Lenders to Partner-Up with You in Your Deals” is adequately answering their questions. And trust me – they’ll have lots of questions for you.

Bearing this in mind, one of the standard lender questions I hear my fellow real estate investors frequently nervous about answering is, “What if things go wrong? What happens to my money if your deal goes south?”

It’s actually a very good question, isn’t it? Anyone with half a cent in their noggin would ask you this, so it’s absolutely essential you know how to answer it, and it is imperative to do so in a way that’s both (i) honest, forthcoming and accurate, and (ii) makes them safe, secure and generally warm and fuzzy about you and your proposition.

So here’s how I do it, and what I recommend for you too.

Not If, But When…

First off, at what point exactly are you trying to answer this question for them?

It’s important for you to understand that timing matters. I’ve noticed far too many people making the mistake of trying to handle this question at entirely the wrong point in time in the private money courting process.

dogMy students know that you almost never answer a “detail” question like this until you’re in a formal sit-down meeting with them. This is where you have all the decision makers present, and you're walking them through your PowerPoint presentation (or mine* that I gave to you :-) Trying to answer this “what if” question has a much higher risk of sabotaging things for you if you contend with it before then.

Dealing With It…

So when I'm in a meeting and the question comes up: “Patrick, what's the worst-case scenario for me in all this?”

My response is something like: “You know what? Great question. Basically if things were to ever go south, worst-case scenario, rather than you being a lender-investor, making interest on your money, you would then become the owner, and whatever equity is in the property would become yours."

And then I would immediately try to comfort them and shift their focus a little with something like:

yoda"You know, at this point in our relationship, my aim is to mostly just to find out what your investing experience is, understand what your needs and goals are, and see how we fit each other. That way, as we move forward together, I can only offer investment opportunities that match your needs and goals very well. That's really all I want to accomplish together today.”

“Then once I find a particular property, I’ll already have my ducks in a row and know that it seems like a good match as an investment for you. Then we’d meet again, and I’d show you all the details of the property. If it looks good to you, then at that point in time you'd make the decision to lend on it – but only because you know it's a good investment and you know that ultimately, if you were to get the property back in the worst-case scenario, there's great equity in the property. You’d be 100% comfortable with it at that time, and confident that it's a great and safe investment for you.”

“So, ultimately, worst-case scenario, if we were ever to be somehow unable to pay you for any reason, you’d safely get the property back, including all the equity, which you were comfortable lending on from the beginning. Does that make sense?”

okay“The Exact Process?”

At that point I would just keep going in the presentation. But if they’re the “focus on the details” type, they may ask you more about what this process would look like exactly.

Keep in mind, I wouldn't actually bring this up unless they specifically ask, but here's how I would handle it painlessly…

“Well typically when a bank lends money, if someone defaults, they would have to foreclose. That's a whole process and usually handled by an attorney. But we can actually go the extra mile to help make sure things are super easy and safe from your end. Whenever you’re lending us the money for a particular property, we can go ahead and sign a deed over to you at purchase, that can then be held in escrow, just in case the worst possible scenario ever happened.”

“So that way, you wouldn't even have to go through any of the foreclosure process if we were to default for whatever reason. You’d already have a deed to you safely in escrow, and it would be outlined in our paperwork that if we ever default, the deed could simply be recorded, and the property is yours. No fuss, no hassle. That's kind of an extra thing that we provide anyone who does business with us, just so you feel 100% comfortable, safe and secure. Does that all make sense?”

From that point I would just shut up and see if they have any more questions. But you really shouldn’t get any push back, and it really is just that easy.

calmBottom Line…

Keep in mind the magic’s not so much in memorizing the exact script I just gave you word-for-word, but in 1) Only ever answering this question when/if asked, 2) Not dealing with it ever until the official sit-down together, and 3) Reassuring them in a confident manner that they’re safe and secure, even if it means offering them a backup deed-in-lieu of foreclosure.

Bottom line, you want to open upfront, lay it all out for them, answer their questions confidently, and then just dive back in the presentation and keep going forward.

Hope that helps! Now go get some deal funding.

*{Mogul Elite: Download a copy of Patrick's private money fundraising presentation in the Power Pack tools for this lesson.}


Do It To It! Immediate Action Steps

Be Prepared – Be prepared to address your lenders’ inevitable concerns about worst-case scenarios, but only broach this topic when asked to do so.

Understand – Understand the importance of timing, and don’t answer a “detail” question about worst-case scenarios until you are in a formal sit-down meeting with all decision-makers for a particular deal.

Reassure & Comfort – Confidently reassure your concerned lenders that they are safe and secure in your hands, even if it means offering them a backup deed-in-lieu of foreclosure.

Stay Focused – Stay focused on your primary goal of fundraising, and don’t allow yourself to be unnecessarily shaken or sidetracked by questions about worst-case scenarios.

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