Attracting Private Money
DISCLOSING RISK
An excerpt from “The Insider’s Guide to Attracting Private
Money: Five Secrets to Fast, Unlimited Capital So You Can
Save Money, Buy More Real Estate, & Build Wealth,” by
Mark Hanf, President of Pacific Private Money.
W
hen you seek to attract capital from private
investors, you need to disclose the risk involved in your proposed project. The reasons
you need to do so are several, but one of
them is that you are asking people to lend you a portion of
their life savings, and they are entitled to know what happens to that money in the event that you exit the picture.
The fifth question we answer in The Five Steps to Money Method™, “What happens if you disappear?” is asking
much more than just “What happens if you get hit by a
bus?” Disclosing risk is a very important yet often overlooked or ignored piece of the private lending equation.
That is, risk disclosure is often overlooked or ignored
by borrowers. Your prospective private lender, on the other
hand, is absolutely thinking about the risks of investing
with you whether you bring them up or not. And what that
prospective lender wants to hear from you is, “What are the
risks, and what are your plans if things go wrong?”
You can answer this question by showing your lender
how you are structuring your company and what measures
you are taking to protect that individual’s investment. For
example, who on your team is positioned to take over in the
event that something happens to you? If you can address
this question and others like it, you will show your potential
lender that you have thought this through, and that you take
the protection of his or her capital investment very seriously.
The level of detail that you go into when disclosing
risk is up to you (with sound advice from your real estate
attorney). But the most basic risk disclosure essentially boils
down to this message:
YOUR INVESTOR COULD LOSE SOME OR
ALL OF HIS OR HER MONEY.
That is why disclosing risk is such an important factor
when you create your investment opportunity presentation.
Addressing and disclosing risks in your presentation will
make you look professional and thorough, just as the other
important components that we have discussed so far in this
book have done.
Many real estate investors don’t want to include
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risk-factor disclosures in their presentations because they are
afraid that they will scare away their prospective private lenders. They worry that if their potential lender understood the
risks, then that person would decide not to invest with them.
However, just sitting back and hoping that everything
goes perfectly is not a strong strategy for success. The truth is
that many real estate entrepreneurs have ended up in lawsuits
because they failed to provide even the most basic disclosure
of potential risks.
You should strongly consider engaging a real estate
attorney to advise you if you plan to raise capital from private
individuals. I am not an attorney, and this does not constitute
legal advice. That being said, I have attended numerous real
estate conferences and seminars on the topic of private capital,
and I have seen many examples of risk disclosures ranging
from simple ones to explanations that were long and complicated. As an example, for my mortgage pool fund, I provide
prospective investors with a memorandum that includes over
twenty pages of risk-factor disclosures.
The fact is that there are basic risks that you should be disclosing to your investors. Those disclosures should be included in any write-up you create for the purpose of raising capital
from private individuals.
You don’t disclose these risks to your potential investor to
scare them away. You disclose them so that the investor can
make an informed decision. Risk factors you might discuss
PAGE 33 • 2016
Continued on pg. 44
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