Attracting Private Money, Disclosing Risk, pg. 33
could include things such as:
• changes in the real estate market
• cash flow problems
• conflicts of interest
• an unproven real estate investing
company (if you’ve never done a deal
before)
CHANGES IN THE REAL
ESTATE MARKET
Your oppor tunity presentation is
based on a set of assumptions. Those
assumptions include things like market demand, potential market appreciation, and an estimate of the increase
in value as a result of your planned
improvements.
guarantee that the results you predict
will be realized.
CASH FLOW PROBLEMS
You have proposed a budget and a
spreadsheet to your lender that shows
your sources and uses of funds. But
what if you come across significant
and unexpected cost increases? Do
you have the ability to cover them?
Typically, your money partner will not
be under any obligation to fund additional costs beyond the agreed-upon
budget unless you bring this up in
your written agreement beforehand. If
the project stops as a result of running
out of cash, you could be faced with
mounting costs and declining profits
as time goes on.
However, the real estate market is
subject to cycles that can affect the
CONFLICTS OF INTEREST
marketability, pricing, and days-onmarket estimate of your project. Real
Are you planning to dedicate 100 perestate can and does decline in value as
cent of your time to this one project
a result of certain market forces. Riswith your prospective money partner?
ing interest rates, job growth, joblessOr do you leader
have other for
projects
or work
ness,We’re
new inventory,
and
other
factors
the Northern California
loans
obligations that might be construed as
can contribute to a drop in demand
real
estate
“conflicts of interest”? You can make
and to
prices
for real
estate ininvestors.
a given
a statement in your presentation that
market. Your prediction of how well
reliable,
and
never
change
gives
yourwe
lender
notice that,
while
yourWe’re
proposed fast,
project we’re
will do should
you are dedicated to the success of
pricing
on you
mid-stream.
be based
on a careful
review
of local
this endeavor, you are nonetheless
market conditions, but you cannot
free to pursue other business ventures
or obligations, as well.
UNPROVEN REAL ESTATE
INVESTING COMPANY
If you are new to real estate investing
or if you have formed a new company to pursue real estate investments,
you may not have a track record of
success. In that case, your business
model is unproven.
Changes in the market, cash flow
problems, conflicts of interest, and an
unproven
realtoestate
Learn
how
findcompany are just
a
few
examples
of the risks that you
your own private
may want to disclose to your lender.
lenders! Get your
There are many others that you can
copy of our new
book by going to
PAGE 44 • 2016
AttractingPrivateMoneyBook.com
identify and include in your proposal to give your investor a complete
picture of what the project will entail.
A qualified real estate attorney is an
integral component to your team and
should be consulted to assist you in
drafting an appropriate disclosure
statement.
I have been telling you to always
put the best interests of your private
lender first, but the fact of the matter
is that a primary purpose of your disclosure statement is to protect you in
case your lender chooses to sue you.
If you can demonstrate that you disclosed material risks to your private
lender before that individual invested
with you, should things not work out
as planned, you will be much better
protected in a court of law.
Excerpted from the book “The Insider’s Guide to Attracting Private
Money” by Mark Hanf, available at
www.AttractingPrivateMoneyBook.
com. Mark is president of Pacific Private Money Inc., a California-based
hard money lender who has raised
over $200 million in private capital
since 2009.
Private Money411