I just received another screeching email from a self-proclaimed guru bragging about how he just did another risky deal with private money from a new private lender in a crap-hole neighborhood that he would never buy in with his own money, and that he didn’t even have to offer a personal guarantee because the lender didn’t know enough to ask for it.
Bravo Sparky. Bravo.
You took advantage of someone that didn’t know any better. I’ll bet your mother is SO proud.
And the crime of it is, he’s far from the only one that does this. I personally know several real estate investors that HAVE walked away from risky deals and left private lenders holding the bag. And that wouldn’t hesitate to do it again this afternoon if it suited them.
Some of them even brag about doing it. The amazing thing is that they continue to find new people that will lend to them.
Personally I have never understood that.
Sure it’s nice to offload risk. That makes good business sense when done properly. But to stick it to someone unsophisticated like a neighbor or acquaintance that doesn’t know any better? C’mon. That’s just plain dishonest.
In my book there are really only five basic rules for using private money in real estate deals. I know that if I abide by them that I significantly increase both the likelihood that we’ll have a profitable deal, and likelihood that we’ll do more deals together.
My five rules are:
1. Don’t use someone else’s money to buy in areas where I wouldn’t spend my own money
2. Don’t use someone else’s money to buy properties that I wouldn’t buy with my own money
3. Don’t use private money to practice if I’ve never done that type of deal before
4. Don’t take private money from someone that can’t afford to lose it
5. Give a personal guarantee
Pretty simple, isn’t it? It really isn’t all that difficult to do things the right way.
As you might expect, I get a lot of grief about #5 – the personal guarantee rule. Other more “seasoned” investors are always telling me that I don’t have to give one, and one of them even told me that I was “stupid” for giving them when we recently got into a heated back and forth argument about it.
Stupid. Really? Hmmm.
That’s not how I see it.
It’s more like putting my money where my mouth is Sparky. Thankfully there’s still a bunch of us left that consider that to be important.