POSTED BY JD ESAJIAN // FEBRUARY 8, 2019
There are many pieces to a successful real estate transaction. You need a good property, the right price, proper vision and most importantly, financing. Without capital to put your plan in motion, nothing else matters. Fortunately, there are more financing options today than ever before. No longer do you need to solely rely on traditional lenders to underwrite your deal. With the increase of hard and private money, there are outlets to quickly find the money you need. As great as working with people close to you can be, it doesn’t come without some potential headaches. The more you have on the table from the outside the easier the process will be. Trying to figure things out as you go is often a recipe for disaster. Here are five tips for borrowing money from friends, family and co-workers.
Treat transaction like a lender. Borrowing money from someone close to you should be treated like any other transaction. In fact, you should use even more caution with the people in your life. There is truly nothing better than sharing the excitement of making money with your friends and family. However, there also nothing worse than losing a relationship over money. The best way to combat this is by treating the transaction like a lender. This means going through systems, policies and red tape prior to getting very far. The idea of working together may sound good on the surface, but once you look at the numbers and the data it can be a different story. Not only do both parties need to know the numbers, you should document everything. This doesn’t make you overly cautious or untrustworthy. It makes you a smart, savvy business person.
Use an attorney. Verbal contracts are great, until there is a problem. The reality of real estate is that the unexpected is the norm rather than the exception. Things have a way of shifting gears when you least expect it. If you are reckless and unprepared you won’t know how to handle this, and it will impact your bottom line. Every time there is a monetary exchange you need to hire an attorney. At the bare minimum, they should write up a repayment agreement. This should have the term, the interest rate and any penalties for failure to pay. This may seem excessive when dealing with friends, but you don’t want to have to scramble if it does. Your attorney should also handle the offer contract. Your real estate agent may write it up, but your attorney should act as an extra set of eyes. They should always have your best interest in mind and both parties should openly agree to it. When one side doesn’t know, or want to know, what is going on there will ultimately be problems. An attorney acts as a great buffer and will protect both sides in the event of the unexpected.
Define roles. Where most financial disagreements run into trouble is when roles aren’t clearly defined. It is important to take some time and talk about who is going to do what moving forward. A financial partner may feel they are entitled to more control simply because they supplied the capital. They want to make decisions on the rehab portion of the project and could become a problem if not addressed before the transaction. Prior to getting too far you need to sit down and address who is going to do what. This includes work getting the offer accepted, coordinating work, physical work, pricing and getting the property sold. It is important not to leave anything unsaid and no stone unturned. It is only when all parties are comfortable with the arrangement that things will start flowing in the right direction. Without this discussion beforehand, you will eventually get in each other’s way or one side will be disgruntled.
Talk worst case scenario. There are many stories of real estate success. A successful partnership with someone close to you is one of the best lives you can have. However, things don’t always go as planned. You need to have a difficult conversation on the worst-case scenario. What happens if there is an unexpected issue with the property? What if the budget needs to be expanded? What if you can’t sell for the number you originally had in mind? What if the contractor walks away in the middle of the project? As crazy as these items may sounds, they can and do happen. Talking about them before you go too far allows you to pivot without wasting time and money. Talking about the worst case isn’t being pessimistic or negative. It is being prepared and realistic.
Discuss sales price. Inevitably in any partnership one partner wants to shoot for the moon and list at an unrealistic number. On average this works maybe one out of every ten times. A more typical scenario has an overpriced home sitting on the market for an extended period. This leads to further disagreement, arguments and panic as to what to do, which ultimately leads to nothing. Not until a month or so after the home is listed is there a price reduction at which time neither partner is happy. Pricing conversations should happen well before the project is finished. This should be talked about when you make your offer on the property.
Working with the right partner should allow you to close more deals and make more money. Always get as much on the table beforehand as possible so there are no disagreements or misunderstandings down the road.