The investors role in house flipping is usually passive. Most often, the investors will not know the contractors or the real estate agents personally. They do not work alongside of them. They only know the flipper with whom they develop a personal relationship based on experience and trust. We have to create that relationship. How do we convince them that their money is safe with us?
Convincing people who are already hard money lenders isn’t hard. They are capable of assessing the deal themselves. These people are mostly concerned with your ability to perform.
Converting your own investors is more difficult. The first $1 is the hardest to obtain. You have to get the first YES. Just one YES. You have to get your foot in the door. In order to get that YES, you must convince the investor to trust in you.
The main factors controlling risk in flipping houses for the investor are the amount, familiarity, and experience. This works best if you think of yourself as being approached as an investor. Think about lending your personal money to someone else.
Amount
The amount of money matters. If someone asks to borrow $1, you would probably lend it. You may even just give it. How about $10, $1,000, $10,000, or $100,000? The point is that everyone has a different amount that is too much. This is the easiest way to feel and understand risk. You may never see that money again!
Remember that when you approach an investor asking for money. You are much more likely to receive the YES by asking for a small amount in the beginning than a large amount.
Familiarity
How familiar are you with the potential borrower? Forget about the amount for a moment.
First, think about your friends and family. You are very familiar with them. We all have some that we wouldn’t trust to repay us at all. How about the ones that you do trust? Why do you consider them trustworthy? They probably have a history of paying you back. You need the lender to feel that way about you. If they already feel this way, and they need to invest somewhere, you are likely to get your YES.
Second, think about the second tier. This is someone that you don’t know directly, but they know some of your close friends and/or family members. Now you have some investigating to do! Which questions would you ask your friends? Two questions would be obvious. How long have you known him or her? Would you trust him or her with your money? The answers to these questions are more important than anything else for most people when deciding to say YES.
Third, think about a person completely outside of your social network. Unless he or she is a celebrity, this is a problem because we have no history to call upon. You can interview them thoroughly, but conmen can be very charming. You can collect references, but conmen are not likely to give the contacts you would need to find the truth.
The point here is that familiarity helps your pitch. When meeting with an investor that you don’t know, try ahead of time to understand your network connections. Odds are good that you have mutual friends or acquaintances if you have lived near each other for some time. Did you attend the same schools? Might your parents or children have attended the same schools? You are trying to find the connection. This means you want names of people you both know in common. Association with the same people can make you more trustworthy.
You can use Facebook for this situation too. Friend the potential investor/lender on Facebook. Use the same trick as before. After you have become friends, you will be able to view their friends. Facebook will show you all of the mutual friends you have with them. Without getting into how Facebook works, let’s just say it can be a valuable resource for you in networking.
Any personal connections you have can help provide familiarity and social accountability. You should mention these names too. This way they know the connections as well. The simple fact that you know these people by name makes you more trusted, familiar, and accountable. Familiarity can help you turn a no into a YES. Social accountability will promote fair treatment in your future business dealings. You are less likely to treat each other poorly if your friends might hear about it.
Experience
How experienced is your potential borrower? Forget about amount and familiarity for a moment.
Nobody wants to meet an 18 year old brain surgeon when they are the patient! We don’t care how smart they are! They can’t possibly be experienced enough for such a serious surgery. Ok, that is an extreme case to prove a point. It was either that or a rocket scientist when you are the astronaut. You get the idea.
Similarly, you would probably not want to give your money to an inexperienced professional. After all, you don’t want to pay for them to learn. Learning something new can be very inefficient and time-consuming. You would naturally shy away from that investment opportunity.
There are two levels of inexperience that matter. How experienced they are in the profession, and how experienced they are in the location.
The first is pretty self-explanatory. 30 completed deals are way better than 5 completed deals, which are better than 0 completed deals (brand spanking new to this!). We think performing well on 5 consecutive properties is a good bar.
The second is more difficult. A different location may mean a whole new game. This could be a different building department, real estate agents, title agents, contractors, materials …. Flipping houses well is done by a team of professionals, not an individual. If this borrower doesn’t have the contacts in the location, prior experience may not matter at all.
The point here is that experience is important. This isn’t something that you can fake. The best thing that you can do to sell yourself to an investor with no experience is to be well prepared. Two ideas are worth remembering for this situation.
One, know who your team members are by name and experience. Meet them ahead of time. Give those contacts to the investor or bring the team members to the meeting. If they can come to the meeting, be quiet and let them speak. Their experience can be projected onto you. An experienced agent and/or contractor with an extensive contact list could really help you.
Two, have your paperwork prepared and ready.
- House Flipping Business and Operational Plans showing that you understand your market and business inside and out.
- Past Project Summary Reports showing your results with actual physical addresses.
- Full Project Estimate Report complete with comparative market analysis (CMA) to show suggested final sale price for the proposed investment property.
- Contract with Contractor. You must know the details. What are the project timeline and the draw structure? It may be too early to have the contract filled out completely by this meeting, but you could at least have the blank contract available. This shows that you know how to protect their money!
- Contract with Investors complete with security instrument. Know what you are offering and what you are willing to accept. Know the exact numbers. This is the carrot! Dangle it once or thrice!
In short, be prepared for the meeting. Being prepared with details ready to present showcases capability. Being well prepared will make you appear more experienced even if you are not. That will make you much more likely to get the response you desire.
Over the years we have had the pleasure of working with several converted investors. These relationships all started slowly. We would meet through a social network. Then we would pitch an investment property over a lunch or dinner. The goal was only to obtain a small initial investment. When we performed as promised we built trust. The trust led to another deal and then another, building even more trust. With the growing relationships, based on trust, comes larger investment sums. Most of our investors have been with us for many years!