My primary role in Dynamic Real Estate Innovations is to borrow money. I borrow from a vast range of different types of entities including banks, hard money lenders, private money lenders, suppliers, credit card companies, and so on, but my most profitable transactions take place with my own friends and family. Real people, with faces, names, emotions, families of their own, and that I care about. I wouldn’t have it any other way. In fact, I like the set up so much that even when I could pay for a project myself, I go find one of them instead to pay for it for me. They profit more and I profit more.
I love it because I have to pay interest anyway, and not only do my friends and family charge me less of it, but when I pay it I can see it go farther in their own lives to relieve their financial stress and build a history between us that means a lot more than a credit report. They enjoy it because usually I pay them more than they could get anywhere else and they can support me, their friend, at the same time. Guess who comes right back to them when he gets a sweeter, fatter deal lined up?
Since it is so central and such a successful part of Dynamic Real Estate Innovation’s financing I thought I’d cover some of the tips for it in a blog for anyone who wants to replicate what we do.
Tip #1. Maintain the proper discipline. This one is ESSENTIAL. Many people have this idea that for friends and especially family that trust and a handshake should be good enough. Maybe they should be, but they are not. A transaction between parties who know each other, however intimately, requires all of the same documentation as a transaction between strangers. In a lending transaction this means a promissory note, a security agreement (or trust deed), a payment schedule, signatures on all three, and copies delivered to all participating parties.
Tip #2. Respect and educate. Chances are, you’ll be much better informed about what you’re doing than your lender. Educate them generously when they’re willing to learn, and pay them respectfully for the value they bring. In the long run, a happy lender will be a much better friend and asset to your company than the used-to-be friend who you screwed for a few bucks. On the other hand, don’t offer them more than you’d have to pay their professional lending competitors.
Tip #3. Know your value, & hold your space. Nothing turns a lender off as quickly as a borrower who seems like they really need the money. The two of you are doing business together, and no should be getting a favor. Face the possibility that if you don’t get the capital you WANT, you may have to let whatever thing you wanted it for get away. Then offer them part of the opportunity that is created by your collaboration.
Tip #4. KISS. The KISS principle applies very well here. Clarity and simplicity is paramount. Let a lawyer write all the just-in-case provisions, but keep it short, and the core of the agreement needs to be explicable in one sentence.
Tip #5. Be creative. Know your own needs, figure out what theirs are, then devise a contract that is awesome for you both! There is no need to stick with the conventional agreements. If you went to an institution they would have either loan type A, or loan type B, and if neither of those were right that would be the end of the story. The primary advantage in dealing with friends and family is that they are more likely to give real consideration to your situation and strike the deal that really is best for both of you.
Hope that helps. Until next week!