Finding Real Estate Investors
Private Investors
The only way I have ever funded my real estate projects is through private investors and I am fortunate that many of them have been repeat investors. The one fundamental truth for me is to treat my investors’ money better than I treat my own. Trust and fiduciary responsibility are the cornerstones of investor confidence, both to gain funding and to keep it.
For this post I used the picture of the guy feeding the lions on purpose….
Fiduciary Duty
There’s a legal definition out there somewhere and anyone with their hand out for someone else’s money should study it, but my personal definition of a fiduciary is a person having the power, responsibility, obligation and liability to diligently manage money or other assets of value on behalf of another party. Management must be done fully, honestly, and with full transparency and accountability.
Folks ask all the time “how can I find investors for my project”, but I think the first question ought to be “who should I look for”. I have future posts coming on the details of investor relations, presentations, management, and reporting, but for now let’s look at my ideas on who and who not to consider. These are my opinions…
The best real estate investors
The Seasoned Land Investor - It’s so obvious that I hesitate to say it, but the best investor for a land development project is one who has done it before. Better yet, someone who has done it before and got their butt kicked along the way and still wants to do it again! Seasoned investors in land don’t even ask if there are going to be problems along the way. They already know it. They are interested in whether I have anticipated the problems and have workable solutions to them.
Referral Investors – Investors in one of my previously successful projects are typically great referral sources for new investors in the future. They can be particularly beneficial since who better to attest to the financial successes of past projects, my character and development capabilities? Trust is a huge factor in a potential investors’ decision making and there is hardly a better referral source than a previously successful investor.
Successful Private Business Owner - I also like potential real estate investors who already own a successful private business, even if it has nothing to do with real estate. This is the person that has come to understand and live with the many inherent risks of private enterprise. They are the backbone of American capitalism and understand risk, the concept of putting money up with no guarantee of return and that nothing gets done unless they create and maintain positive momentum. In other words, they generally have creativity, guts and fortitude.
Other Land Developers – There are guys out there that used to be active, made their money and are not actively in the game anymore. Once real estate gets in your blood it has a way of staying around forever and there are guys that passively fund the projects of other guys. One nice thing is that they know the road from having travelled it themselves. A sub-set is the developer from somewhere else, say another state, that wants to passively invest in my market because the conditions are favorable.
Successful Real Estate Agents (as investors) – Note the word successful. A lot of money has been made in real estate sales, but only by a very few on a percentage basis. Think about what it is like from for an agent from a retirement point of view. There is no 401K, stock option or retirement plan. What do they do? Many invest in rentals along the way and when they really start making money, some start investing in land development. I used to own a real estate company so I am not picking on anyone except myself, but they can also be a pain as it relates to over-involvement during the project. At the same time successful ones are connected and can be very helpful when problems arise, also in preventing them. I always keep in mind that an Agent investor may want the lot listings when we go to market and I clarify this up-front.
Successful Real Estate Agents (as referral sources): The good ones get around and are known and trusted by their clients, some of whom might be qualified investors.
Private Trusts – Trusts are not run by “Trust Fund Babies”, they are run by the Trustee of the Trust. I have been a Trustee of seven different private trusts and it is the highest level of fiduciary responsibility that I know of. It’s a no-nonsense responsibility and Trustees can be personally liable for any mistakes that they make. Therefore, they are usually pretty smart and responsible people. Diversification of assets can be a great choice for trustees, and some are involved in real estate as part of the overall trust portfolio. Trusts are often created as part of a long-term estate plan that takes into account future generations, like Generation Skipping Trusts. These types of trusts have a long-term viewpoint, perfect for real estate investing.
The worst real estate investors
No best investor review would be complete without the worst list. There are always exceptions and I was going to stack rank these, but I couldn’t figure out how to rank one below another since they are all inherently bad prospects for raw land development in my opinion. But like I said … there are always exceptions:
· Anyone who is sinking any portion of their net worth into land development that is greater than what they can afford to lose entirely.
· Investors who must recapture their investment within a pre-defined personal timeline, a timeline that is not related to the project’s timeline.
· The investor that wants to be actively involved in managing a project but has never done one before.
· Anyone who is putting more than 1/3 of their investible portfolio in raw land development.
· A person that is unable or unwilling to put in more $ for a cash call to further capitalize a project.
· People in protracted litigation.
· A person in an unstable personal relationship.
· People in a divorce proceeding.
· Anyone actively abusing chemical substances.
· A person with a terminal disease, unless they are considering Testamentary Division (subdivision).
· Friends or family – generally, but not always.
I always remember that my investors and I are going to have to live together in business for a while. It might as well be enjoyable as possible, but with the wrong investor it can get tedious or even intolerable for all.
I owe it to myself and to them
I owe it to myself and potential investors to not get the wrong people involved in the right project. There are guys that will take any dollar that shows up, but I think that approach isn’t always the best for land development.
Here’s what I get a handle on
Do I clearly know my investors’ expectations?
How long are they willing to tie their money up?
What are their ROI expectations in the end?
Have they invested in raw land before?
Have they invested in any kind of real estate before?
I usually have to get a gut feel on this one, but do they really have the $ to do this?
Full Disclosure from me
Are my expectations clearly known to the investors?
Have they been told what they are, and do they agree?
Have I adequately disclosed the known and potential risks to them?
Do they understand they can lose money?
There is much more to acquiring and working with investors that will be covered going forward. For now, if I have succeeded, it would be in making today’s case that finding land development investors has a lot of risk and responsibilities for all involved. Putting a single investor or a group of them into a project requires thought and care to make sure the project is consistent with their goals, expectations, experience level and financial capability. I take it upon myself to cover the issues presented above to make as sure as I can that it will work for them and for me.
