Private money can be an invigorating source of funds precisely because it is outside of the formal mortgage and lending institutions.  Private investors expect a high rate of return, but are usually easier to deal with than institutions and have more flexible requirements.  What potential risks do you take when using private money for your financing?

1)      The investor’s personal financial issues jeopardize the project – A private money investor may not be all they claim to be, financially or personally.  What if you find out later that your investor has financial problems ranging from bankruptcy to divorce?  You run the risk that the cash flow for rehab and selling expenses may stop.  And if a private investor holds title to the investment property just as they are slipping into a financial crisis, things can get really sticky.

2)      The investor sues you – Private money lenders and investors can be anxious about things going wrong and the chance of being left holding the bag financially.  Some are prepared to file a lawsuit(s) against you, the project leader, sooner rather than later.  They know the more time goes by, the more difficult it is to recover their investment.

3)      The investor claims the profits and the title to the property and leaves you out – Providers of private money may want their name on the title to help protect them against losing their investment.  You must rely on their integrity not try to take it away after you do all the work, regardless of contract provisions.  Of course in this event you could proceed against them legally, but practically you may not have the means or general ability to proceed effectively through legal channels.

Private money has some unique advantages that can benefit all parties.  Sometimes private money is necessary to make a project happen at all.  But private money may have unknown issues, not usually encountered with banks and institutional lenders, that leave the other party – you – left out in the cold if your business partner runs into serious personal and financial problems.  Be sure to protect yourself.

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