Yesterday I had some driving time and, for some reason, a disintegrated private money deal popped in my head. Must have been because I was driving by some landmark or something (damn those psychological triggers…)

Here’s how the whole deal went down:

A guy approaches me at a real estate networking event. Says he wants to invest in real estate. Tells me he used to run his own contracting company and he’s looking to do some flips.

Par for the course so far.

Then, he proceeds to tell me that he has some money he wants to invest in real estate – but he’s leaving for a warm southern state for the winter (snowbirds, we call them here in Michigan) and that he wants to get his money out and working for him soon. Then, he drops the bomb…

He tells me he wants to just invest his money with me and take a share of the profits instead of doing all the work himself. Naturally, my ears perk up at this and I start to get real interested. This guy has just passed two of my three private money tests. He is ready and willing, I just need to make sure he is able to place funds. I want to know more about this guy and what kind of dough he’s working with.

So I set up an appointment for him to come into my office. Meet everybody, get a look-see and get comfortable investing with me. Standard real estate courtship ritual.

(in case you’re wondering, the answer is ‘no’, not all private investors need to come into your office or anything like that, there are ways to raise money the right way without even ever meeting the investor face to face, but I’ll get to that stuff in another post)

Now, my mind is going in some different directions here. Usually you have to work a little bit harder to get someone to throw money at you (not much, but geez, this one was a wiz-bang) – you have to dance the waltz a bit more. But, why look a gift horse in the mouth, right?

So I start thinking about this meeting as it approaches a few days later.  I’m doing the boy scout thing and being totally prepared. My mind races ahead a little bit more – maybe this guy has some serious funds to invest? After all, he told me he had a contracting company (any of those guys with half a brain cell did very well during the boom building years) and he also had a place in Florida.

Que the bell ringing and my salivating like Pavlov’s dog. No steak needed.

(hey, I’m human!)

Allright…the big day arrives. I’m pretty excited. All my paperwork is in line. My suit is clean. My breath is good.

Guy arrives at my office.

Meeting begins.

And…30 minutes later I was completely deflated and wanting to go lay down in traffic.

What happened in just a short half-hour that caused this?

Good question – cause there’s a lesson in this for you that is really going to save you a lot of time, money, hassle, headache, Malox, Pept0-Bismol and psychiatric drugs.

This guy – my golden guy – wanted to invest what I called bad money.

What the heck is bad money, you ask?

Bad money is money that comes with strings, hoops, rings of fire or other stipulations that make it more trouble than it is worth. Bad money comes from people who want too much control, too much say-so, too much interest, too much of your time or too much of anything else except a good return on their money.

The “meaty” part of the exchange between my prospective new golden investor and me sort of flowed from “how are ya?” to “I’m taking out cash advances on some credit cards to fund this. The interest rates are special now, so I’m paying 10% for the first 6 months and I’m want to make at least 20% on my money in that time frame.”

Game. Set. Match.

It’s all over at this point. I have only one option. If you’ve ever seen the movie The Matrix, you might remember at the end where the machines are just about to destroy the ship where the hero’s of the story are and they push a button called an “EMP” (electromagnetic pulse) which kills all electronics – and kills the machines that were about to kill them. Basically, everything working on electricity stopped and flopped to the ground or shut off in an instant.

That’s what happened to this deal.

Done.

Here’s how I blew up this deal – verbatim: “Mr. Investor, I appreciate your interest. At this time, we can only accept funds in excess of $100,000 and from only those comfortable being invested for at least 3 years. I will give you a call if we ever have a deal that makes sense for what you need. Let me show you the rest of the office building…”

Finito.

My big mistake in this whole thing was not qualifying the investor enough before they came in. I was so caught up that somebody wanted to place funds with me – and they even approached me about it – that I lost track of the basics. Forgot how to shoot a layup.

The numbers and the way this investor wanted to do business did not mesh with what I could offer him. I would have been chasing dollars – giving up substantial deal profits. The 20% he wanted in 6 months  amounted to a 40% annualized return. Not sure where else you can get those numbers unless you’re loan sharking money (maybe he was moonlighting with that profession). Either way it wasn’t going to work out.

Fortunately, he took it like a good sport. I offered to add him to my buyers list and maybe he could just flip a house on his own and make the money he wanted when he got back from his vacation.

Sayonara.

Strive to reach and grab for private money. But, if you stretch too far, you may end up bringing back more problems than you want. A good private investor (one that’s going to be profitable for you, which is the whole point) will want a good return on their money and enjoy other aspects of investing with you. Some may want to know more about what you’re doing than others, but the common traits are the same. They wont’ be like my golden buddy.

Happy Investing.