This case study relates to how important the selection of your wording can be and that if you get it wrong how a deal can unravel or become difficult to complete.
It revolves around me coaching a client and the discussion we had about using other people’s money to invest in your projects whilst giving the investor a better return on their savings than the standard bank rate.
Once you start to actively invest in property it is well known that at some stage you will run out of your own money. This means that it is advantageous to build up a list of potential investors who would be interested in loaning money with appropriate security for a fixed period in order that you can finance deals. These loans are usually person to person and do not come under Financial Conduct Authority rules PS13/3.
A typical scenario is to borrow funds from an investor to complete a refurbishment or development project thereby adding value to the property which you can then re-finance with a registered lender and use the added funds to pay the investor back their loan.
Why are you in a position to pay a higher rate than the banks on savings? Well, if you have calculated the potential returns correctly on your project, they should be even higher than the return you give your investor. A win-win situation. They get a better return and you’re able to complete your project.
But, why would you not go to the registered lenders in the first instance and use the appropriate product? The simple answer is that in some cases you would. However, there are many hoops and challenges associated with using registered lenders as well as the times scales involved to secure the funding. Sometimes it’s more cost effective to use a knowledgeable private investor who can fund the project almost immediately, you can therefore complete it much faster, refinance it quicker and start earning a great return – ready to move on to the next project.
One of the main reasons though that you might use another person’s money is that you are helping them. You are giving them the opportunity to earn a much better return on their savings.
This often requires a mindset shift.
You are not asking for money! You are allowing them the chance to earn more money than they are currently getting.
So, as an experienced property investor who manages the risks involved you can utilise other people’s money to achieve your goals whilst boosting their savings.
A strategy used to present the opportunity to a potential investor is to ask them three simple questions.
The first question is, ‘what rate are you currently earning on your savings?’ They will answer something like 1% per year. (or less in the UK at the moment).
You then pose the question, ‘how much would you like to earn?’ Not wanting to sound greedy they will often answer around 5 or 6%.
The final question is, ‘and how long would you like to earn the higher interest for?’ They usually respond by quoting a year or two years. You then proceed to explain how you could offer them that 5 or 6% based on a project you are working on. Once explained you can finish with, ‘so if you or anyone you know is interested then let me know.’
A straightforward strategy for offering individuals the opportunity to earn a greater return on their money. Only three short questions. What could be simpler?
So, back to the case study and the coaching session with my client.
I knew they had been trained in the above and they came on the call expressing disappointment that they had tried it, but the person responded by stating they wanted a 12% return. This is highly unusual when dealing with friends, relatives and inexperienced investors. (Knowledgeable and experienced investors fully understand the value of lending money on projects and will therefore negotiate and expect a much higher return than 6%!) The client had a potential deal for which they needed the funds, but it meant that the proposed deal did not now make financial sense as the return wanted by the investor was too high.
I asked them to explain to me exactly what was said. The client stated that they had asked what return the potential investor was currently getting. The response was what was expected – less than 1%. The client then asked, ‘What would be your ideal return?’ I understood the issue immediately and why they had gained the response of a much higher interest rate than expected.
I replied, ‘well you changed the wording and that gave a completely different meaning to the question.’
The client asked, ‘in what way?’
I explained that if they had asked me for my ‘IDEAL’ interest rate return my mind would have started thinking about ‘in an ideal world,’ or ‘in a perfect world,’ or ‘hypothetically’ or something similar. Therefore, thoughts of an imaginary rate of return that I did not think would happen and I could make up anything I wanted as an answer. (See one dictionary definition of ideal below)
I continued by asking the client to compare this with the word ‘like.’
‘Like’ is a simpler word that conjures up thoughts of desirable but not necessarily attainable. Based on this it is more probable that a person will state a reasonable rate of return which you can then start to negotiate with.
Our words can become thoughts and it is important that we use those words carefully. By using the word ‘ideal’ it had created the situation whereby the investor felt it was ok to aim for a much higher rate of interest. This in turn meant that the deal did not make financial sense with the client having to pay out the higher rate. A great deal potentially lost because of the poor selection of a word.
Fortunately, the client has now had the benefit of being able have a coaching session during which they gained the opportunity to reflect on their language and refine their approach for the future.
Definition of ‘Ideal’ taken from Google search.
*1. satisfying one’s conception of what is perfect;
Similar: perfect, best possible, consummate, supreme, exemplary, ultimate
- 2. existing only in the imagination; desirable or perfect but not likely to become a reality.
Similar: unattainable, unachievable, impracticable, unworkable, unfeasible, unreal
hypothetical, theoretical, ivory-towered, imaginary, idealized, utopian.