Sunday, February 17, 2013

Finding Private Money

8:24 AM
Legalities of Private Money was covered by Jillian Sidoti during our NAREIA cruise. Most investors are interested in raising money. Yet under the Uniform Securities Act, at what point does the law come into effect? The test that governs securities law is the Howie case from the late 1800s. It states simply: Is there investment in a common enterprise with expectation of profit through a promoter? One private lender per house will generally keep investors out of trouble; yet "common enterprise" could mean when you are doing more than one house rehab. Asset backed security; must disclose risks to a lender. The investor must do more than a promissory note; the investor must disclose that funds are at risk; house may burn down, etc. Prepackaged websites may violate securities law, so be careful when purchasing from national speakers. Late filings may trigger fines; Not filing Form D exemption from registration to file with SEC will also trigger scrutiny. So what is the process and cost to stay legal? When using private lenders, try to limit one property per lender - rather than pooling funds. File Form D, quarterly and annual reports. Owner financing is exempt from SEC requiremets; one private lender on top of that is fine. Be sure to disclose risks to lender. How to raise private dollars: Jillian then gave several examples of how her clients raise private money. Chris Yates, who had 100 lenders on 100 properties, qualified investors and provided disclosures, used the internet to promote investing with a SDIRA. People signed up for his newsletters, saw properties that were being rehabbed and spoke with him about investing with their SDIRA. He never asked for money. Another client in Beverly Hills raised money for the fashion industry; his goal was to talk to 50 people before he went to bed every night. His strategy was all about making friends; he raised $2M from three people in a month. Jillian recommended writing a great blog; give a lot of information talk about your market, hang out at swanky places; Warren Buffet approach, folksy, personal; send out a newsletter - give a tip, talk about market, something funny (Employee of the Month - same employee every month); bulky mail; exclusive wine and cheese parties; Make your gatherings as glitzy as the corporate annual meetings where prospective investors buy one share of Microsoft, Google, Amazon, etc. just to go to annual meetings. Start your private placement memorandum by writing a business plan: Who, what, when, where, how? How much do you need? How much will I make? When do I get my money back? Offer investors a promissory note attached to risk factors; plus document your pre-existing relationship with your lenders. Are you intimately aware of your investor's ability to invest? income? net worth? verify that this is true. Know your investor. Scott Whaley also announced plans for an Association for private lenders, association on private lending; National Private Money Institute (non-profit association). Stay tuned for more info on this.


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