Raising Money / How to Structure

[Collin Luckett]

I have a couple houses I'd like to put under contract as fix and flips and would like to you private money lenders to help fund. I know when you make an offer you typically specify how you plan on funding the deal. I'm currently going through the process of getting a HELOC and feel confident we'd be able to fund a purchase using that but using PML has ultimately been a goal of mine and would like to incorporate it into one of these purchases if possible.

My question is, if I do want to make an offer funded with a HELOC, can I later bring in investors or even a hard money lender before the purchase? Is there that kind of flexibility in a purchase agreement? Also, I'm pretty new to this but I'm assuming you'd have to have an LLC in place to accept hard money or money from private lenders?

Sorry if this has been covered before, we are located in Minnesota if that matters.  

[Tim Swierczek]

@Collin Luckett

The answer to your questions is nuanced. This is for basic informational purposes I am not an attorney and this is not legal advice.

First, if you offer to purchase a property using a HELOC to fund the purchase you cannot later back out of the agreement because you couldn't find PML or investors. Most sellers only care if you close so you can usually use another form of capital stack other than what is on the agreement, however, the seller can force you to use the originally agreed-upon payment method. This is rarely an issue provided you still perform.

The raising money part is more complex. It depends on what stake you offer in the property.  The cleanest route but the least attractive method for most investors is to have the investor provide debt. In that case, they have no ownership only lien rights.  The relationship is straightforward and you don't need to know much else legally. I would get an attorney or title company involved to create your loan documents to ensure they comply with the law and cover all the aspects you need.

Another method that is likely your best bet to take on investors is to create a joint venture (JV). Under this method each investor has ownership and voting rights. You will need an attorney to properly structure the partnership and you will make sure you do it correctly. If you start a JV in name but do not give your partners proper control and decision-making rights and the deal goes bad you open yourself up to serious consequences which can lead to SEC violations with extremely high fines.

Lastly, you can offer the project up to investors who have no voting or control.  In this case, they get equity but do not make decisions.  Check with an SEC attorney to learn where this line is drawn. If you choose this method you will need to learn SEC money-raising rules. The short version is that you must have a  Private Placement Memorandum (PPM) to show your investors and you must decide upfront if you will only accept accredited investors or if you will allow investment from non-accredited investors.  This is very important. If you allow non-accredited investors you cannot advertise, or post looking for investors. You need to really learn these laws if you want to start a partnership where you make the decisions.