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.

[Nicholas L.]

@Collin Luckett

just curious - do you have a successful track record of flips, or are you looking to do your very first one?  100% leverage, which is what it sounds like you're proposing, is high risk.

true private money IMO is someone already in your network - your uncle, your dentist.  work out whatever terms you want with them.

everything else is hard money / commercial money.

[Collin Luckett]

We finished our first one this fall, which went pretty well. I recognize I still have a lot to learn and that having a track record would help. 

I have individuals in mind that have either directly told me they would lend or indicated they might, so I don’t think finding the lenders is my issue. It’s more the actual “how-to” or structuring it into the process I’m in, as I mentioned. I don’t mind having skin in the game either, but I know using private money is key to scaling one day and would like to get some experience with it now, even if it doesn’t fund a majority of the deal. 

[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.

[Collin Luckett]

Quote from @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. 

@Tim Swierczek thank you, very good info! And in regards to getting educated on the the laws, I assume the best route is to link of with an attorney who has experience with these types of transactions? Anyone you recommend in Minnesota? We are in the brainerd lakes area. 

And if you go under contract as an individual, can you then JV with another investor or is it too late? I have something I will buy regardless of others' buy-in, but the way I see it working is I get it under contract, present my plan to a couple others who are interested and more experienced, they agree to partner and we complete the purchase together. Does that sound right?

[James Hamling]

@Collin Luckett what your touching on for changing of buyer during pending is not a viable direction. 

In theory, yes you could get under contracting adding "and or assigns" but really good odd's that's going to kill a significant # of potential deals. Because it looks shady to most sellers, in a variety of ways. 

Best approach is to have your "team" set, before going out to secure properties. 

In short, having all the conversations and commitments in strategy, setting up LLC and all the fun docs of who's doing what, and I'd suggest even getting initial funding into account for at least EM.

Than you set out, per the strategy, to get a "deal" under contract. 

Now on raising $ side of things, I suggest first you do some research on syndications. You do that, it's going to be best place to start because I am betting from there you will seek how to simplify things. 

Keep in mind all this stuff is uber regulated, very detailed, far from simple. But sure as heck not impossible, it just takes a commitment to learning a very complex detailed facet of business and regulations. 

[Chris Seveney]

Quote from @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.  

 Simple answer - yes you can alter your funding source after putting it under agreement if you chose to use a hard money lender instead - i would just communicate with seller that hey I was going to use cash (assuming you have it from your heloc) and instead will finance some of it but let them know its not contingent on financing. That will be an issue if you change it to try and make it contingent on financing.

[Tom S.]

@Collin Luckett Just adding, if you have the ability to fund with your HELOC, it would be far cheaper than PML or Hard money. I recently opened a HELOC and I recall it's at prime for the first year (7.5% currently), and I only paid minimal closing costs.

PML or HML I would expect rates >10%, plus points, possible prepayment penalties etc.

[Tim Swierczek]

Quote from @Collin Luckett:

Quote from @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. 

@Tim Swierczek thank you, very good info! And in regards to getting educated on the the laws, I assume the best route is to link of with an attorney who has experience with these types of transactions? Anyone you recommend in Minnesota? We are in the brainerd lakes area. 

And if you go under contract as an individual, can you then JV with another investor or is it too late? I have something I will buy regardless of others' buy-in, but the way I see it working is I get it under contract, present my plan to a couple others who are interested and more experienced, they agree to partner and we complete the purchase together. Does that sound right?

Yes, you can add a JV partner after the contract. You can purchase using an LLC and then add a partner and the seller will never know or you can assign the contact to an LLC you control. If you are still a majority or controlling partner you will get no pushback. If you sell your full interest you may get push back but contracts in MN are assignable unless otherwise prohibited.

[Jeffrey Blackman]

@Collin Luckett congrats on finding 2 great deals! I'm an investor and a licensed mortgage broker who has done fix and flips both using my home's equity and borrowing against the investment property.

If you (1) have enough equity in your home to fully fund the deals, (2) don't mind tying that equity up for these deals vs saving it for a rainy day and (3) are ok linking the place you sleep with the success of the flips, this could make sense.

We offer a ton of different fix and flip programs including putting 10% down on the purchase price and funding 100% of the rehab. We also have programs that can close in 3 days or less if you need speed. Our loan minimum is $75,000 and we go up to $10 million, and we can lend to both individuals and LLCs.

I'd be happy to share my experience as an investor and as a lender. Feel free to contact or DM me to let me know if you think I can be helpful.

Good luck with your deals,

Jeff