Private Mortgage Lender Do's and Don'ts

[Dan Funk]

I'm a newbie to BP...love the depth of knowledge I'm seeing on here.

If you keep your quest for private mortgage lenders with people you know...are there any disclaimers or disclosures that "need" to be made to these people from a legal perspective? What can you and can't you talk about with prospective investors in this circle? 

Does this change if I were to approach local businesses owners that I think might be interested in lending? Do I need to be more careful with this circle until I've known them for 45 days and had 3 contacts including one face to face? 

I'm in Indiana and it appears that a private mortgage note is exempt from the SEC requirements on registering if I get one note per transaction and it's tied to the mortgage. Is there anything I need to do (any forms need filed out) with the Indiana Securities Division? 

I did contact a Securities Attorney...and he was pretty clueless. I'm still looking for another.

I would appreciate some feedback from all you seasoned veterans!!

Dan

[Bill Gulley]

Dan, first, I have no clue as to what is required in India, unless someone here is from there I'd take those questions to your local authorities.

Mortgages are pretty much exempt from SEC as they are regulated elsewhere, that doesn't mean the root of the instrument is totally dismissed as a bond. 

Private transactions are exempt from SEC so as not to hinder individual transactions. The emphasis here is on "individual" personal transactions. A business entity is not a person but an alter ego, and an individual who acts in multiple transactions making a significant amount of income will be seen as being in the business of doing something more than acting individually. Anyone who advertises to make loans is not acting individually for a personal investment but is seeking business, they are not private lenders and may well be unregistered lenders in the business of making loans. 

In order to show that the loan is made on an individual basis, that lender/borrower must show a personal relationship, being introduced through other friends, family, business associates if they don't have a personal relationship. There needs to be some other relationship between them other than the business at hand. If you meet someone at church or in a civic organization or some professional organization you may have a personal relationship. There is no time limitation or past transactions required, but such can certainly strengthen your claims as to personal relationships if you do have that history.

This is why solicitations for money or to provide money is so tricky and both are regulated. Advertising is a solicitation for business, it is not a personal matter if you address several you don't know or the general public. 

When you see posts on the internet, help, need investors will pay 15%, they are in violation of, most likely, state law and are under federal law. You can say all day long that you need to find a mortgage, or need to obtain a loan, but stating "investor"  advertising a yield or interest rate, is a regulated matter.

What you say can hurt you as well as what you don't say when it is required. You also have different requirements for commercial loan transactions, consumer loans, purchase money loans and refinance transactions. Commercial lending is the least regulated, the impact to the general public is limited and those in business are deemed to be more astute in financial matters than the general public.

How to? I have asked people in business "have you ever done any lending in real estate?" That's a question, I'm not asking for a dime. I may say "I borrow from individuals I know" I'm not asking them to loan me anything. I might say "we have an opportunity to do this or that deal" I have the opportunity, didn't ask them if they wanted in too! Make them ask you for the opportunity to participate, "I'm considering partners or arrangements with other people" "would you be interested in looking at this in detail?" I still haven't asked for a dime! At some point, they will use the "I" word, what kind of rate can I get on this? That opens the door to bring the discussion from speaking in generalities to a personally involved matter. 

I never ever give any written solicitation or that may be construed as a prospectus for an investment, never! You can show contracts, proforma accounting statements, show the books, estimates, all the details you base your opportunity on and never call them an "investor" or promise any return other than a note rate of interest.

I also do not call anyone an 'investor", individuals relate that word to investing in stocks or bonds or business ventures where there is an opportunity to profit beyond some stated amount.  We may partner on this, your loan is at 15%, we can do this together, we should profit nicely from this. I never call them an "investor" as they are not investing in my company. They may call themselves an investor, their attorney might call them an investor, but I point out that I understand things from that perspective but on my side, I'm not selling part of my business, we are dealing together in this transaction.    

Obviously, there needs to be some ice breakers there when meeting people, it may not serve you well at all to try and bring up money in your first contact. The longer and better you get to know someone the more receptive they will be in your offering them to participate in an opportunity that you have. During that time, I "talk up" what I do, how I have made money for others........pretty soon, most will ask how they can get in, I've had a few beg before I let them in, especially the newbies as I can always point out "you wanted in this deal" if any road gets rough. I also tell them how rough the road may get, but greed usually wins them over and they do that themselves. But, I've not had very many rough roads either.

Look to your state laws and requirements for small lenders, see what requirements there are, there will be if you are deemed to be 'in the business", look at the functions that are governed and if you want to act then don't do those functions, keep things on an individual and private basis. 

Additionally, it's easier to admit a partner in an entity than to dance around lending requirements, then they can act from a capital injection stand point rather than a lender or borrower. 

That's long enough, LOL :)