Newbie... How to Secure your investors investments

[Andrew Bowden]

Hello, BP Community! I'm on the hunt for private investors. I have a few people in mind that I would like to ask to be investors. I'm in the middle of writing up my game plan and I hit a wall. Questions start arising. "How do I make my offerings to these people to sound most appealing?" "These people are friends and family members. Should a house flip go wrong, some way, some how. How do I secure their investment?" I started thinking more and more.. Questions for BP. 1. Is there some kind of structured account that I can find at a bank that will hold these funds and allow the investors access to their money to pull out if they need or want to? 2. Perhaps a escrow account could be had with the right structure? Maybe reworked to tailor my needs. 3. Should I go to a real estate attorney/ accountant and have him figure it out? Any help is appreciated!

[Don Konipol]

if you believe people are going to invest money with you in a blind pool, letting you choose the investments, pre fund your potentional deals before you identify them, and then allow you to use "new money" to cover "old money" loses, you are far off base.

IF you are able to convince someone to invest in one of your deals (unless it's your father whose essentially giving you a gift), they are going to want to know the property their money is buying, what percent ownership they get for the money vs what you get for finding and structuring the deal, and how the profits, income, or loses are allocated.  Further, any investor with any sense will want to hold on to his capital until a transaction is imminent, and will want to wire funds directly to the title company, not to you or to an entity controlled by you.  After you have established a verifiable track record of success, you may be able to find investors who will front money for purchases not yet identified.  In order to proceed on that basis, you as sponsor will have to comply with Federal securities laws and regulations, state securities laws, or possibly both.  Except in the simplest of situations, you will have to pay a securities attorney to draw up a Private Placement Memorandum, Subscription Agreement, Accredited Investor Verification form, and to offer an opinion as to compliance with securities laws and regulations.

Over funding a transaction by 2/3, completing the purchase, and then giving money back to an investor who wants out before the sale is complete and before other investors are paid is known as preferential treatment, is illegal unless ALL investors agree to it in writing, and is a non defensible accusation should any of the remaining investors decide to sue you.  Under certain conditions it may also be considered what is typically called a Ponzi scheme.  While most of these small time violations of securities laws do not end up with any felony charges, and are not pursued by the SEC, state securities agencies love to pursue them. The result is that the accused pays a fine and agrees to an order to cease and desist.  The order becomes part of the public record, is easily found by googling the violators name, and as a result makes it extremely difficult if not impossible for the violator to raise investment capital.

What defines a security is an investment in which the investor is not a active participant in the investment and or doesn't have day to day decision making authority. This is what separates it from a partnership, where a few people pool resources to buy an asset, hire a manager, and all get to participate on a decision making level.  My advice is to get a loan from a lender to flip a property; if you want to syndicate the deal comply with securities laws.