Issues with using Non-Accredited private investors

[Sean H.]

I am speaking with my attorney who is helping me setup the proper documentation for use with private investors. She is suggesting that I do not deal with non-accredited investors because if something should happen to them and they need their money back, they could sue me and claim that they should not have invested in the deal but did anyway because they didn't know any better. She feels that the disclosure documents that would be required for me to use a non-accredited investor would be too onerous for the type of financing I am seeking.

My strategy is to use private money for a one year term to acquire/rehab a rental property priced under $100k, then refinance to a conventional lender after that term.

I am kind of stuck here, as most of my potential private lenders have money sitting idle they want to invest, but do not meet the accredited investor threshold.

Has anyone had this sort of risk come up and how have you dealt with it? Is everyone who is using private money only using accredited investors?

[Brian Burke]

Using a non-accredited investor adds an additional layer of risk. You have to mitigate that risk. Will the loan-to-value ratio be 70% or less? Will there be an appraisal? Lenders policy of title insurance? Does the investor have hard money lending or real estate experience?

If you do this deal with a non-accredited investor, you aren't heading straight to jail. If you make money, your investor makes money, and your investor gets their money back, you are fine. The $&!? hits the fan when the deal goes south and the investor loses money. Now it's game on, and you have to defend what you did. You need as many facts in your favor as possible. If you can answer yes to the questions in the previous paragraph, you still don't have a get-out-of-jail-free card, but you are defending your actions from a safer position.

Your securities attorney is giving you good advice if your objective is to minimize your own risk. Business is about taking calculated risks, and perhaps the additional risk of using non-accredited investors is acceptable to you in exchange for the opportunity of doing this deal. Only you have that answer.