Raising Funds - Selling Notes?

Question

I am doing some research on doing some fund raising for private funds.

The original concept I have is take some existing properties I have and advertise the notes for sale.  Or have another broker I know advertise these notes for sale at full face value?

50,000 First Trust Deed
8-12% Interest Rate
8 year term
Property Value 90,000
Rent $995

If I advertise this, or a bunch of these on a web site for sale is this a violation of the SEC laws?  What is the safest way to do this?

Steve Sparks · Answer

This is a very delicate area. I would advise anyone considering it to google "Mtt Scott Private Money". Matt is the only one I have ever paid anything to advise me on any part of my RE business. He is extremely knowledgable. FYI I am in no way affiliated.. Just trying to help.

Jon Holdman · Answer

I wouldn't advertise a range of returns because only an idiot would agree to anything but the top end of your range.  That's like saying "I'll sell this house for $80-120K".  That's exactly the same as saying "I'll sell this house for $80K".

In order to create the note, you have to make a loan.  You cannot just create a note out of thin air and then turn around and sell it.  To "create the note" someone has to loan someone else money.  As far as I can tell the only person putting up any money is your "note buyer".

You're making this overly complex.  You are simply asking for a loan and offering the property as collateral.  While these's some debate as to whether this constitutes "selling a security" just asking someone for a loan appears to be at the least risky end of the spectrum.

The note would be created when the loan is made.  The person who makes the loan is the one who can turn around and sell it.

If you were to create a note and record a deed of trust without any money actually changing hands, and then turn around and try to sell this note, I'm pretty sure you're on very shaky ground.  The problem is the note paper work (the "promissory note") and the deed of trust are fraudulent because there was no loan.

Jon Holdman · Answer

That's not really an "original concept".  Perhaps the approach of advertising notes for sale, but all you're doing is refinancing the property.

I would not advertise "8-12%" interest rate.  If I respond to your ad, guess what rate I'm asking for?

Marc Faulkner · Answer

Steve-I totally understand.  A lot of folks are here looking for money so they can continue to do business, and buy more at today's cheap prices.  With that said, pre payment penalties WILL take away from the value of your note in the secondary mortgage market as our yield goes up dramatically if the note pays off early.  You are suggesting to set up the note in a way that will prevent an early pay off instead of encouraging it.  You are looking at selling notes as if you are looking for a loan.  They are two totally different areas.  Yes anyone that loans you money, would create a Promissory Note and secure it with a deed or mortgage on the property but, in this instance you would be giving the lender a note, and not actually selling anything.

So-to stay safe, I suggest calling a spade a spade and phrasing your offering in the way that Loc mentioned w/out advertising a return or talking to an attorney about what it takes to advertise actual rates of returns to private investors legally.  There seems are several hard money lenders and others here that have set up funds.  I am sure they can shed more light on the subject than I can and, there are several posts on BP that talk about the subject if you search.  My gut feeling here is that you are not going to be looking for enough money to justify the time and money involved, which brings me back to Loc's advice.

.

Loc R. · Answer

Steve,

If you're looking to raise money, secured by your (free & clear) properties, you could put up ads to the effect of:

"Looking for private money.  Offering 1st TD positions at 50% LTV."

There are several websites where you can post "Looking for Money" type ads.

Will Barnard · Answer

I do however agree, that if one was publically advertising, it may be better to post just one figure to avoid any confusion. Once a prospective investor gets confused, you may have lost them to fear.

Steve L. · Answer

I work with a hard money lender and have a good setup to continue to buy.  But I can do a lot more volume if I can find additional capital or non hard-money rates for funds.

I think I can put together some relatively attractive notes secured by my rentals properties (60-70% LTV) and maybe add pre-payment penalty to get close to full-face value.

I know friends and family have been very happy with the rate of return I have been able to get them on their funds.  The whole point of this thread is I would like to start advertising for more funds and be legal about t.

Marc Faulkner · Answer

Or have another broker I know advertise these notes for sale at full face value?

I will give you BIG money if you will introduce me to any brokers that can come anywhere close to "full face value" for any notes.

Marc Faulkner · Answer

When is a note not a note?  When it is a loan....  You can't be both the lender and the borrower and you can not offer a rate of return w/out the right licensing in place.

I don't think there would be a problem in stating an LTV as Loc suggested and seeing what types of offers come in.  I would look for private money from friends or family or look for a hard money loan if you need capital.  What do you want the money for?

Raising Funds - Selling Notes?

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