My plan WAS to get several family/friend investors to lend to me Personallly (or my llc) unsecured money....SEC issues?

[Amy Solomon]

I THOUGHT I had a good idea, but now reading about SEC I am not sure. I am working hard right now on my business plan and investment proposal because my plan is to ask for loans from some people I know who have money. These were not going to be based on any deals. My goal is to raise $300,000 in unsecured loans (or possibly secure with equity on my primary residence but that's another post all together). They'd lend me the money at a rate we agree on, and a term we agree on. The money would then be mine, in my account. I would use this money however I needed, paying cash to buy flips, paying for down payments if I get a loan, paying for renovation costs on seller financed flips...really whatever I wanted, however I wanted/needed.

Basically my question is, is there a problem with this? I don't know much about the SEC and what kinds of loans fall under their guidelines. I guess I thought this wouldn't...because I will be the only one on the deeds, these would be cash deals as far as purchasing is concerned.

Please let me know what you know. And more questions on this raising of funds I am working on will come later! ;-)

[Jon Holdman]

@Amy Solomon if you get one person to loan you enough money to do one deal and give them a security interest in the property you're flipping, you are probably OK. By security interest I mean a mortgage or deed of trust or whatever is used in FL. As @Ned Carey points out, even this may be considered a security. However, this is quite commonly done. This is the classical "private lender" situation.

OTOH, if you have two or more people funding the deal, and if they don't have a security interest in the property, then you have just created a partnership. No formal paperwork is required, its automatic. When people are investing money into your partnership, you're "selling securities". Sorry you don't like this, most folks trying to do this don't like it either. But this is the legal situation.

Yes, you can of course get loans from friends and do whatever you want with the money. Its a dangerous road. And you've already run off the smooth part of this road into the very rocky part when you write: "In fact, I may be OVER confident in my abilities to not lose money." Yes, you are. If you do this right you will give your investors two key documents - a "private placement memorandum", which describes the investment they're making, and an "operating agreement", which describes how you will run your company. The private placement memorandum, or PPM, will contain words very much like "This is a terrible investment. You will lose all your money. Only an idiot would make this investment. If you lose all your money, don't blame me." That last bit is key and will be repeated throughout this paperwork. It is a key point for your investors. This paperwork is primarily meant to protect you. Not your investors. They're admitting they're idiots by signing. YOU. At this point you must assume this investment will go badly. You must assume that you will lose money and your investors will want to sue you. Family or not. So this paperwork is designed to protect you when that happens.

If you do a deal like this without this paperwork you are not only improperly selling securities but you're leaving yourself in a much weaker position if things do go badly.

Its very easy at this point in this project's lifecycle to see the upside. It is absolutely essential for you to also take a hard look at the downside. If you cannot do that now you have no business going down this road. Because bad things do happen. Any number of things could happen that cause you to need an extra $10K or more. I made a loan to a rehabber who got only some of the permits they needed. My mistake for not figuring it out. His mistake for not doing it. He got caught. He ran out of money and couldn't finish. I only lost a few grand on the deal. He lost about $30K. If you cannot think through such situations now, when things are calm and there is no money or feelings on the line., you're sure not going to be able to work them out later when they, inevitably, come up. If you can only see the "happy path" as we call it when writing software you don't yet have the full picture of actually doing this work.

I'm sorry, but yes, you are very naive. Have you ever actually fix and flipped a house? I get the impression you have not, but perhaps I'm mistaken. Transaction costs on buying and selling a house will eat 10% of the sales price. A few cosmetic updates will rarely generate the sort of price increase to cover those costs. A rule of thumb is that your purchase price plus rehab costs must be less than 70% of the price you'll get when you sell. If you do that you will have good returns for your investors and a nice profit for yourself. You seem very confident you can find those deals, which tells me you've not done it. These deals are VERY hard to find. Its also very easy to fool yourself into thinking you have such a deal only to find you've underestimated the rehab budget and overestimated the selling price. Like my rehabber above who was experienced and was a real estate agent.