Okay, so here are the top 4 private money rules as I know them. These are based on the meetings and conversations I had after thinking there must be a better option for me than crowdfunding or hard money (see my last crowdfunding blog for details).
Comments, revisions, corrections and other slapdowns were thoughtfully provided by Jillian Sidoti Esq.
Responses to Jillian provided by Robert.
Private Money Rule #1: Never use the word Guarantee
The G word is a no-no. Because these deals have so many variables there is no way anyone can be guaranteed a return. Here is a brief list of things that I have seen go wrong.
- Contractors don’t show up
- Contractors steal materials
- Local crystal meth addicts break into house, take apart all the kitchen cabinets and build a small club house in the living room with the cabinet doors. (Twice)
- Neighbors fill up the trash dumpsters
- House was not framed to code and everything is just laying on top of everything else.
- Enclosed and non-permitted patio/garage conversion (over 25 times)
- Missing pipes
- Missing furnace
- Missing everything!
- Chimney collapses
- Pools that leak
- Lead pipes
- Knob and Tube wiring
- 60 amp panels with fuses
- Rats, Roaches, Asbestos, Ants, Mold, and a bunch of dead things.
As flippers, we typically add a contingency number in our deals to make sure a return to investors is possible but there is still no Guarantee!
Private money Rule #2: Don’t cross state lines
You can’t take money from a passive investor across state lines. As I understand it this action needs to be regulated by the Securities and Exchange Commission (SEC).
So if I live in California, and I do, I can’t take any money from investors here for a passive investment in New Jersey.
Drat! That means I have to find investors in NJ to do deals.
Private money Rule #3: Relationship required
If I do meet investors in NJ then I must show a valid relationship building period.
My personal rule is that I have to “date” the investor at least 3 times before I can take any money for the deal. A few people I trust have told me that three meetings is enough, but still don’t believe or more accurately I can’t believe that “three meetings” is a real SEC thing.
Private money Rule #4: Don’t advertise
Unless you are registered with the SEC, you can’t advertise any investment opportunities.
And yes, standing up in a real estate investment club (REI) meeting and saying “I have a deal and I need an investor” could count as advertising.
It got to the point I was just terrified to talk to anyone about any sort of investment opportunity. And If I did, because I was bi-coastal it was hard for me to get a second date.
Which brought me back to the diner for a lunch and 15% interest rate.
I kept thinking “There HAS to be a better way”. Join me on the next blog when I discuss the beginnings of my crowdfunding for real estate.