Raising Private Money – 4 Things to Avoid
If you go to your local real estate investing meeting or association, more than likely they have talked recently about raising private money. If not, they will soon. It’s hard to find real estate education anymore that doesn’t include a big segment of the education on raising private money for your business. With the economy in a state of flux and financial lenders struggling to figure out their own ever-changing lending guidelines, let alone expect you to know them, getting financing for all of these great deals can be difficult. Raising private money to fuel your business has never been more important.
When you combine an influx of quality deals and a lack of reliable financing, you have a problem. How does a hard working real estate investor who is trying to grow his or her business get the money to do it? This is precisely why so many gurus and industry professionals regularly talk about raising private money for your business. Almost everyone these days agrees on the importance of raising private money for your deals, however, very few know how to do it legally. And, in turn, break some very important rules that can get you into big trouble.
My goal is to help you avoid some of the most common and avoidable mistakes when raising private money and help you do it the right way.
Before I go any further, let me remind you that I am not an attorney and I do not play one on TV. I also don’t work for the Securities and Exchange Commission (SEC) that regulates securities. So, make sure you talk to a qualified attorney that specializes in real estate and securities in your area before going out and raising huge amounts private money. You need to do it legally. I am not giving legal advice, but I have worked with a lot of attorneys and have raised plenty of money and hopefully can give you some sound tips that will keep you out of trouble. Believe it or not, there are some major things you should avoid when raising private money.
Raising private money – 4 things to avoid
- No general solicitation or advertising – General Solicitation is the act of advertising your offer to a general group of people that you do not have an existing relationship with and who are not qualified for your investment opportunity. So, what does that mean? Well, in a broad stroke it means you cannot advertise your offering to try and find new investors. This means no advertising period. This can include postings on your website, message boards, newspapers, etc. If you have questions about what is and isn’t a general solicitation, you might be surprised. Please talk to a qualified securities attorney in your area or your local SEC office. The SEC takes this rule very seriously and I see it broken almost daily by unknowing real estate investors.
- Do not present offers to potential investors before you have qualified them or have established a relationship – Part of raising private money requires you to only present investment offers to potential investors with whom you have an established relationship. You also must qualify that those potential investors are qualified to invest with you before you can present them with opportunities. The two qualifications most commonly used are Accredited or Sophisticated investors.
- Never use the word “guarantee” – This is a word that can get you into a lot of trouble. As a real estate investor, you cannot guarantee the property or investment’s results or performance. You can do financial analysis of the investment until you’re blue in the face, but you never want to guarantee the performance. Instead, show different scenarios and possible outcomes, but do not guarantee. Enough said.
- Don’t raise private money without the proper paperwork – I see this happen all the time, but it can get you in a lot of trouble. Do not attempt to raise money or invest with others if they do not have the proper paperwork in place. There once was a time where all business could be done with a simple handshake, but it’s not today. Talk to your attorney and make sure you have the proper legal work in place. Some of the common paperwork includes an operating agreement, subscription agreement, and even a private placement memorandum if you are raising bigger amounts of money or combining investors into an investment.
Lending guidelines from traditional lending sources are changing daily. To take advantages of the amazing opportunities presented during uncertain times, you’ll need to find alternative ways to finance your deals. Raising private money can be a great way to grow your business. It can help you avoid some of these obstacles and take advantages of the opportunities in front of you. Just be sure to finance your business the right way and avoid the four big “no”s to raising private money.