Best Way To Form Agreement W/Private Investors W/Personal Cash Avail. To Purchase, Rehab & Sell???
I am looking for opinions out there on the best way to accept cash investments to my Corporation from private investors looking to invest in my "rehab and sell" properties.
These are primarily individuals in their 50's-60's with plenty of expendable income and cash in the bank or CD funds or Profit Sharing plan funds now available. I have several individuals that have offered to invest in my company or set up some kind of partnership should I be interested, as they have seen my successes.
I want to keep this as simple as possible and generate more immedite profits using their money and at the same time protect their interests since they will very likely want to continue rolling any "shared profits" or "interest" back into the purchasing cycle.
Any professional opinions or experiences would be appreciated...
SG
By check is good. =)
(I know...not very professional, nor "experienced".)
I have a funding agreement that each investor signs. It spells out what they're getting into, what the money will be used for, where it is held, and what they are entitled to when the company buys a property.
have your investor hold a promissory note and a mortgage on the property. you hold the title. i.e. they act as the bank. you can pay any interest to them and design whatever repayment terms you like. you can have the investor wire the money to the closing agent if that makes them feel more comfortable. as long as you keep your loan to value ratio 70% or lower - they are protected. ltv is based on after repaired value. example: house worth 100k fixed up, you buy it for 50 and it needs 10 in repairs. you can borrow 60k or you could borrow 65k. the investor is well secured, you have some immediate cash in your pocket and enough to get the job done. good luck.
I am in a similar position of starting an investment corporation. In my situation investors will buy "shares" of my corporation. Will a funding agreement be used in the instance? If so do you know of a resource I could locate a good standard funding agreement to look at? Thanks.
Thanks Guys...Anymore out there??????
Compwhiz.....I'm sure I could come with a "funding agreement" between my CPA and RE attorney, but do you have a source for that?.... before I make the call and it costs me alot more than the paper it's written on. I would appreciate any direction or more details.
Thanks very much,
SG
Also known as a subscription agreement.
Search the net and you can find an exxample to use as a template,
Good things come to those who wait...I'm tied up right now, but I've received the requets for a copy of my funding agreement, and I will try to post it somewhere here shortly.
Someday I'm going to have to write an article on this topic which comes up all the time. Get a good lawyer. One who does securities law. Accepting money from unqualified investors is potentially a very risky business. Penalities begin at 5 years in the federal prison. It does happen. My buddy just got released after 40 months. You must not only be concerned about the SEC act of 1933 but the "blue sky act" of whatever state you, your investors and/or the property is located in.
There are fairly easy "safe harbor" actions that keep you reasonably protected but this is not as simple as a form agreement. Do it wrong, loose the money, go to jail.
Do not sell shares in your corp to your investors without checking with your attorney. You can lose Subchapter "S" status if you have shareholders of certain classes. See your attorney for examples. Also it can be a headache for management issues to have multiple shareholders all with different needs. Another idea would be to have your corporation be the manager of a LLC. Then sell units in the LLC to your investors.
Thanks everyone.
I like the LLC method above and will check that out with my contacts. But, I do agree with CommercialKing (99.9% of the time gives great advice by the way) and I will be checking with a RE attorney for more appropriate methods.
Thanks again!
SG
Thanks SG, for the compliment. I'm not quite sure what to do with that other .1%. I'm not sure whether I should work on being more "out there on the edge" and get that number up or whether I should go the other way and try to eliminate it all together.
Well.......The old Italian Giovanini family lived in Chicago...So I guess as long as you dont "go both ways", I guess a guy from Chicago cant be all that bad! Ha!
SG
Make your Mortgage "Walkable" to another property so that you do not have to constantly pay it off and re-mortgage another property. Make sure that the note is Non-Negotiable (can not be sold or transferred), or make sure that in your Negotiable Note, you have first right of refusal if the investor decides to sell the note at a discount. I also believe that the IRS has stated that a Negotiable note is considered an installment sale, because the Negotiable Note can be sold for cash.
We usually pay interest only, in 1 annual payment so that the amount owed never changes. This leads to a lower payment, keeps the investor fully invested, and most importantly leads to no disputes over the principal amount owed on the amortization schedule
When you buy I recommend that you never purchase property with a promissory Note & Mortgage, instead use a Purchase Money Mortgage & Note to protect your self from personal liability.
Probably more than you wanted to know.
Ed Hall
Can you expand a little more on what you mean by
"never purchase property with a promissory Note & Mortgage, instead use a Purchase Money Mortgage & Note"
What is the difference is b/w a "promissory note and mortgage" and a "purchase money mortgage and note"?
The note and the mortgage are both separate documents in either case, right? THe note is just the promise to pay while the mortgage secures the lender's interest allowing them to foreclose on your ownership, right? As far as I know, a purchase money mortgage is just a mortgage that is transacted at the closing table, isn't it?
Thanks.
I do Partnership Agreements whenever I have other Investors as Partners in the Purchase and Sell of Investments. I do not do Rehabs.
Each Investment has a separate Partnership Agreement. Investments and Partnership Agreements are never chained. Each stands alone.
The Partnership Agreement should contain as much information as possible. Such as:
Goals of the Partnership
How are decisions made (I do maintain 51% control)
Contributions by Parties of the Partnership (Does not have to be monies)
How expenses are to be covered
How profits are to be distributed
How does a Partner leave the Partnership
How do you add Partners (I don’t)
What happens if a Partner can not perform
Etc., Etc., Etc.,
My Partnership Agreements are from 15 to 35 pages depending on need. Every scenario that could happen is covered plus more.
Taiyo