WHY PRIVATE LENDER MONEY MUST BE TIED DIRECTLY TO THE PROPERTY

JUST THE FACTS:

A lot of my students have asked me if it's important to always keep their private lender's money tied directly to the property it's being invested in. In fact, enough of you have asked me about this that I asked my SEC attorney to tell me more about this topic and to help explain this to my students. I always want my students to have the information you need to run your real estate investing businesses the right way and to arm you with information on securities laws and regulations.

I asked my securities attorney if it's really important to keep your private lenders' money tied to the properties you are investing in. The bottom line answer he gave me was, it's not just important, it's CRITICAL.

It turns out that the federal SEC, and the state securities divisions, are very much focused on protecting investors across the country, especially non-accredited investors, as well as accredited investors. One of the single most important rules they have is that you simply cannot mislead any of your private lenders. That's part of what they call the antifraud provisions of the SEC laws and regulations.

What does this mean to you? Well, the SEC puts it this way on their website:

...a company should take care to provide sufficient information to investors to avoid violating the antifraud provisions of the securities laws. This means that any information a company provides to investors must be free from false or misleading statements.

False or misleading statements can cover a number of different situations. One of them is whether or not you are telling the truth when you promise your private lenders that their money will be used to buy a particular piece of property, or rehab that property, or otherwise be used in connection with that particular piece of property.

When you make this promise, it's got to be true 100%. If there's a break in this connection, say because you ask a private lender to put the money in your personal bank account instead of wiring it to a title company or writing a check to a closing agent, you could be accused of making a false or misleading statement. And that could mean a heap of trouble, meaning the SEC could accuse you of violating their antifraud provisions. And being accused of fraud could damage your reputation, and possibly lead to civil or even criminal charges.

You don't need to be scared about this. Just put your documents in order, make sure to record all your real estate transactions and be vigilant about having your private lenders provide their funds to your title company, closing agent or other real estate professional. And keep that money tied to the property from start to finish, with all your paperwork clean and clear and easy to access for anyone that has a question.

Do it the right way and you'll be fine. Do it the wrong way and you'll find yourself with problems you could have easily avoided.