Private Lender/Joint Venture Structures?

3 Replies

I came across someone that raises money for a deal, offering 50% of the profits to the cash investor. However, if there is a loss, it is the cash investor that absorbs the loss.

Frankly, I think that's a hard sell, "Invest in my project and if I screw up, you take the loss". But in the discussion, this person said that's why they give 50% of the profit to the investor for doing nothing.

Does this violate any SEC rules? Getting money from unaccredited investors expecting them to take the loss?

What do you think is the most common form of deal structuring with private investors? I usually offer 50% and share profits and losses equally (although I've been known to pay the investor back in full and take the loss on myself).

This post has been removed.

Originally posted by @Jean Norton :

I came across someone that raises money for a deal, offering 50% of the profits to the cash investor. However, if there is a loss, it is the cash investor that absorbs the loss.

Frankly, I think that's a hard sell, "Invest in my project and if I screw up, you take the loss". But in the discussion, this person said that's why they give 50% of the profit to the investor for doing nothing.

Does this violate any SEC rules? Getting money from unaccredited investors expecting them to take the loss?

What do you think is the most common form of deal structuring with private investors? I usually offer 50% and share profits and losses equally (although I've been known to pay the investor back in full and take the loss on myself).

It sounds like what they offered you was both reasonable and legal but is a matter of whether or not you trust their ability to deliver. The splits are always negotiable just like the rate of return any investor seeks on an investment. The level of investor involvement in the project is also always an issue so for the remote, 'hands off' investor, half of profits might make $en$e or might also be excessive.

As an issuer, its best to deal with accredited investors that are able to assign a premium to the level of risk undertaken but there are various specific conditions under which an unaccredited investor may be legally involved in various types of offerings and also various conditions where their involvement could disqualify the legality of the offer.

"What do you think is the most common form of deal structuring with private investors?"

I am the investor; I currently work with two different flippers (one in FL, the other in IN), and complete an average of two (2) deals a month.  Because my flippers are skilled (they have their realtors license, and have been flipping for years) and I'm risk-averse, my rate of return is fixed and guaranteed (I get paid ahead of them).  They, assuming the majority of the risk, get to keep the profits.

In a typical deal (well - almost every deal we've done), I fund 100% of the purchase price in addition to repair/remodel costs. The home must have a 70% ARV. In return, I'm secured by a mortgage or trust deed, with a note bearing 14% APR interest plus origination points; notice that I said APR (annual percentage rate). Since most deals flip in 90 days or so, my actual return on any specific deal is roughly 1.17% (for 3 months use of my money), along with origination points.

From my flipper's perspective, it's in his best interest to properly compute the value of a deal before entering into it.  If his calculation for rehab/remodel is off, market pricing and hold time, or inspection for red flags is off, it eats into his profits.  On the other hand, as an experienced flipper and estimator, he also reaps the bulk of the profits.

In addition, my deals are legally structured to avoid certain issues that come up often with flippers and funding - that of requiring a loan originator and loan broker license in order to properly comply with federal law (even on personal deals like these).

Contact me privately, if you wish.

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