This was a key element of my mortgage business. Pooling money is the quickest way to get side ways with the SEC and state finance departments.
Frankly, the issue lies in selective enforcement attitudes of regulators. One of my clients was an FBI Agent and the position the FBI took as far as financial fraud issues was that a mortgage or secured note was a security and having more than one entity funding could be construed as a mutual funding transaction. It depends on how it is structured. Having and LLC with investor members can work. As to SEC attorneys, I doubt you'll find one who will say that your operation avoids SEC regulations and provide a guarantee of that, since they are pretty broad in what might constitute a security, that will be determined by the regulators not one attorney.
You'll also find that a broker or investors who have problems in a deal will put any straw man in a bind quickly if they can not cure the problem quickly. Financing deals through several investors is basically a banking operation and if you have an investor who squeaks really loud you can have the state banking authority knocking on your door.
What I'm saying is that there is no 100% safe way that avoids all banking and security issues regardless of what an attorney might tell you, after all, the attorney has an on going opportunity representing you as issues arise.
The way to put such a lender group together is to obtain contractual loan agreements with your investors, as a loan committment, to make future loans available within a short period of time.
Usually obtaing short term financing for long term obligations is a good formula for failure. Being able to bring in a new or another investor to pay out another one is key.
Chris made a great point with this matter and the personal guarntee. Basically that is what I did years ago, in the old days.
Substituting collateral is a very touchy situation IMO. There are issues of self dealing that can apply if that new collateral is not as sufficient as the prior collateral and frankly, I doubt many brokers or investors address the issues as they are usually leaning toward conducting business in their own best interest. You need to go out of your way to ensure that the collateral is in all ways as good or better than the collateral being replaced.
While I have done collateral substitution deals, I strongly advise to avoid the temptation of doing so without the approval of the lender/investor, such approval not being unreasonably denied. This puts the risk and liability back in the lap of the investor, taking at least some of the responsibility for their money. I don't think, IMO, that an investor type switching collateral to a lending investor does so without a vested interest or sufficient understanding of how the hammer can drop on them in doing so. I would never allow an investor to replace my collateral without my consent....NEVER!
As I mentioned, doing so with consent and wording it that consent shall not be unreasonably denied, should be sufficient if you're worth your salt, for you to point out to your investor why you are doing so and "selling" them on the next deal or the substitution.
Having done thousands of deals involving investors and lenders I can tell you there will be problems. Some investor or broker who has done maybe 300 deals has not done enough business to experience enough defaults and funding problems yet...you never know when you'll get squeezed for money.
Best way is to line up with a bank or another institutional lender for a line of credit. I realize most investors can't swing this but even a charge card could help at 10K that could be
tapped for small investors, seller seconds and misc. deals.
Guess what I'm saying is that being able to do what you say you will do is paramont. My attitude was that my investors would be protected above all as you are really working for them. So you need to have money waiting in the wings to come in on a deal when it is needed. I suggest you try to put together your individual investors and institutional lenders. All in all, over twenty years +, none of my investors ever lost a dime!
As to terms, such are only structured when you are borrowing as a commercial loan to your business and allow you to have working capital. As I recall, most of mine were three years with 30 yr. ams and the right of early payoff without penalty (as you can have penalties with commercial loans). An easy rate would be a couple points over the local bank CD rate, selected by the investor.
When you start getting into improved values on properties held for sale, you can add interest equal to a shared appreciation amount to intice investors to go in to higher LTV properties flipped. Translating shared appreciation as an interest rate balloon payment keeps the investor wearing an investor's hat and not a partner.
Substituting collateral is not necessary to keep the invested money when you sell the collateralized property. Your agreement can include an arrangement that any funds not collateralized shall be on deposit in an insured banking institution with such balances pledged to the investor.
It's also a good idea to set forth a standardized LTV based on a qualified appraisal for those funds to come out of the bank and fund the next deal. If your next deal meets the collateral requirements set forth then there should (could)not be a reasonable denial!
When getting an appriasal on rehabs, get the present market estimate and the value after repairs noted in the same appraisal so that you can use both values as they property is completed.
Construct you collateral agreement around those values.
IMO, as well, LOL, it's not a good idea to put investors in an arrangement that can be construed as a partnership.
As additional collateral you can provide an assignment of rents, and insurance proceeds in the event of default (be careful here as insurance needs to go to the property, but if it is in default it could be used to reduce the amount owing).
You can also simply assign any purchase agreement you do with a buyer to your investor....in the event of default.
Investors (you) should keep a copy of the purchase agreement and place the original in a safe deposit box file. You should do an escrow agreement with YOUR attorney and provide instructions to release those contracts as appropriate in the event of your default or demise. Your sfae deposit key should be in a safe so that others can get to it in the event something happens to you and your money investor's attorney should know how they can proceed without you. This aspect of working with your money investor's attorney can really provide alot of credibility as a business person who knows what he is doing. Making the risks better managed for your investors makes them sleep better.
Just some thoughts, didn't mean for it to be so long, but there is much more than these aspects. Ya think anyone would want a book on how to set up a successful lending operation? LOL
