Issues with using Non-Accredited private investors
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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votesUsing a non-accredited investor adds an additional layer of risk. You have to mitigate that risk. Will the loan-to-value ratio be 70% or less? Will there be an appraisal? Lenders policy of title insurance? Does the investor have hard money lending or real estate experience?
If you do this deal with a non-accredited investor, you aren't heading straight to jail. If you make money, your investor makes money, and your investor gets their money back, you are fine. The $&!? hits the fan when the deal goes south and the investor loses money. Now it's game on, and you have to defend what you did. You need as many facts in your favor as possible. If you can answer yes to the questions in the previous paragraph, you still don't have a get-out-of-jail-free card, but you are defending your actions from a safer position.
Your securities attorney is giving you good advice if your objective is to minimize your own risk. Business is about taking calculated risks, and perhaps the additional risk of using non-accredited investors is acceptable to you in exchange for the opportunity of doing this deal. Only you have that answer.
30 Replies
- Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes13y
Are you trying to pool investor money in a syndication of some sort or fractionalize notes among individual investors, Sean H.? If so, there are all sorts of SEC and state restrictions you have to follow and you’re attorney is probably correct. She could also be correct if you’re taking on silent partners. What structure are you trying to achieve?
Unless there is something state specific about Pennsylvania, you generally don’t have to be an accredited investor to simply loan money. Any private individual could loan you money secured by a note and mortgage on a specific property. I’m doubtful there is any accreditation requirement but you might talk to a broker to find out. Are you sure your attorney is just not being too conservative? Does she have securities/lending experience?
Jeff
- Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes13y
Sean H. Jeff S is right. For the deal you're doing you don't need Accredited Investors and all the hoops you're jumping through, what you probably need is a Hard Money Lender.
- Flipper/Rehabber · Pittsburgh, PA · Member since 2010 · 224 posts · 75 votes13y
Jeff S I am not trying to pool money or do anything too complicated. One investor, one note secured by one property. I think she is being a bit too cautious as well, but I have never set up a private lending transaction before and she is the director of the securities division for a large law firm, so you can see why I listened to her. How do I basically tell her shes wrong?
Karen Margrave thanks for the feedback, and I agree with Jeff as well. Hard money lenders have their place, but I can get better terms from private individuals, so if I can do that without jumping to #1 on the SEC's watch-list, I want to try that first!
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes13y
Sean you can play with fire and take the risk but the attorney who has built their business up to soaring heights isn't going to go to grey areas or maybes.
I would speak with your attorney again as maybe the attorney is misunderstanding what you are trying to do. - Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes13y
In this particular case, I’d simply ask if there are any laws that will be broken if you borrow from non-accredited individuals and, if not, tell her to draw up the papers and help you through the process. This is not even a gray area, in my view. Ask your attorney if she agrees.
It appears you don’t have a legal problem, Sean H., but you might have a problem selecting your professionals. Your attorney is so conservative, she’s a “deal killer.” I don’t know if this is your case, but I prefer to do business with professionals that also personally invest or loan in real estate. I like to be educated and given practical advice by those also in the trenches, not scared into my decisions.
Jeff
- Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes13y
Maybe a couple of other lenders can weigh in? Ann Bellamy Don Konipol and someone with experience with Accredited Investors Bryan Hancock. I must say I'm confused as to what it is you, Sean H. are doing, as it seems to me you could easily approach a mortgage broker that can handle the deal and find you the financing. As for HML, don't believe everything you hear, they have their place.
- 13yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
Using a non-accredited investor adds an additional layer of risk. You have to mitigate that risk. Will the loan-to-value ratio be 70% or less? Will there be an appraisal? Lenders policy of title insurance? Does the investor have hard money lending or real estate experience?
If you do this deal with a non-accredited investor, you aren't heading straight to jail. If you make money, your investor makes money, and your investor gets their money back, you are fine. The $&!? hits the fan when the deal goes south and the investor loses money. Now it's game on, and you have to defend what you did. You need as many facts in your favor as possible. If you can answer yes to the questions in the previous paragraph, you still don't have a get-out-of-jail-free card, but you are defending your actions from a safer position.
Your securities attorney is giving you good advice if your objective is to minimize your own risk. Business is about taking calculated risks, and perhaps the additional risk of using non-accredited investors is acceptable to you in exchange for the opportunity of doing this deal. Only you have that answer.
- Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes13y
There are a number here on BP who can speak more intelligently than me. One has already been Mentioned, Brian Hancock. Perhaps he will chime in.
The issue is, if you are offering a security you need to register it (never going to happen) or you need to find an exemption to registering. The exemption will cost you $7K to $50K. Using no accredited investor will cost you more. Using Accredited investors will still cost you, and you need to file an exemption.
So what is a security
From the 1933 securities act
Any note, bond, debenture. . . investment contract. . . for 10 or 15 more lines.The second word is note, in other word a loan. The other key phrase is investment contract. This has been defined by a Supreme Court case, Securities and Exchange Commission v. W. J. Howey Co.The "Howie Case"
This created the Howie test which basically says if an investor is a passive investor it is a security.
In other word if you Brother loans you a quarter to put in the parking meter and you promise to pay him double tomorrow you have crated a security. Failure to register that security could land you in Jail. It may be absurd but that is what the law says.
Now you will never go to jail for accepting .25 from you brother. What is a gray area is; at what point would it be enforced?
Many Gurus say you are OK if you One investor per one deal. The issue is if you are "pooling " Money. That is absolute horse poop. The word "pooling" is not in the 1933 Securities act and a "note" is pretty much by definition - 1 investor.
I specifically asked the Maryland Securities Commission if a Mortgage was a security and they said yes if it is more than 90 days. Researching printed material confirms that.
The reality is most "private lending" is breaking the law. From a practical standpoint it is not an issue unless someone loses money and is smart enough to pursue it from a securities standpoint. Another option is to make sure your investor is not passive. That they have an active role in the investment and that some of there profits are coming from their own actions.
This is a complex area of law. The risk to you is relatively small, However the consequences could be large. The risk of flying in an airplane are small but if it crashes the consequences are catastrophic.
Good luck - Ned
- Altus, OK · Member since 2008 · 2k+ posts · 690 votes13y
"In other word if you Brother loans you a quarter to put in the parking meter and you promise to pay him double tomorrow you have crated a security. Failure to register that security could land you in Jail. It may be absurd but that is what the law says"
Well I better take him to court as that bastard owes me a $1.50 :)
- Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes13y
In general, attorneys advise on legal risks. They seldom mention the likelihood of encountering that particular situation or the frequency of those cases going to court or the likely outcome should you choose a course of action. They consider those to be business decisions, not a legal recommendation. They are paid to advise you what could happen, not what the probable outcome is. Because their E&O insurance premiums will be skyrocketing if they are sued for bad "business" advice.
There is ALWAYS a risk, if you are using someone else's money and the deal goes bad, of getting sued. You might consider having a separate contract with your private lenders outside of each note and mortgage. Disclose every possible risk you can think of. Find a real estate attorney locally who does lots of private money closings. They are better able to help you structure the deal so that your risks of being sued are reduced.
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes13y
Originally posted by Ned Carey:
So what is a security
From the 1933 securities act
Any note, bond, debenture. . . investment contract. . . for 10 or 15 more lines.The second word is note, in other word a loan. The other key phrase is investment contract. This has been defined by a Supreme Court case, Securities and Exchange Commission v. W. J. Howey Co.The "Howie Case"
....
I specifically asked the Maryland Securities Commission if a Mortgage was a security and they said yes if it is more than 90 days. Researching printed material confirms that.
I still have the question, if a mortgage is a note, how does EVERY homeowner who gets a loan from a bank not have to register with the SEC for an exemption to get that loan (security)?
Why would banks be risking their existence to illegally loan trillions of dollars to homeowners?
- Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes13y
Check out Don Konipol's post in this thread:
http://www.biggerpockets.com/forums/49/topics/86884-private-lender-list
- Flipper/Rehabber · Pittsburgh, PA · Member since 2010 · 224 posts · 75 votes13y
Jon Klaus Thanks for the link to Don's post. He does a great job explaining the issue. I will respond to his post in that thread with a couple questions.
Brian Burke and Ann Bellamy, both of you work extensively with private investors. Do either of you work with non-accredited investors? Why or why not? Have you seen any of the legal issues discussed in this thread come up with them and if so, how easy were they to mitigate? Brian, if I remember correctly from the podcast, your first group of investors were your former co-workers (policemen and women). Surely, most of them were not accredited. so am I right to assume you felt comfortable with the risk?
Ned Carey thanks for your breakdown of the law. I have followed your responses in a few of the other theads and your frightening analysis of how just about anything is a security is what led me to consult an attorney prior to completing a deal. I would be interested to hear your response to J Scott's questions.
Joel Owens I am definitely leaning on my attorney's advice. As I said, she is the director of security law for a large firm. I know that rank does not necessitate intelligence, but I have to respect her highly paid opinion as I move forward.
Great advice Jeff S. How did you find a strong attorney who was actively lending on real estate?
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes13y
I appreciate the vote of confidence folks. I'm not an attorney and you should consult a good one in your state and ignore my advice. I do agree with Ann's post about attorneys though. Their job is to tell you everything that COULD go wrong regardless of the probabilities. Your job is to take the information along with all of the other information to make a calculated decision about what to do. In normal circumstances a lot depends on your downside; or what you have to lose. With securities if you get them wrong YOU COULD GO TO JAIL. That is your downside, so you want to get it right. I think it is exceedingly unlikely that you would go to jail for borrowing money, but I am sure you can find egregious cases where people have.
The common definition of a security is an investment of money, in a common enterprise, with the expectation of profit, solely through the results of a promoter.
In a loan, with a one-on-one relation between the borrower and lender, it is likely that no common enterprise exists. If the borrower does not pay, the lender forecloses, as the relationship is more adversarial than a common enterprise.
However, some attorneys take the position that if there are multiple beneficiaries or if the note calls for equity participation, debt may likely considered to be a security. Thus a lot depends on how your note is structured.
All of what is written above is about what happens at the federal level. States have their own laws and the state securities commission is more likely to come knocking before things get caught at the federal level.
Regarding disclosure and sophistication I would have to agree that more is better on both accounts if things go awry. I purposefully don't allow non-sophisticated investors to participate in our JV partnerships because they'd be hard-pressed to claim that they're naive and the gov-mint needs to take care of them. Purely passive, non-sophisticated money has a nice home in our private equity fund provided they're accredited. I don't take in dough from non-accredited investors via deeds of trust because I would be too easy of a target for suits if things go south regardless of my level of disclosure. Fighting frivolous suits over this doesn't make sense from a cost/benefit analysis. I'd rather find more sophisticated money and surrender a bigger portion of the deal in trade for greater protection from suit if things go south.
This is an extremely complicated subject and it is not a do-it-yourself project. I recommend talking to an attorney that specializes in these matter AND some local investors that are well-versed in the business decisions that accompany the overall decision.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Continue to read the 1933 SEC Act, there are exceptions for a mortgage secured by RE. Notes can be bonds when funds are for capital, secured or not. A loan to buy an asset and providing a security interest in that asset is not a regulated bond when it is with one lender, a regulated lender, regulated by federal or state law. Loans to individuals are not considered bonds. I can loan money to my brother to buy a car, it's not a bond and such a loan to immediate family members are excluded from any lending regulation I can think of. Loans to a company entity, without personal recourse, begins being a bond, with recourse it may not be. And, while a note may be a bond, it may not meet the threshold for compliance.
You can't really take the SEC regs and define securities from one paragraph as there are exceptions throughout and the transaction viewed as to it's purpose, amount, use of funds, security collateral, parties involved and the intent of the law must be determined.
Generally, if an accepted lending activity is regulated by law it will first be viewed as being compliant under those restrictions and not under SEC, unless that activity takes on more of the flavor of a security activity in light of various issues. The intent of the SEC was not to stiffel small lending activities. That's why SEC attorneys get big bucks and I'm not one of them. :)
- Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes13y
Let me start by saying I am not trying to be alarmist. I am trying to educate so that at least you have a basic understanding of potential risk and better conversations with your attorneys.
There is a LOT of mis-information out there - often from sources thought reliable. None of the information I am sharing has come from a forum post or a Guru. It is coming from conversations with attorneys and my reading of the actual laws.
I don't have all the answers, and what I write makes no sense. Yet sadly no one has been able to show me specifically why I am full of poop.
I want to be proven wrong Lots of people say that a mortgage is not a security. However no one has ever been able to specifically tell my why that the Note in a mortgage is not a security when a NOTE is clearly defined as a security.
I can read what the law says. I can point you to the law so that, you can read it for yourself. However I am not an attorney and often the law is modified by exceptions in a totally different area of law or by court precedents. I'd love to know more.
The risk is real, the risk is very small, however the consequences could be large.
I think @Ann Bellamy put it best from a practical standpoint.
Originally posted by J Scott:
I still have the question, if a mortgage is a note, how does EVERY homeowner who gets a loan from a bank not have to register with the SEC for an exemption to get that loan (security)?Why would banks be risking their existence to illegally loan trillions of dollars to homeowners?
There are exceptions in the laws for regulated financial institutions. I don't know much about this because it doesn't affect me.
The second question is easier. It is not illegal to loan based on securities laws, it is illegal to borrow. (crude generalization but you get the point)
Originally posted by Bryan Hancock:
The common definition of a security is an investment of money, in a common enterprise, with the expectation of profit, solely through the results of a promoter.True this is the Howie test I mentioned above. However this was a court case specifically to define an "Investment Contract" Which is just two words in the 20+ lines of text defining a security.
Absolutely true, However the second word in the definition of a security is Note - in other words a loan. Also a bond is a security. Although typically there would be thousands of bonds issued , each bond is one investor and one borrower.
Sadly here is the rub, Most attorneys that do not specialize in this area will look at you like you are a nut for being concerned about it. Attorneys who do specialize in it will assume anything you want to do is a security and want to proceed from that perspective.
At the federal level they understand there is a gray area and talk about a "Safe Harbor" to clarify. Of course that "Safe Harbor" is reg D and will cost thousands of dollars to comply. - Ned
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes13y
Originally posted by Ned Carey:
Originally posted by J Scott:
I still have the question, if a mortgage is a note, how does EVERY homeowner who gets a loan from a bank not have to register with the SEC for an exemption to get that loan (security)?Why would banks be risking their existence to illegally loan trillions of dollars to homeowners?
There are exceptions in the laws for regulated financial institutions. I don't know much about this because it doesn't affect me.
The second question is easier. It is not illegal to loan based on securities laws, it is illegal to borrow. (crude generalization but you get the point)
That's my exact point. Exceptions for regulated institutions shouldn't matter, since securities laws impact the borrower, not the lender. It's not the banks that need the exception, it would need to be the borrower who received the exception to be allowed to borrow from banks.
That's why I'm skeptical.
That said, I'm not arguing with you Ned. You've provided support for everything you claim, and everything seems to be exactly as you indicate. But, clearly there is some missing piece of the puzzle given the point I'm trying to make.
That missing piece could be a legal exemption somewhere, it could be case law, it could be that the banks lawyers feel they can support their client's actions, or something completely different. It just feels like if we knew what that missing piece of the puzzle was, it may make everything clear.
Or maybe not... :)
Again, not trying to be argumentative...just keeping the question open in the hopes that someone can eventually shed more light...
- 13yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
Originally posted by Sean H.:
Brian, if I remember correctly from the podcast, your first group of investors were your former co-workers (policemen and women). Surely, most of them were not accredited. so am I right to assume you felt comfortable with the risk?
Sean H., yes I was comfortable with the risk. The advice I got from my attorney (not advice that I am giving, your own attorney can do that) was that I was OK if I had less than 35 unaccredited investors, and I had a pre-existing personal or business relationship with those individuals. As co-workers, they met that test. - 13yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
J Scott and Ned Carey, here is the missing piece of the puzzle:
In Reves v. Ernst & Young (1990) 494 U.S. 56, 110 S. Ct. 945, 108 L. Ed. 2d 47, reh’g denied, 494 U.S. 1092, the United States Supreme Court held that the appropriate test for determining whether a promissory note is a security is the “family resemblance” test adopted by the Second Circuit. The Court began its analysis by noting that the phrase “any note” in the section of the Securities Exchange Act defining the term “security” should not be interpreted to mean literally “any note,” but must be understood against the backdrop of what Congress was attempting to accomplish in enacting the statute. It approved the distinction made by the appellate courts between notes issued in an investment context (which are securities) from notes issued in a commercial or consumer context (which are not). Pursuant to the family resemblance test, the Second Circuit has devised a list of notes that it has decided are obviously not securities, such as notes delivered in consumer financing, secured by a mortgage on a home, secured by a lien on a small business, secured by an assignment of accounts receivable, evidencing a personal loan to a bank customer, or formalizing an’ open-account debt incurred in the ordinary course of business. Accordingly, the “family resemblance” test permits an issuer to rebut the presumption that a note is a security if it can show that the note in question bears a strong family resemblance to an item on the judicially crafted list of exceptions, or convinces the court to add a new instrument to the list.
We must all remember to be careful when reading codified law and making interpretations of it. In my humble opinion, one of the reasons that so much money is spent in this country on legal defense is the challenging task of interpreting codified law as modified by case law. Without having knowledge of the case law interpretations to back up the statements made in codified law, we might hesitate to make reasonable business decisions for fear that the letter of the codified law prohibits an action that the courts have ruled is permissible.
- Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes13y
Originally posted by J Scott:
.You've provided support for everything you claim, and everything seems to be exactly as you indicate. But, clearly there is some missing piece of the puzzle given the point I'm trying to make.That missing piece could be a legal exemption somewhere, it could be case law, it could be that the banks lawyers feel they can support their client's actions, or something completely different. It just feels like if we knew what that missing piece of the puzzle was, it may make everything clear.
Or maybe not... :)
I am with you J, There must be a missing piece. That is a good way to put it but I haven't found it.
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes13y
Brian -
Thank you for that. Great information!
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
http://www.law.cornell.edu/cfr/text/17/240.3a12-4
As to what I was saying.
You'll find missing pieces through other Acts, RESPA mentions exemptions from SEC regs, FDIC, COC, Treasury Regs have consumer protection aspects, the Dodd-Frank Act mentions exemptions.
By exemption, they are saying that a certain agency or Act will govern the activities of some function and that defines the governing authority, "exempt" from other Acts unless that activity becomes another activity. (If that makes sence)
A sale of mortgage loan is exempt, but the pooling of mortgages sold can become another issue.
Back on topic, I've mentioned it many times before, unaccredited investors should be in a partnership arrangement, in the company with thier own capital account as an active participant as this will provide the best insulation from one claiming they are an investor in some enterprise, IMO, several attorneys from here, St. Louis and Kansas City dealing in securities and the opinion of an FBI Special Agent who investigated financial fraud agreed, BUT, with all the assurances I ever got, there was never a guarantee, that one could not make a claim, as they certainly can. It does get tougher to counter when one has no investment and another has all the financial risk and does very little in the administration of the activities, from any view point they may appear to be an investor. Then comes the solicitation of that investor and how they were solicited, ie, through the mail.
I'm pretty sure that SEC Agents do not go searching mortgage filings looking for private money deals to investigate. The issue will likely never arise so long as your investor is well protected and gets thier money back. It's usually only people who lose money that cry foul. Best solution is make darn sure your money guy doesn't lose money. IMO :)
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes13y
My what a tangled web we weave....
Here is a link to Reves v. Ernst & Young, 494 U.S. 56 (1990):
Reves v. Ernst & Young, 494 U.S. 56 (1990)
Here is the Reader's Digest version:
This test came from another decision that gave a list of notes that are not securities:
1. The note delivered in consumer financing,
2. The note secured by a mortgage on a home
3. The short term note secured by a lien on a small business or some of its assets,
4. The note evidencing a ‘character’ loan to a bank customer,
5. Short-term notes secured by an assignment of accounts receivable, or
6. A note which simply formalizes an open-account debt incurred in the ordinary course of business (particularly if, as in the case of the customer of a broker, it is collateralized [… and]
7. Notes evidencing loans by commercial banks for current operations
Here is the four-part test:
First, we examine the transaction to assess the motivations that would prompt a reasonable seller and buyer to enter into it. If the seller’s purpose is to raise money for the general use of a business enterprise or to finance substantial investments and the buyer is interested primarily in the profit the note is expected to generate, the instrument is likely to be a “security.” If the note is exchanged to facilitate the purchase and sale of a minor asset or consumer good, to correct for the seller’s cash-flow difficulties, or to advance some other commercial or consumer purpose, on the other hand, the note is less sensibly described as a “security.” .
Second, we examine the “plan of distribution” of the instrument, to determine whether it is an instrument in which there is “common trading for speculation or investment”.
Third, we examine the reasonable expectations of the investing public: The Court will consider instruments to be “securities” on the basis of such public expectations, even where an economic analysis of the circumstances of the particular transaction might suggest that the instruments are not “securities” as used in that transaction. […]
Finally, we examine whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument, thereby rendering application of the Securities Acts unnecessary.
“If the note in question looks more like a corporate bond, debenture, or other instrument the value of which rises and falls with the success of the issuer’s business, has a term of several years, and is easily traded, then that presumption will not be rebutted, because the note will not bear a strong resemblance to any of the notes listed in Reves for the basic reason that such a note is easily characterized as an investment, and thus a
security.”I didn't go back and read through the whole thread to see what the original purpose of the note was, but 4 years seems to be the cutoff line in some of the cases.
Here is a later case I found:
In SEC v. Edwards, 540 U.S. 389 (2004), the Supreme Court held that a note that falls outside the family resemblance test as a “note” could still qualify as an “investment contract” under the Howey test.
To me this whole discussion is one of risk tolerance and how you structure your notes. It seems like keeping the duration under 4 years is a good thing to do. I am guessing that providing a personal guarantee and keeping them safe for the lender are probably good things to do too. The yield should also be commensurate with the risk in the project so that it won't somehow be re-characterized as a hybrid equity investment by a court. If the note is a large amount to borrow for you then you probably want more legal advice. If it is small and you can pay the investor off if things go south then you're probably fine without seeking expensive legal counsel.
Oh...and I told ya it was complicated. Good luck interpreting minutiae in the guidelines above. Each case is different and that is why you need legal guidance from professionals about your specific situation given your net worth and desired raise.
- Investor · Milwaukee, WI · Member since 2013 · 1k+ posts · 1k+ votes13y
Argh. Well that about clears it all up, like mud that is. I would LOL, but am closer to tears. Can it really be this complicated?
Going to the store for tissues and beer. I suppose I have no choice but to engage a lawyer who may or may not know any better. I find I have moral issue with paying an industry to solve a problem that they created.
- Lender · Honolulu, HI · Member since 2013 · 7 posts · 0 votes13y
With my experiance working with non-accredited private investors give you a lot more wiggle room. I have worked with a few self-directing IRA clients and non-accredited private investors. The only issue is when you do sign a promissory note with them and they want to back out a few months down the road, take that into consideration and always have an exit strategy.
When I work with non-accredited private investors they are given a first or second mortgage that secures their legal interest in the property and secures their investment.
As a rule of thumb, my standard LTV ratios are always 70% or under of the value of the property securing the loan. Additionally we always make sure we have a good exit strategy (lined up wholesale buyers or a reliable back up lender).I find that my lenders stay loyal because not only do I offer them great interest rates, I also provide them with a copy of the mortgage, the original promissory note (drafted by our attorney) and insurance endorsement naming them as the mortgagee. At that point they feel pretty safe and normally when they are done lending on a property they are ready to take what they have earned and revolve it right into the next project.
I would consider asking other local investors in your area what attorney they go to for advise, or explain to your attorney what you are trying to accomplish. Some get it, some don't :).
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