Hey, what's up guys.
It's Clint Coons here.
And in this video, we're going to talk about
working with private investors to fund your real estate deals.
Okay, let's get started.
All right. So here's the deal.
You don't want to work with traditional lenders. Interest rates are up.
You find it harder to put together financing packages.
So what are you going to do?
Maybe you go out there and you start working with private
investors, people who are willing to invest in your deals.
Now, the thing about working with private investors always comes down to
how are you going to structure the deal with that investor?
Some people just want interest and that's pretty simple, right?
You just structured as a loan.
Some people want to own a piece of the deal.
That is when the property sells.
They want to get paid a percentage of the profits.
So this is where it can get complicated in structuring these types of deals.
And I've seen a lot of people screw this up before, not only on the
lender side, but also on the developer or the person who's managing the project.
And it ends up in litigation and people are suing.
And the only people that are winning in that scenario are people like me,
the attorneys who are representing both parties,
and they're just sitting there billing the time.
At the end of the day, both individuals walk away from the table with no recovery.
So what do you want to do?
You want to use sound business practices to put these deals together
to make sure that it's meeting the expectations of each party,
but at the same time not putting anyone at exceptional risk
or hampering the ability of the investor to move their deal forward.
So I'm going to go through four scenarios for you
that you should consider when you're putting together
a deal with a private investor who wants to come in and help fund your project.
And I'm going to do them, as I would say, in order of preference.
That is the way that I like to put deals together for my clients.
All right. So here's the first one.
The first way you want to do
a deal, working with a private investor investor would be to use a deed
of trust.
All right.
So what that means is that you're going to bring some money
and let's say we got this property right here.
And I want to bring in an investor and they're going to bring in, let's say,
$200,000 to help put this deal together.
Now, in a lot of scenarios, people think about a JV and I will get to that.
But I think it's simpler and cleaner and more beneficial for the investor
and the person over here who's managing
this project, who's putting the deal together to structure it is straight debt.
Just treat this person as a lender and when you borrow the money from them
to put your your deal together, give them back a secured interest in that property.
So what does that look like?
Well, if they're the only one funding the deal,
that's going to be a deed of trust right here.
They're going to give back a deed of trust.
So if they send you $200,000,
you have a promissory note to pay back 200 grand with this deed of trust.
Now, I understand, as we talked about, that some people want more
than just interest. They want to own a piece of this deal.
What they're looking for is a piece of the profit.
So then how do you structure this this structure here?
Use the word twice so that they get paid a piece when the property sells.
Well, that comes down to your promissory note.
So when I enter into a loan agreement with this,
this lender, I'm going to have interest in their
and then I'm going to have another type of interest on top of that.
It's called contingent
interest.
And what is contingent interest, which is this
that's it's contingent upon the sale, the property.
So this individual here, they get paid
20% of the profits on the sale of the property
or 30% of the profits on the sale of the property.
And you define that out in your promissory note.
So now this lender knows, hey, I'm getting 1% return
on my money as the standard interest or two and a half percent.
I got to be careful there and what the interest rates are,
and then I'm going to get contingent interest on the sale.
So now they're in for peace.
They have a secured interest in the deal. Right.
So they know they're going to get paid.
This is what how you entice people to come work for your loan,
your money are coming to your deals.
It's like, listen, you really don't have any risk here
other than if I decide to bulldoze the property down and screw it up.
But other than that, what you would never say is that
you are a lender, therefore you're secured in the underlying asset.
So I can't sell it without you get notified without you getting paid.
Now I like that type of structure.
However, the problem is, is that this person here
may not be the first because you might have a first position here
already with with a lender.
It may be that that lender prohibits you
from borrowing any additional money or granting any other security interest.
That's what we did there with that deed of trust against the property.
Okay.
So what do we what do we do now in that scenario where I know
I can't grant another security interest against it, but again,
I want to bring this person into the deal and I want them to feel comfortable.
So number two is to file a memorandum
of interest.
Okay.
So you want to file a memorandum of interest
against the property.
So back to that is another example. Again, we got the individual there.
This is the lender.
All right.
This is you.
If you're the one doing the deal.
So you're going to loan money against this asset here.
But rather than record a deed of trust, which is going to show up
against the property, is a secured interest on the property.
If someone were to look you for what's called a memorandum of interest.
Now the memorandum of interest is really pretty nebulous.
Okay?
When it gets filed against a property, all it's doing is this alerting
anybody that ever pulls title if you try it.
When I sell the property that, hey, there's another party out there
that has some interest in this deal, what that interest is,
they don't necessarily know until they contact this party right here.
So again, what we would do is we would put together a promissory note,
an agreement to borrow money, and in exchange for that as collateral,
allow them to file this memorandum of interest against the property.
So when the property is sold, if we went back and use my first example
where you get 30% on the sale of a property,
this individual here would tell your title,
Hey, listen, I'm owed 30% of the profits.
Here's how it's calculated.
This is what I'm owed out of the deal
because you guys are going to be talking right
back and forth.
And so then they'll they'll send that over.
They're going to check with you and say, yes, that is correct.
And so then they'll get paid out of escrow
when that property closes.
But that first position lender.
Now, you agreed not to encumber the property with any other creditors.
I'm not encumbering the property.
There's no deed of trust or mortgage that was recorded against the property.
So this is a way for me to sidestep work around
those lenders who want to be the only person in play.
And believe me, there are a lot of them out there
because of the fact that they don't want to deal with junior mortgages
if they had to foreclose.
And so this is one of the reasons why they prohibit you from bringing on
any other secured parties into the on that particular piece of property.
Okay.
So that's the second step.
Now, let's say that the person you're working with
just isn't comfortable, does want to be a lender.
They want to feel like they have more skin in the game, they have more protection.
Then the third option that you have that I would look at
is what's called a tick or a tenant in common agreement.
Now I've got a great video discussing tenant in common agreements
and I have another video that I'm released that discusses
the important provisions that need to be in a tenant in common agreement.
Now, I'm not going to go into those here, but be sure to check the show notes.
I've got links to those videos there if you're interested.
Tenant in common agreement because you're thinking, Hey, that's for me.
That's what I'm going to be able to do to fund my deals.
Check that out.
Tenant Common agreement. What does that mean?
It means that they're essentially an owner in the property.
That's that's what they are.
So when you put your deal together now and you're going to go in on this
this property, you've got tenant in common.
This is me, the investor, and this is the party I'm bringing into the deal.
We'll call them silent party because they're not going to be doing
anything other than bringing to the table money.
Now title.
Okay.
And these two, number one and number two title
would be held in your limited liability company.
That's how title you'd be in full control of the property in this scenario
title is going to be split, title will be held in
you know, I have you here, but actually it's going to be in your LLC
and then whoever this party, however they want to hold their title,
maybe it's their individual name, maybe it's an LLC.
My recommendation is tell them to set up a limited liability company
to hold their interest because you know what's going on in their life,
what type of challenges they face, lawsuits.
You just want to get tied up in another person's problems.
So I would have them come in as an LLC as well.
But in this scenario now,
is that up this tick agreement or this tenant common relationship?
And if you watch my videos, you hear me talk about this, you want to make sure
that you're in control.
So you file the tick agreement
you record against a property that states, hey, you know my case clinching control.
The deal fell silent partner over here they have nothing to say about it.
I control everything.
So you would set that up so you can do the deal and rehab the property, flip it,
whatever, whatever the intent is here, and then when the property sold,
if this was a see a 6040 structure, a little different
than what we had last time, 6040 structure than 60% of the profits.
And that's actually recorded against the property would say, you know,
Clint owns 60%.
And John, as to his 40% tenants in common, John would get 40%.
He signs off at closing.
I get 60%, I sign off at closing.
And that's how the money would be split.
So it's great way to set it up if one or two doesn't work.
But the drawback to the tenant and common agreement,
that's why I have it at number three is you're actually bringing
on somebody else as a partial owner in that deal.
And you have, you know, it complicates things, right?
If you want to sell well, potentially they could try to block the sale
even though you can draft around that it's an issue.
So that's why I put it at number three.
All right. So what is the fourth way
if you're going
out there to find money for your deals to put it together?
Well, the fourth structure that you could look at
is called a joint venture.
All right.
And if you're going to do a joint venture, you're always going to use a limited
liability company.
So I'm going to set up called this a Joint Venture LLC.
And what we're going to do here is we're actually we're going to set up
a limited liability company just like this.
I'm going to be here
as one of the partners, and then you're going to have the other
individual over here. We're going to come in.
And if it's again, like using the last example at 6040, we got 60 here, 40 here
properties owned in the name of the limited liability company.
Now when you
set up a joint venture LLC, of course you want to be in control.
So this would be a manager, managed
manager, managed LLC with you as the manager.
Because if you're the property, I mean, this is your deal,
you want to control it, you're the one that has the expertize here.
You don't want this guy interfering with what's going on.
You're like, Thank you for the money.
You you trust my expertize, sit back, shut up.
Basically, and wait for me to do what I need to do.
And then then we'll split the profits from there.
So here's the complex here.
The problem with going the joint venture route
with using the limited liability company is that if you're the manager
and I'm a member in this LLC,
I'm relying upon you to do everything
and therefore you have a fiduciary relationship or obligation to me.
And this is where things can get sticky.
Is that this JV member, if for whatever reason they decide to
start throwing
some glue into the mix, they can do that is the fact that they're a member.
So now they can proceed against your company and start creating problems
for that joint venture and what's going on.
I've seen this happen before where you've had people come in to JVs.
They're not experienced in real estate investing.
They don't understand what you have to go through for feasibility and permitting
and all of that.
And they're complaining about the time.
They just want their money back now
because they don't think it's going to work out.
And so now they start bringing lawsuits against the LLC,
they screw up the project, they halt the project,
you can't move forwards and everyone loses money in that type of deal.
So you've put them in a position now where they're able
to step in and start causing problems.
And unfortunately, that's just the way limited liability companies work.
It's very difficult to draft around that.
I mean, you could try to come up with two classes of interest,
give them a second class of interest in that LLC.
But inevitably they say that those members you have an obligation to them
if you're the one that's in control to meet certain fiduciary standards.
And that's where Joint Venture LLC is,
can create problems and slow the overall development down.
That's why I put it at number four.
A lot of people use them in their in their deal structuring.
I've set them up myself, but it always comes down
to, hey, make sure that you're not violating expectations.
I've got some great videos on joint venture limited liability companies.
Just search my YouTube channel for that.
You'll be able to watch those videos if you're considering going that route.
Hey, if you like this video, hit the like button for sure.
And don't forget to subscribe to my channel
if you're not already a subscriber, take care, everyone.