Thinking of working with private investors when selling mortgage notes or trust deeds?
Thank you Tracy, I have one other question, are there any laws surrounding selling notes to non institutional investors for whom I would need to do the research on a Note for? – Mark
Yes and great question! You want to keep a careful eye on the SEC rules when working with private investors rather than institutional investors. We cover this in more detail in the PPS manual in chapter 6 page 61 and also Chapter 18 which can be downloaded under the PPS tab of your Finding Cash Flow Notes Training members area.
If you are going to solicit private investors I strongly encourage you to read the SEC regulations and consult with an attorney. While we are unable to give legal advice, you are generally in good shape sticking with the institutional investors in the directory.
Here are some additional tips on…
Working with Private Mortgage Investors
As note brokers and private mortgage professionals expand their the note business they often run across deals that are harder to place with institutional investors. This leads some to cultivate a circle of private investors. This is best achieved through networking with local investor groups. It might include doctors, lawyers, or real estate investors. It could also include self-directed retirement accounts.
Extreme caution is recommended when dealing with private investors. Special consideration must be given to:
• The fact that a private investor is more likely than an institutional investor to come knocking on your door due to a late or missed payment from the note payer.
• The sophistication level of the private note buyer. Are they truly equipped to underwrite, close, and service a note?
• Whether there is any implied or actual guarantee provided on the performance of the note.
• Compliance with all aspects of SEC, including restrictions on the solicitation of investors and the offering of unregistered securities.
An Introduction to the Securities and Exchange Commission
A whole manual could be written on the Securities and Exchange Commission (SEC) by attorneys well-versed in law. On top of that there are state laws in addition to the federal regulations. To keep it straight forward, many feel you will be safe from violating the SEC rules in the note industry if you:
1) avoid soliciting investors through advertisement,
2) only sell one note to one investor,
3) have the investor take ownership/title of the note and perform all due diligence for themselves, and
4) verify they have sufficient income or net worth to be considered an accredited investor.
While working with private mortgage investors can provide more options it also comes with additional risk. If you choose to play in this arena, first get some deals under your belt working with institutional note buyers and seek competent legal counsel.
Want to learn more? Check out this article on How to Fund Good Notes Successfully with Private Mortgage Investors from Toby Preston.