There is a squeeze on Wall Street that is leading many note buyers back to Main Street. The drought of institutional money from the sub prime mortgage crisis is creating a resurging interest in working with private investors for the purchase of seller-financed notes.
The first question is the obvious, “Where does a note broker find private investors willing to buy notes?” A good place to locate private investors is through participation in local networking and investor groups. These often include doctors, lawyers, real estate investors, and self-directed retirement accounts.
The second question should be “How will working with private investors differ from institutional money?” It is important to exercise caution when dealing with private investors, paying special attention to these potential challenges:
- What are the expectations of the investor? 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.
- Does the private investor have the experience and knowledge level to purchase notes? The investor, rather than the note broker, should be equipped to underwrite, close, and service a note.
- Are there are any implied or actual guarantees provided on the performance of the note?
- Will actions be in compliance with all aspects of the Securities and Exchange Commission (SEC)? Exercise caution when dealing with restrictions on the solicitation of investors and offering of unregistered securities.
While this blog does not intend to provide legal advice, it is generally understood that to be in compliance with the SEC it is imperative to 1) avoid soliciting investors through advertisement, 2) only sell one note to one investor, and 3) have the investor take ownership of the note and perform all due diligence for themselves.
As note brokers gravitate towards private investors they are wise to seek competent legal counsel and the services of a third party note processing company. This not only protects all parties but also keeps everyone informed and satisfied.