Real Estate Investors: Can I Get Private Investors Across State Lines?

I have covered many aspects to creating an effective business plan

. Here we can discuss questions that have been asked by some of my students with regard to developing a business plan concept.

Crossing State Lines with Private Lenders

Question: I have a question about crossing state lines with finding private lenders. I know the rules here in Arizona might be different, but I'd like to see what you know. My family lives all across the US and one of the things it says is to hit up your family. That would mean I'm crossing state lines.

What if you know football players in different states and they come to Arizona? Right now they have the NBA here. What does crossing state lines really mean?

Michael: It's fairly clear. As far as I know and the way I operate my business is I will not cross state lines. Absolutely not. I'm a Pennsylvania resident. The properties that I buy are in Pennsylvania. The private lenders that I deal with have their primary residence in Pennsylvania.

Student: I know the homes will be here in Arizona. I'm talking about the people who fund them.

Michael: Right. Their primary residence has got to be in Arizona if you want to live within the Arizona exemptions. I'm not claiming to know what they are because I don't. I would assume most states have an exemption within their SEC regulations that allow you to not have to register with the local SEC if you comply with a few exemptions.

In Pennsylvania - and in most states - one of the primary exemptions is that you do not cross state lines. Once you've done that, you're essentially under the jurisdiction of the federal SEC. You would then have to refer to their regulations as to whether you need to register with them.

You can register with your state or federal SEC, there's nothing wrong with that. A lot of people do it. It involves more cost, attorney fees, and things of that nature, so you need to be aware of all that. As long as your business and the size of your business justifies it, there's nothing wrong with it.

Student: So in my case I couldn't hit up my family for funds.

Michael: Family is a little bit different.

Student: I want to know where the distinction is. I've seen several of these private lender deals and they always say hit up your friends and family. Then they say don't cross state lines.

Michael: I'll be honest with you. As a general rule I would be leery about doing business with your family. It's not the amount of what it is; it's that doing business with family could potentially produce some problems. You may have a family that is more accustomed to doing business with each other, I'm not sure. It's going to be up to you.

As far as family is concerned, I'm sure there are ways around some of these things. It doesn't matter whether it's family or not, I would recommend you document these loans. Do not do them on a handshake. I really do believe you need the right documents.

You need a promissory note that lays out what's going to happen and how and what's expected by both parties. I would not short circuit that. I believe you'll find it will cause you some problems. People are going to misunderstand and have their own interpretation. Things like someone saying you were going to pay 15% interest or pay it back faster or later. It can be a lot of things. I would get all that in writing family or no family.

by: Michel Lautensack

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