Using other people's money

[entrepresooner]

So I posted here a few weeks ago looking for investors to invest in foreclosures with me. I think I have found someone or a few someones, and I am curious if there are any precautions I should take when investing their money.

I am not referring to the investments themselves as they are sound, otherwise I would not risk it. I mean as far as protecting myself from becoming liable for the loss if worst comes to worst.

This is not to say I'm not confident. I am just being realistic because I know there are never any guarantees.

Also, should I invest in my own name or through a holding company of sorts? Would there be a tax/ or liability benefits to using a company?

[akula]

I think I have found someone or a few someones, and I am curious if there are any precautions I should take when investing their money.

that's exactly the problem with the RE market. you get uninsured, unlicensed, untrained, unqualified amateurs like entrepresooner taking money from unlicensed, untrained, unqualified investors (i.e. your mum/dad/) to then turn around and say "not my fault, I thought the investments were "sound"". these dramas so common, they're a cliche. even the smallest local court in the country has a dozen of these cases running at any particular time.

entrepresooner, yes there is a whole bunch of things you must do for the purpose of "protecting myself from becoming liable"...this includes (amongst other things) the use of corporate/trust structures, insurance, particular kinds of exclusion clauses in your contracts, and changes in the representations that you make to your clients...my day job is to write prospectuses for investments banks...so beleive me when i tell you that there is a lot of ground work that needs to be done if you want the safety of going around offering people investment opportunities without the hazard of being on the wrong end of a damages order.

if you think this is funny or exaggerated, check out the list for your local court and talk to the poor sap who told people he was a "property investor" and who now has to restitute all those plaintiffs whose money he lost because "the market turned sour"

[SlvrBulletV6]

I am not referring to the investments themselves as they are sound, otherwise I would not risk it. I mean as far as protecting myself from becoming liable for the loss if worst comes to worst.

....I am just being realistic because I know there are never any guarantees.

Wow...what a contradiction. If they were really that sound, then nothing should happen right. So why not guarantee it?

First, I have never heard a thing that is of sound investment. (Well maybe a money in a CD account or savings account, if that is even considered an investment.)

Second, if you had the skills to necessary manage an investor's money, you would know of the necessary elements to do so which includes protecting yourself.

(I am basing all my assumptions on your posting above. If you are truly qualified, then great for you, prove me wrong and give a great ROI to your investors. But just based on your statements, I am running away as an investor.)

[chuff1026]

lol
entrepresooner....first i dont suggest that you take these people's money as you do not seem experienced. What makes you feel so confident that you can beat the odds without experience...anyway

start an LLC which will act as a separate entity which will carry out th investing. that should protect you somewhat if its done right

not feeling to go into the specifics
its friday

[entrepresooner]

Thanks for the all the help. You all pretty much told me what I had assumed, I need to do this through a legal business entity and not in my own name. Luckily, the people I am working with have been doing this for a while. I just like to be as informed as I possibly can.

Akula: I am fairly certain you don't have to be licensed to invest in RE. Who says I am not trained in RE, and not qualified? I will admit that I am an amateur, but everyone is at one point. As far as insurance I had no idea there was insurance for this kind of thing, that's why I asked.

SLVR: Do you have any investments that offer a decent ROI and are 100% guaranteed because I would definitely like to get in on those! The reason I said that was because I realize that no matter how good something looks, there are never any guarantees. Also I don't want to "manage" their money. I am looking for a partner, their role would be mainly to just provide the initial capital, and mine mainly to run things. But, I will not be making decisions with out consulting them. Also, I don't want, or need your money, I was asking a question so that I don't have to learn stuff the hard way.

Chuff: The people who's money i'm "taking" are people that already have 10 yrs experience in RE. So I will work with them to get started and build up my on experience.

[SlvrBulletV6]

SLVR: Do you have any investments that offer a decent ROI and are 100% guaranteed because I would definitely like to get in on those! The reason I said that was because I realize that no matter how good something looks, there are never any guarantees. Also I don't want to "manage" their money. I am looking for a partner, their role would be mainly to just provide the initial capital, and mine mainly to run things. But, I will not be making decisions with out consulting them. Also, I don't want, or need your money, I was asking a question so that I don't have to learn stuff the hard way.

Your original post said the investment were "sound." Sound by definition "financially secure and safe." The fact that you used the word "sound" MEANS they are 100% guarnateed, secured etc. Putting money in the bank in a CD account is safe, secured and backed up by the FDIC (most, if not all backed up by the FDIC). That to me is a SOUND, yet not a great ROI.

If the investments are not, then don't state that they are "sound." If you don't need my or any others investment money, then why are you here soliciting for investors, perhaps not in this thread, but in others?

You make these general claims without explanation, the more details you put the better it will be for the readers to understand what you're asking/soliciting, etc. Because right now the general claims makes your credibility low. I am not here to "kill your dreams," we just want to weed out those who aren't experience and being misinformed from misinforming others.

[SlvrBulletV6]

Thanks for the all the help. You all pretty much told me what I had assumed, I need to do this through a legal business entity and not in my own name. Luckily, the people I am working with have been doing this for a while. I just like to be as informed as I possibly can.

From my understanding, an LLC isn't a bulletproof legal entity; just because you have an LLC doesn't mean you can't pierce it.

Heres is a quick read from what I googled:
Wahab, Riveles & Medenica-Properly Managing an LLC to Avoid Losing your Liability Protection

[entrepresooner]

I overreacted a bit in my first thread.

Also, I did not realized the denotative meaning of "sound" and would never intentionally misrepresent information.

I have given up trying to use this forum to raise capital. It turns out, I know alot more people, and have mnay more contacts in RE than I realized. I am now working both through family, friends, and the alumni of my fraternity.

So now I think I will be here to discuss ideas and try to get general information, hints, tips, insight, and then use what I find here to do my own research through other venues. This time next year, maybe I'll be handing out a few words of wisdom based on my first year in RE.

Thanks
Anthony

[akula]

Also, I did not realized the denotative meaning of "sound" and would never intentionally misrepresent information.

anthony, I think you're taking a great first step by being interested in business. the job of a real estate entrepreneur is technically difficult and the pathway to success in this industry is pretty clear: players start their careers in other people's shops and branch out on their own when they're ready.

this is done for a lot reasons, one of which is the avoidance of making statements that I've quoted. you don't wanna be the guy standing before a court saying "your honour, I didn't know". that's not good enough. to be liable at tort you don't have to "intentionally misrepresent information". doing so unintentionally will suffice to meet the requirements for negligent misstatement and other kinds of illegal conduct.

be smart, don't be a retard. before you go around taking other people's money, consider the ramifications of not knowing what you don't know. for example: the law of equity affords great protections to unsophisticated investors who give away money without independent 3rd party advice. contracts matter very little in these kinds of equity disputes, and if you're gonna be the guy who goes around taking money from people who don't utilise independent 3rd party advice, that's the sort of things you wanna be aware of (amongst a million other things such as regulation D exemptions and blue sky laws in general etc).

good luck. be professional. find a shop where you can learn this kind of stuff.

[entrepresooner]

Would I find myself in the same situation if the investors and I became partners in an LLC or Shareholders in a C-Corp?

[jasaunders]

Yes, forming an LLC or coporation is not the end all of liability protection, and is irrelevant to what Akula is telling you. He is referring to using unsophisticated investors, those that are not accreddited and are not received third-party advice. It doesn't matter if you have an LLC or not.

The best advice was given to you already, work alongside a successful RE professional, learn from them, and then branch out. If you do decide to go it alone, you will likely face many additional obstacles making it very difficult to be successful.

[lilbilly]

I would suggest you join reiclub.com and learn there. A large amount of successful investors are there to give you advice.

[entrepresooner]

An "Accredditted investor" has to have a net worth of 1 million right? So if I am using sophisticated investors that are accredditted and use 3rd party advice, then I am alot better off?

I am not ignoring what ya'll are saying about working with a proffessional, I simply don't have the means to get on somewhere right now. I am a full time student at the University of Oklahoma, and I have to work to help pay my expenses.

[akula]

An "Accredditted investor" has to have a net worth of 1 million right? So if I am using sophisticated investors that are accredditted and use 3rd party advice, then I am alot better off?

anthony, this stuff is complicated. think of it like this: if you're raising money from an unaccredited investor - the contract is automatically void ab initio and you have to give the money back. if however, you're raising from an accredited investor there's plenty of procedures to follow (such as making sure that they're accredited), and if you fail to follow the procedure, the contract is potentially voidable...and that's just a small fraction of the laws you have to follow before any money changes hands. once a transaction has been recorded, things gets more complicated, much quicker.

managing liability is difficult. it involves a whole heap of technical, compliance/SEC related issues, as well more sophisticated concepts such as director's duties. people learn this stuff "on the job", college short courses and industry conferences/seminars. the reason why the this is complicated is because every time the defendants point to something that limits their liability, the plaintiffs come up with another argument for why the liability ought to extended...this process has been going back and forth for more than 300 years in places like Delaware...the result is legal fees, lots and lots of legal fees heavens bless lawyers

[BusinessAdviser]

One word to think about: Attorney.