1/26/14: From the Archive – Practicing Safe Syndication

Many people are seeing the big opportunity in raising private money to do more and bigger deals.

So we thought it would be a good idea to go into the Archives and dig up an episode we did with our friend and attorney Mauricio Rauld.  After all, we don’t want anyone getting into a syndicationally transmitted debacle.

Providing prudent policies for practicing safe syndication:

  • Your carefree host, Robert Helms
  • His cautious co-host, Russell Gray
  • Attorney and wet blanket, Mauricio Rauld, Esq.

Raising money from investors can be a great way to to fast track into full time real estate.  It’s an alternative to the typical “how-to-get-started-with-nothing-in-real-estate-investing” techniques such as wholesaling or bird-dogging.

Even better, it gives you a chance to build a portfolio of your own right from the beginning.  Wholesaling is about generating quick cash today.  But you need to keep finding new deals all the time.  So while it’s a great way to make fast money, it’s a treadmill of feast and famine.

Whereas (we just wanted to say that because it sounds kind of legal), building a portfolio of income producing properties and earning a recurring management fee can be a a way to earn money from a real estate portfolio that you build using investors’ money.

But this episode isn’t about convincing you that starting a fund or taking on partners is the best way to go.  It’s more about important things you need to be aware of once you decide to go down that path.

Many real estate investors don’t have much legal background.  So they go buy a few houses in their own name and rent them out.  After a while, they move up to apartment buildings or small strip centers.

At some point, hopefully sooner rather than later, asset protection and estate planning attorneys get involved.

Meanwhile, your friends and family see you doing well (or they read the papers and see real estate is doing well) and they want to get into a deal with you.

Great!

So you all put something into the deal and you’re elected to manage it.

Oops.

Here’s where it starts to get sticky…

(Remember, we’re just radio guys, not lawyers…so check with your own attorney…or call Mauricio…before you take any action on anything you find on the internet, including this blog)

If you take money into a deal where you’re in control of the deal, even if you’re not offering shares of an entity like an LLC or corporation, you might be offering a “security”.  And when you offer a security, there’s a few important things you need to be aware of.

First, all the the risks that you can reasonably be aware of need to be disclosed.

Next, you want to be very careful about “blue sky” (as in “there’s all sunshine in the forecast”) and other “forward looking” statements.  It’s a fine line between saying what you HOPE will happen and making a PROMISE that something will happen.  You might know what you mean, but if it’s stated the wrong the way and things go sideways, a plaintiff’s attorney can twist those words into a liability producing commitment that you failed to meet.

Also, when you’re conducting business on behalf of an entity, it’s important to always follow proper corporate formalities.  If you say or sign something in your own name, without properly putting all parties on notice that you’re functioning in the role of manager or officer of an entity, then you may have inadvertently created “a hole” (our nickname for the lawyers of financial predators) in your corporate veil.

That means EVERYTHING you own is potentially at risk.  Yikes!

Are we trying to scare you away from syndication?  Certainly not!

But we are trying to scare you into being sure you’re smart about it.  Just like when you took driver’s training in high school and had to watch all the movies about nasty car crashes.

Syndication is something people do safely all the time, just like driving cars.  But like cars, it’s a big responsibility and one you should take seriously.

Once you get some experience, you can operate your syndication business with great speed and skill.

So if you’re new to syndication or want to get started, listen in to this episode as attorney Mauricio Rauld shares important things you need to know about how to practice safe syndication.

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