What documents should I review before investing in a private real estate deal?
It varies by structure, but expect some of: a private placement or offering memorandum, subscription agreement, operating agreement, promissory note, deed of trust or mortgage, financial statements, property information, risk disclosures and any securities filings. Read them carefully and consider having your attorney, CPA or financial professional review them. A Form D filing, where applicable, is a notice filing; it is not SEC approval of the investment.
The documents are the investment. Everything else, including this website, the webinar and the conversation with Dan, is context. Here is what typically lands in front of you and what each one is for.
For an equity investment (LLC, partnership, fund)
- Private placement memorandum (PPM) or offering memorandum. The full description of the offering: business plan, use of proceeds, fees, conflicts of interest, and the risk factors. Read the risk factors first.
- Operating agreement (or limited partnership agreement). The rules of the entity: who manages, how decisions are made, how and when distributions are paid, what the manager earns, how transfers work, what happens on dissolution.
- Subscription agreement. Your application to invest: how much, representations about your eligibility (including accredited status), and acknowledgment that you have read the other documents.
- Investor questionnaire and verification. For a 506(c) offering, evidence of accredited status.
For a private loan
- Promissory note. Amount, rate, term, payment schedule, default interest, late fees, prepayment terms.
- Deed of trust or mortgage. The recorded instrument that secures the note against the property. Confirm it is recorded in the right name and position.
- Lender’s title policy. Insures your lien position against defects.
- Loan agreement and guarantees. Draw schedules for rehab funds, borrower covenants, personal guarantees if any.
- Insurance certificate. Property coverage naming the lender as loss payee.
About the property
Purchase contract, appraisal or broker opinion of value, comparable sales, scope of work and rehab budget, contractor bids, inspection reports, preliminary title report, photos.
About the operator
Entity formation documents and good standing, track record summary, financial statements for the entity (and for a fund, audited or reviewed statements if available), references.
Form D
An issuer relying on Regulation D files a short notice called Form D with the SEC (and typically the state). You can search it on EDGAR. Its existence tells you the issuer is claiming the exemption. It does not mean the SEC reviewed or approved anything.
How to read all this without a law degree
Start with the risk factors and the fee section. Then trace one dollar: where it goes when you wire it, how it earns, how it comes back, and what happens at every fork if things go wrong. Write down every question the documents raise and bring the list to your attorney or CPA, and to the operator. A few hundred dollars of professional review on a five- or six-figure investment is cheap.