How to Raise Capital for Real Estate Investors with Jillian Sidoti

Mike: Welcome to the FlipNerd.com podcast. This is your host Mike Hambright and on this show I’ll introduce you to VIPs in the real estate and investment industry as well as other interesting entrepreneurs whose stories and experiences can help take your business to the next level. We have three new shows each week which are available in the iTunes store or by visiting FlipNerd.com. So without further ado, let’s get started.
Welcome to the FlipNerd VIP investors show. Today I’m joined by Jillian Sidoti who wears lots of hats like a lot of folks I’ve had on the show so far. Before we get started here talking to Jillian and meeting her and learning some things about raising money and a lot of other things she’s working on. Let’s take just a second to recognize our sponsors.
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So Jillian, welcome to the show.
Jillian: Thank you so much for having me Mike. I really appreciate you having me.
Mike: Awesome, awesome. Well Happy New Year. We’re getting the year started here.
Jillian: You too. You too.
Mike: I assume you’re looking forward to an exciting 2014 ahead?
Jillian: I definitely am because actually as of January first my firm, the Law Office of Jillian Sidoti, actually emerged with another firm, Trowbridge and Taylor, so we’re hoping we’re going to be able to expand services and really be able to provide more to those people out there who are trying to raise money for their entrepreneurial pursuits or their real estate projects.
Mike: Awesome, awesome. I’ve sat in some training that you’ve done. I know we have, we run with some of the same circles of friends. I know that you’re an attorney. I think you’re an astronaut. Your husband’s in a rock band, right?
Jillian: That’s right.
Mike: I know you’re an investor. You’re a strong woman that wears a lot of hats so why don’t you introduce yourself and tell us a little bit more about you.
Jillian: Thanks, I actually started in this particular line of law because I was a real estate investor. Previously that, I was running a record label and we were incredibly under-capitalized. We didn’t have any money. So I ended up going back to law school and when I was in law school I knew that I wasn’t going to be a traditional lawyer. I kind of went to law school for something to do and so in the middle of law school I started getting into real estate investing and as I was doing it I realized that you need money to do this. You need money to do, to build any business you need to start with some kind of foundation of money. You and scrimp and save, but it’s always easier if you can leverage with cash.
So I started looking into that and actually the firm I just merged with Gene Trowbridge, who’s the founding partner of our firm now, he kind of mentored me and showed me that, “Yeah, you can use investor money but you have to use it in a very specific manner. There are laws and rules that you have to follow”, and so, once the bottom fell out here in Southern California in the real estate market we were doing condo conversions. You know, taking apartment buildings and converting them into condominiums and basically we were flipping apartment buildings. Once that market kind of fell out in 2006, 2007 that’s when I started my firm and I started helping other real estate investors with financing their deals with private money.
Mike: Okay, okay. I got to say something. When you said that you started a record label, I mean, putting something like that on your resume it makes you sound really cool.
I got to tell you a story. At one time, this was like five years ago, I did a Google, whatever it’s called, alert. Where you can type in a keyword and if this ever pops up, alert me. Well I found out immediately that there’s another Mike Hambright in the United States who’s in a rock band and he was a lot cooler than me. So I kept getting all these things about how cool Mike Hambright was, but it was wrong Mike Hambright so I had to kill that alert. Anyway, that sounds awesome.
Jillian: That’s good stuff.
Mike: So you actively invest in real estate yourself now, right?
Jillian: I do. I am very passive investor at this point in time. So I’m not in the trenches with a lot of you folks out there listening to this, and the reason for that is that I have a law firm. I also have two small children so it makes a difficult to go out to properties and scope properties. So I’m much more passive. I have a group of people around the country that I invest with. I own a couple of notes, second notes on properties out in Ohio. I’m a partner in an apartment building in Kansas City and I also have done a bunch of single family [inaudible 05:48].
Mike: Yeah, they tend to usually be late to the party on both ends of the booms and busts though. Yeah, who knows?
Jillian: Who knows? I don’t know. It’s crazy how quickly and how much these houses are going up and, Mike, actually where are you guys located? You’re in the DC…?
Mike: Dallas-Fort Worth.
Jillian: Dallas-Fort Worth. Sorry. So I don’t know what it’s like out there. Actually, I know a little bit. The houses are not nearly as close together there as they are here so the houses are crazy close together and there are tons of them all in one little concentrated area. If you ever see the beginning of that show “Weeds” and it’s little houses on a hillside. That is exactly where I live.
Mike: All right. All right. So tell us a little bit about, I know you kind of specialize in helping investors raise money. Is that right?
Jillian: Yeah. That’s exactly what we do. So, I have a bunch of, and another way to speak to the economy and the way the housing market is going, I have a bunch of single family flippers all over the country really, but right here in Southern California who are, who raise money, who have private placement memorandums, who have funds, and or they do the one investor per property model. So they’re raising money that way and now we’re seeing them starting to run out of deals.
We’re going through a little boom right now so they’re starting to run out of deals, and now when that happens it’s almost the perfect storm of everything you don’t what to happen. Which is people start getting back interested in the market, they’re not scared anymore, so now there’s an abundance of investor money. So all of you out there who don’t think you can get any investor money- that is completely wrong.
I did the math on it. If you invested like $10,000 in say, Apple stock around 2008, it would have been $70 a share, and so if you waited around for it to reach its peak you may have made up to a $100,000. That’s a $90,000 profit. A very nice profit if you went to the peak in, I think it was 2011 or 2012, but if you went instead took that money and put it into flips and you kept flipping, and flipping, and flipping, you would have made exponentially more money. The reason being because Apple doesn’t pay dividends so you never had any kind of reinvestment of that gain. You would have to buy and sell, buy and sell, buy and sell over and over again in order to realize any traction.
Mike: So let’s talk about, having heard you speak before I know that you are certainly a believer, and I’m sure you’re right, that most investors that are trying to raise money are probably doing something illegal or at least wrong or doing it in the wrong way. I think of, all the time, spouting off on social media platforms, that I’m looking to raise this much money and you’re guaranteed this much return, and stuff like that which is obviously is a big no-no, and everybody thinks, “Well, nobody is going to come after me because I’m just a little guy”, but talk about what I guess people do wrong and then after that we’re going to talk about how to do it right.
Jillian: You know the biggest thing is that people put things on their websites, just like you said, people put things on their websites or their social media and says, “I’m looking for investors. I’m guaranteeing something. It’s safe, secure, low risk”. The words like that, “safe, secure, low risk, guaranteed”, those should never be used. Period.
Second of all you should never be asking people for money on any social media or website type platform, and for those of you who think you’re too small for the SEC to care, you’re wrong. The SEC’s bored and they’re looking for you. They think, you know, they all have these weird fantasies that you’re the next Bernie Madoff and you’re just a sleeper cell or something and they’re going to get you and they’re going to crack this case wide open, or even worse, that you’re low hanging fruit. You don’t have money for an attorney and you can put a “W” in their column. They’re litigation column. I would be very cautious when you think that you’re too small for them to care. That’s absolutely not true at all.
Mike: And for the folks that think that, in order to do this right I have to hire an expensive attorney, spend a bunch of money, do a bunch of stuff that I don’t quite understand. I mean, there’s some simple ways to raise friend and family money without having to go through the SEC. Can you talk about the closer to the [vest], friend and family type deal, or people that you know without doing anything publicly?
Jillian: Well, okay, that’s a great question. The thing is there is no such exemption as a friends and family exemption. Now that’s a big misconception that if you just use money from your friends and your family that you don’t have to follow any rules. That’s absolutely not the truth.
Mike: I’m not saying not follow rules, but . . .
Jillian: Oh yeah, right.
Mike: …there’s some distinction between using a public solicitation and working through people that you know. Is that right? Or maybe I’m the low hanging fruit here.
Jillian: Let’s talking about how you can deal, if you’re a smaller investor or you’re just starting out, and you just need a couple investors on one deal or a couple deals. Whatever it might be. I’m going to tell you how to get around spending a lot of money on an attorney and getting it done.
Now, I’m going to tell you right now, anytime you’re taking somebody else’s money, whether it be your best friend or whoever it might be, you need to hire an attorney. To make sure that they properly protect you and disclose all the things that your investors need to know, because the number one thing that’s going to come up if something goes wrong is that, “Well, you didn’t tell me that”. So that’s a huge, huge, huge thing.
So if you’re a small investor and let’s say you have your first flip, and you want to get money in the door for that first flip, and perhaps you want to offer your investors a note, and you want to do the one note per investor and it’s secured by a deed of trust. What you should be doing is still calling an attorney. Making sure an attorney drafts that promissory note and makes the terms and conditions very clear, but not just the promissory note but also gives them a discloser document that says, “Here’s exactly what you’re getting into.”
Now I’m not talking about a whole blown private placement memorandum. I’m talking about something that says, “Look, I’m an investor. I know what I’m doing. I’m getting into this. I know the risks involved and you being the company or the issuer- here are all the risks this is what you’re getting into. Sign off that you understand this.”
Mike: Right. Yeah. Okay, and for folks that are looking to raise larger sums of money that clearly need an attorney more than anyone else. Talk a little bit about some of the pros and cons, or the good and bad things that people have done wrong, and some simple ways to fix those things.
Jillian: Okay, so you can always, you know. I’ve had this happen a bunch of times where a client comes in and goes, “I just got a phone call from my local securities board, or the securities exchange commission, or whoever, and they want a subpoena on my records, and oh by the way, I never gave my investors anything except they signed this one little piece of paper that said that they’re giving me money and I’m giving it back to them. What do I do?”
What we’re traditionally done is that we’re asked that issuer or that person, “How friendly with your investors right now?” and if they’re friendly with their investors at that point in time we actually draft up the documents that they should have drafted up and ask them to go give to their investors have them read them and have them sign off on them, and that has helped a bunch of my clients get out of trouble in the past.
If you find yourself in a situation and you go, “Hey I might not be doing this quite right”, you always to have a chance to at least try and fix it. You should always try and do some kind of damage control and people are welcome to call me. I do a free 20 minutes so if you really do feel like you’re in a situation where you might be at risk just give us a call and we’ll take a look at what you’re doing and we can try to fix that for you.
Mike: Yeah, and I’ll add your contact information below the video when we’re all done here.
Jillian: Excellent.
Mike: So tell me this, do you, this is an obvious question, do you help people in 50 states or do you…
Jillian: Oh, all over the place. I have one client right now who owns property in England but he lives in Hong Kong. So, and he’s doing an offer here in the United States. So all over the world.
Mike: So the services you provide though that you could help somebody in any state…
Jillian: Yeah. It turns out…
Mike: Okay, I guess most of what you’re dealing with is Federal law more so than State law, is that right?
Jillian: It is, but you do to worry about each individual state. There are some States that are rougher than others. So if you live in the state of Arkansas or Kentucky then I feel bad for you. Because those states are a pain in the butt.
Mike: I guess typically that the Blue states are a little more challenging?
Jillian: No, it’s not necessarily that. It seems to me more bored states. Like literally the more bored they are the time they have on their hands to go after things. I’ve had a couple of run ins with the state of Texas but they’re more than reasonable. It seems to me that the state of Texas is truly looking for bad guys. It’s not interested in looking at minutiae, but yeah, there are certain states that will actually read your, ask for your document, your offering document and then read the entire thing. To me that’s a sign of being bored.
Mike: Now how about, there’s obviously some trends going on right now with crowdfunding, especially in the real estate space. There’s a fair bit of buzz about that. What do you think about that? I mean what’s going on and what can we expect going forward/
Jillian: Well the crowdfunding rules are not completely flushed out yet, but I’m looking forward to seeing that happen. I think crowdfunding, especially for this audience, Mike, is a really great option because if you haven’t done your first deal yet you can probably crowdfund your first deal relatively easily. Now the only problem with doing crowdfunding is that you are limited at, it’s a $10,000 cap per investor, so if have a deal and you need $100,000 for that deal that means that you need at least ten investors. So that’s a little harder to swallow and it’s also limited to a million dollars. Which for most flippers that’s not a problem, but if you’re doing a flip here…
Mike: Per house? That’s per house?
Jillian: You could do it per house, yeah.
Mike: I mean, you could raise more than a million dollars as long as it’s multiple houses or does it have to be a…
Jillian: Yeah, you would have to redo it each time. For example, let’s say you have a house at 123 Main Street and then another house at 456 Cherry Lane then you would have to list on a crowdfunding portal that’s been recognized by the Securities Exchange Commission 123 Main Street and 456 Cherry Lane separately and then raise money separately for them.
Mike: I see. I see. Awesome. Gosh I wish I’d done some more research than I need to on crowdfunding, but are people raising, are people doing just that if they need more than a million bucks? Are they starting multiple projects, and I guess said another, because you kind of want to, I mean the investors are not getting first [line] deed of trust, obviously, right?
Jillian: Well not necessarily. It depends. You can really set it up however you would like. Now if you need to raise more than a million dollars I suggest you do a private placement memorandum and really kind of hit the ground running there, and that’s generally speaking, what most of my clients do. Is that they go out and they do a private placement memorandum. It’s kind of, it runs the gamut, where I would start is if you’ve never raised money before start with crowdfunding, see if you have any success there, and then the second way to do it is have, what I call a discloser document, and then you can offer first lien [first deed of trust] or a mortgage, so I would also take a look at that. Then the third, the third thing you might want to look at is doing a private placement memorandum where you just a bunch of money and go out and blast out as many properties as you like.
Mike: Yeah, yeah. Do you help people at all with crowdfunding stuff or do you just…
Jillian: Oh yeah, for sure. The thing, the only problem I see with crowdfunding, and this is a problem I see for the individual company or real estate entrepreneur is that there’s a lack of trust building in the crowdfunding portal. So, [phone rings] sorry about that. There’s a lack of trust building in the crowdfunding portal, so with that being said, it’s hard to go out and ask a bunch of strangers, “Finance my deal even though you don’t even know me. You don’t know me at all but I’m asking you, on the Internet, to give $10,000,” or however much money. I think that’s going to be, I think there’s a fantasy amongst real estate entrepreneurs and entrepreneurs in general that crowdfunding is some kind of magic bullet and it’s not.
My most successful crowdfunding portal type companies are those that deal in the non-profit sector so there’s another reason for the investor to invest and has nothing to do with the company or the returns or anything like that. As a matter of fact, if they never get their money back, and a lot of cases they don’t really care. So they’re doing it for some kind of greater good, if you will.
Mike: I guess, one other challenge, one of the ways that I’ve been successful and a lot of the folks that I work with are successful is that you have your funding lined up way before you ever found the house. So if you have a house, you know a lot of investors are unfortunately not like that, which is why a lot of investors are unsuccessful, is that they find a house and then they don’t know what they’re, they’re almost afraid to get a house because, “I can’t stand behind what I said [inaudible 20:51]” which is why a lot of folks just assign properties, but yeah, it’s like a chicken and an egg, right?
Jillian: Oh sure. So what I recommend, it’s always nicer to have the investors lined up first. If you have that time and ability and you don’t have a property quite lined up. That’s fine. Come up with a business plan and do it that way.
Mike: So do you see, in all this money raising stuff, just kind of a generally feel, I know you’re a libertarian like I am, I saw that on your profile, so we won’t, in case we have some other types of folks watching this show I don’t want to alienate anybody, but do you see the government getting more litigious in this space or do you see them getting a little more relaxed perhaps because of crowdfunding and things like that? What do you think on a macro trend?
Jillian: I think what we see is that there was this outcry of the small business community that was trying to use a rule that was not used a lot. Which is Rule 504, and then the SEC came barreling in and said, “You can’t use that rule five-oh-four the way you’re using it. You’re using it the wrong way”, so all these small entrepreneurs were basically halted from doing business because they couldn’t raise money anymore.
So there was this outcry from this community, the small business owners or entrepreneurs, or start-up companies that said, “We need this bill to be passed”, and at that particular time when the Jobs Act was being passed, Obama really needed to look like a champion for small businesses because he was trying to get healthcare passed among other things. Not only that what also ended up happening was that a bunch of hedge funds ended up throwing money behind it. The bill, because why? There’s a bunch of things in there that benefit hedge funds. Big firms like that.
So the bill was introduced to Congress in January of 2012 and passed, was signed by the President in April 2012 which means it was a very short time that it got passed, but here we are in 2014 and the bill is still not fully vetted and the rules aren’t completely made by the SEC, and the reason is that the SEC doesn’t particularly care for it and they’re doing it almost in protest at this point.
Yeah, so I think they’re very nervous about it. They’re very nervous about the prospect, and I even didn’t understand it at first until somebody explained it to me. Somebody from Florida said, “I don’t know about California, but in Florida we have a lot of scam artists,” and he said, “I could see five guys getting together, each starting a crowdfunding platform, each trying to raise a million dollars with the same plan or a similar plan and then voila they have $5 million and no accountability.” They don’t have to give it back, and the whole thing, and that’s the end of that. He could see a bunch, that’s how the SEC is seeing it and they believe that a bunch of bad apples are going to ruin it for the rest of us.
Mike: Yeah. I could see that too.
Jillian: So it’s even getting more litigious? I don’t know. I mean I would be more worried about, and I’m not trying to get political here, I would be more worried about the IRS because they have so many agents right now, and them looking at how you get money and how you give money back, and where money is going and how it’s getting reported. That, to me, would be my greater concern for people out there.
Mike: So what else do you do? From of law prospective what other types of law do you help with or do you primarily focus on the raising money [phase]?
Jillian: This is all I do. Nope! This is it.
Mike: Yeah?
Jillian: This is it. We help mostly real estate entrepreneurs. As a matter of fact our website is SyndicationLawyers.com. I mean it’s all focused on raising money for the entrepreneur and how they raise money, and that can mean a variety of things. There’s different ways to do it, but our primary focus is doing private placement memorandums.
Mike: Send me all those links and we’ll add them to the video.
Jillian: I will.
Mike: So yeah, anything coming up here? Are you coming to the expos this year? Or going to be anywhere people might see you at?
Jillian: Actually, I busy. I busy the weekend I think the Dallas one is coming up. I busy that particular weekend, but where am I going to be? I’m doing a bunch of speaking engagements. Right now I’m lined up in California and Ohio, so if I come back out to Dallas I will let you all know.
Mike: Absolutely, and obviously there’s, you know, wherever you’re going let us know and we’ll get you some friends to come meet with you.
Jillian: Oh, thank you. That’s very sweet.
Mike: Well, hey this is an interesting topic and there’s not a lot of folks that, I found, that know the nuts and bolts of what’s going on. The first time I heard you speak, I was impressed by everything you had to say because there definitely was some folks that I’ve talked to this about and I tend to get mixed misinformation and what to do and what not to do. So awesome. Well hey, thanks so much for joining us on the show today. I appreciate it.
Jillian: Oh, you’re very welcome and if you guys need I have a bunch of articles, free stuff, I’m not looking to for anything I just like to spread the word about what to do and not to do so you don’t have to call me after you get in trouble. Let’s try to avoid that. So if anybody needs anything out there, if I have an article written on it I’d be happy to give it to you if you want a free 20 minutes I’d be happy to give that to you as well.
Mike: I like free time from lawyers. I can’t say I’ve gotten free time from a lawyer before so that’s awesome. Awesome, but have a great week and thanks for joining us.
Jillian: Thank you for having me. Bye guys!
Mike: Take care.