Hybrid flipping idea - You do the flip / you and owner split profit

[Daniel Ryu]

Hi BP..

Just wanted to see what people thought of this idea:

Problem - Out of state investor OR someone who has a different primary resident wants to sell home but has deferred maintenance to the tune of 30 or 40K. 

OWNER doesn't want to go through the hassles of a flip to get full market value due to lack of experience or other reason.  

YOU don't have funds to purchase of the house. 

YOU think the house is worth 140K as is. YOU think after rehab, it could be worth 220K. 

YOU suggest - YOU will pay for rehab and sell house for the owner. 

YOU and OWNER agree that after sale, you will split proceeds like this:

OWNER will receive first 140K. Then YOU will receive cost of repair for flip + 10K. After that, whatever is left, you split 60/40 in OWNER's favor. 

Pro: OWNER is guaranteed a minimum amount for house + the opportunity to make more

Pro: YOU can get the benefits of a flip with a lot less out of pocket money. 

Anyone ever do a deal like this?

Is this a good type of deal structure? 

And to protect your investment as the one paying for the rehab, what about asking the OWNER to place title of house in your name in return for a LIEN against property for the first 140K in the OWNERS name? 

If anyone has input, I'd like to hear it. 

[Tyler Treadway]

I like the idea. I had a very similar idea for a property I was looking at, but couldn't come up with a good way to protect my investment and structure the deal. I am interested in seeing if anyone has done deals like this.

[Daniel Ryu]

@Tyler Treadway 

Yeah... This is actually someone else's idea but I was thinking the same thing. How to protect the investment?

I thought.. maybe:

1) Transfer the title in your name and give the owner a LIEN (or NOTE?) for the agreed upon amount.

OR 

2) Would you as the person paying for rehabber be able to get a LIEN against the property (mechanic's lien?)?

So sounds like at least one other person things it's an idea worth exploring.

Thanks for commenting.

[Tyler Treadway]

I could see the second working out. I think it would be difficult to talk an owner into transferring title to your name without any consideration. Maybe placing a lien for the specified amount would take care of this issue, but I still feel that if I was an owner, that would be difficult. I don't know though, I don't have much experience in this area. I just want to get into it and I too, don't have a ton of capital to work with. 

[Maxwell Lee]

good questions, dan. good questions! ;)

Thanks for your thoughts, Tyler. 

[Griffin Fehrs]

Sure, what this ultimately is - is owner financing which can be done on rehabs and negotiated to any agreeable terms - such as yours stated above.

I've experienced seller financing on a flip. Seller and I agreed to a price. They held the note until the property was sold at 10% interest on the note (their opportunity to make some more money). This can be attractive to a seller because they can be protected via promissory note, personal guarantee, etc. At closing all that was transferred was title. Less money out of your pocket. Better cash on cash. More deals. 

[Brian Gibbons]

JV With the Seller - Minor Rehab

Deal Details - Granny's House ARV $300K

40 year old house - Free and Clear, good neighborhood, all major items in good shape, from roof to foundation to HVAC.

Problem, the house is dated.  Needs $20K for new kitchen and updated bathrooms.

Solution:

1. Buy on a Seller Financed Mortgage (can be a moratorium - no payments for 6 months) and a JV Agreement agreeing to buy on a note, repair as per a scope of work, and list with an agent at 97% of comps with a CMA performed

2. Own the house, Repair the house with a Private IRA Loan $20,000 8% apr for 3 months

3. List and Sell at 97% of comps, pay the costs to sell, pay the private lender

4. Earn a JV Fee of $10K or so

5. Pay the Seller's note off

@Rick H. 

@Ellis San Jose 

@John Jackson

@Dmitriy Fomichenko 

Any thoughts?

[John Jackson]

@Daniel Ryu   What you are referring to is often called  "wholetailing"

The owner doesn't have the funds...you have the contractors....you put a lien on the property, do the repairs and then RETAIL it, and you all take the proceeds and divide them based on the contract you have. 50/50  60/40  whatever. 

My dear friends Tim Mai and AC Ramos in Houston do this quite a bit. 

[Daniel Ryu]

@John Jackson 

Ahhh.. so that's what 'wholetailing' is...

Thanks! 

So seems like you create the agreement, take it to the title company, title company creates the mortgage for the amount of the repairs + profit split on sale.

I guess one question would be how to set an agreed upon sale price (ie. using 97% CMA as Brian mentioned)

@Brian Gibbons @Griffin Fehrs 

Great ideas for structuring the deals. When @Maxwell Lee and I were talking about scenarios, one idea that came up was having very specific, non-ambiguous terms that weren't too complicated, so I like your suggestions.

Learn something new everyday on BP ^^

[Bill Gulley]

I brought this up several years ago on BP, search "Partnering with owner" that might get it, since I think it has taken on the wholetailing name by Michael Q. I believe.

Done for years, you can secure your position several ways, with a JV and by contractor liens for labor and materials, by seller financing with a partial interest sold along with a sale agreement, by a second mortgage with a balloon required, or just a sale agreement with a contractor's agreement.

First step is gaining the trust of the owner, they need to know that the whole deal is in good hands, they don't want a newbie tearing in to their property, so experience and ability to manage is needed, use good contractors if necessary.

Many of my deals were arising from a slow pay loan, where the owner was having issues and the property was not marketable for them to sell, I'd offer to take it, have it fixed, list it, sell it, take them out of the loan and give some cash to move on. I'd take the difference from the loan payoff and their equity less repair costs, management as a contractor, carrying costs and expenses. I usually picked up the financing for the next sale, but I don't take title from a lender's position. When I was not the lender, I could.

You can also facilitate repairs with another buyer, set the entire deal up with an owner and buyer like a sandwich deal and make repairs with construction management oversight.

Now, you're thinking!

As to sources of funds, you have all the possibilities available, private money, HMLs, IRA, conventional or seller financed transactions as an installment. Shoot for a win-win! Good luck :)

[Cal C.]

I've thought about doing this, but I think the crux of the issue is the contract with the seller.  A lot of sellers are going to want more money after the rehab for THEIR shiny new house. 

This is not wholetailing.  Wholetailing is a hybrid of wholesaling (simply flipping a contract with no work involved) and retailing (a finished or largely finished rehab).  Basically you do a minimal amount of rehab, i.e. cleaning it up and fixing a roof leak or two.  

[Account Closed]

Why not take out hard money loan and buy the home.The owner would be happy and you would make more.owner would save commission and other costs

[John Santero]

That is my business model!! I have done several very close to those same parameters. I even partnered with a Church (their rectors house) and ended up making them more money than what they would have made if they sold it to me cash.

Always use the low cash, higher if you owner finance strategy - your cash on cash returns soar when they option for the latter.

[Rick H.]

I like this model and apply it when and where it makes sense. 

There are a seemingly endless variety of ways to work and apply this. In lieu of a note secured by trust deed or mortgage you can merely secured your agreement with a Performance Trust Deed signed by owner in order to secure the active partner. 

Or, transfer property to title holding trust while doing the same. It is not necessary to pay interest or installments to record owner unless that's how negotiated. 

[Daniel Ryu]

@Bill Gulley 

I had to google Performance Trust Deed.. thanks for bringing that up. The idea of transfering property to title holding trust sounds interesting as well. Good to know you can structure it so there's no payment needed, as long as it's negotiated that way.

Thanks everyone for the input. I think it's clear that this is a valid way of creatively financing a deal, and there seems to be a lot of different ways of handling it.

[Bill Gulley]

Daniel....and others, just a note on using a note to secure your interests:

Be careful that you use a contract for your equity position or profits from an arrangement and use the note to secure actual cash injected to make repairs or improvements, the note can only secure cash as a loan, unless;

you hold a license as a contractor or an agent as commissions, or if your labor is by contract and is customary for the work performed.

1. Trying to secure an unknown amount such as potential profits or X dollars as to some fee is difficult to justify or earn and if amounts secured are questionable or rejected, the entire note can be invalid.

2. Putting a note on an owner occupied home by a contractor will be covered under Dodd-Frank, trying to secure an equity amount that isn't funded can be predatory and viewed as a cost of financing being included in the loan, that can move the APR to the moon.

Under these new circumstances, I would suggest using a "Future Advance" note.

These notes are common in construction loans where a loan might be made initially for $50,000.00 but the principal is advanced in disbursements over time as the project is completed. You might have 5 disbursements of 10,000 each. Interest accrues or is charged as funds are disbursed. 

Notes are not a catch all or cure all for just any arrangement, an attorney familiar with financial matters should be used to establish your method or arrangement. Once you have a few methods of partnering with an owner that is acceptable in your area then employ that method to replicated other transactions. Doing convoluted things and trying to use a note and security agreement (deed of trust) can have a list of issues, including filing false liens. See an attorney! :)  

[Account Closed]

I've thought of doing this with an Option Contract. That way the sell price is locked and the owners can't change their minds after they see the nice new rehabbed house. Any thoughts?

[Daniel Ryu]

@Bill Gulley 

Thanks for the further insights about trying to secure against potential profits. Seeing a lawyer definitely sounds like great advice. 

In general, would you trust the title company to walk you through all of this?