Help needed before I sign a contract

[Sheila Villacampa]

I have a fixer upper house which I bought for 4,000 in an upcoming area. I have contacted a contractor who suggested that we would partner together. The discussion was that if I buy the materials, he'll take care of the labor. We also agreed that we establish a contract and that his name is also added to the deed. It sounds fair to me. My questions are: 1. He quoted about 50-60k cost in rehabbing the place that includes materials and labor, how do I know that that is fair and legit? 2. What should I include or exclude in the contract in a 50/50 business partnership? Is it best to hire my own lawyer to review the contract? 3. This is a single family house which I intend to live for 1-2 years, how can we structure the contract in a way that is fair to my partner. 4. If all is well and I sign the contract, I plan on financing the half of the project with 10K loan with 6% interest, 8k on credit card with 22% interest, these I already have. But I still have to look for funds for the remaining, minus the value of the house. Is this too much risk? My personal finances now are not great, but I'm willing to work hard and hang in here but is this project worth it? How do I know my numbers are correct and know that I'm not running into a trap. This single family house needs extensive work but does have Hvac in place, water and electricity are working although I don't know the condition of those. Also, the roof is just 3-4 years old. It is situated in a 3000+ sq ft lot which is typical of Chicago city lot. If I don't act now, I figure the house is not able to survive the winter. Please help!!! I'm in a rock and a hard place, or am I? Thanks so much.

[Bill Wallace]

To me the only way you will know if this is a fair deal is to get at least 2 other quotes from reliable local contractors. 

After that, yes, I would hire a lawyer to give advice and write up any contract. He should pay for part of the legal fees.

[Crystal Smith]

@Sheila Villacampa What's the up & coming area in Chicago where you can purchase a house for only $4K? 

[Sheila Villacampa]

Thanks, Bill.
Crystal Smith , this property is 2 blocks from the lake in South Shore. We're thinking of buy and hold get a refi and do it again within 1 mile from the Lake. Rents are about 1-1.2k for 3/2 SFR.

[Robert Chuang]

@Sheila Villacampa 

I would establish the Joint venture contract instead. He does not own the property nor paid for the property, he has no reason getting equity on it. What you can do. Establish the material cost and labor cost then figure out which one cost more (hence one will have higher % of profit).

You should definitely ask for another contractor for their labor only, to confirm the labor cost.

Worst come to the worst with your finance, you will have to go out and present the number and have hard money (or private) to fund your construction. There should be some bank will fund you construction cost when you own the property 100%.

Hope it works out for ya! Best of luck!

[Bill Jacobsen]

As already mentioned, it has to be determined whether the bid is fair.  If we assume it is then you will have paid $4,000+ (let's say) $30,000 for materials.  Let's say the house is worth $100,000 when complete.  After selling cost of $7,000 there is $93,000 left over.  Subtracting your cost of $34,000 leaves $59,000 to be divided between you and your partner.

1.  Verify a fair bid

2.  Determine after repair value to verify that this house is good deal

3.  Determine how to deal with fact that you want to live in house.  Do you pay rent to partner or assume a value for the house and pay partner his share before you move in.

Good Luck.

Bill

[J Scott]

Don't do it.  

Multiple reasons:

-  What happens if this contractor doesn't do good work, works too slowly or turns out to be a jerk?  You can't fire him...which means you will either have to deal with the consequences of a bad contractor or you'll have to pay someone else to do the work.

-  For a $60K rehab, it sounds like a big job.  Is this guy going to work by himself?  If so, it will likely take many months more than hiring a larger crew.

-  For a $60K rehab, it sounds like you'll need to pull permits.  Is this guy licensed to pull permits?  Does he plan to?

-  For a $60K rehab, it sounds like you'll need some specialty contractors -- electrician, plumber, HVAC, etc. I don't imagine this guy is licensed in all these trades, so he won't be able to pull those permits.  So, you'll be giving this guy equity and still paying labor costs to the other trades.  Unless he is planning to pay those trades out of HIS pocket...is he?

-  If you're inexperienced, how do you know if what you're paying in equity is comparable to what you'd be paying in labor if you just hired a contractor(s)?  You don't, so you may be getting ripped off by going this route.

-  He quoted material costs in his $50-60K.  But, unless he's an experienced investor, how does he know what materials should be used?  Has he looked at the comps and the competition in the area?  Have you talked about the level of finishes that you want?  If not, he's just guessing on the types of materials, and that's not something that should be guessed at.

I'm very much against investors partnering with contractors, and this is especially true for brand new investors.  Most contractor relationships don't work out (especially for new investors), and all you're doing is locking yourself into a situation that you may quickly want to get yourself out of.

[Joel Owens]

I agree with J. Too much risk here and sounds like a nightmare waiting in the wings.

Why don't you just sell the house and build some more capital??

You bought it for 4k can you sell it for 10k or 12k as it is?? Why not just sell it to this contractor AS-IS??

You NEVER want the total value of a project if it goes south to wipe you out for turn around type deals. You only want it as a certain percentage of your overall portfolio. In investing sometimes you lose, sometimes you win, sometimes you break even. Everyone loses sometimes but as long as the wins are more you usually come out ahead and keep growing successfully.

[Crystal Smith]

Now that I know where the property is located I'll give you my 2 cents.  We've invested in the SouthSide of Chicago including the South Shore.  Every property I've seen that can be purchased for $4K is either a tear down or something that would require $100K to be livable and compliant w/ Chicago building codes.  Get 3 other contractor bids.  

Regarding the value: Parts of the South Shore are up & coming. Other parts won't be coming for years to come. You need to hire an agent or get friendly w/ someone that can provide you w/ true sales comparables of the After Repair Value (ARV) of the property.

Partnering w/ your contractor- This is a viable strategy but not the preferred.  If you're deal is good then there are other strategies for funding it that are more viable than partnering w/ you GC. 

[Sheila Villacampa]

Thanks to you all for the response. I'm being blown away by the many ideas, which made me really think how inexperienced I am. I'm willing to learn though.

[Sheila Villacampa]

J Scott
You definitely hit some points. I've had some bad experience with contractors in the past too, enough to suppose scare me away. Thus your advice is a good one, albeit may not always true since I'm sure there might be still some good and honest contractors out there.
He did show me some of the work that he has done in the area. We talked about materials to be used that are comparable. He mentioned that he likes to get permits for the electricals and plumbing but he has to hire somebody since he is not licensed in that area, but that he can pull out the license for dry walling and stuff. The house that he showed me seem to be of good craftsmanship. In front of that same building is a sign that says - NSP project. I don't know if that proves some integrity on his part being the contractor of that building. He seem to have same goal as me and that is to be financially secure to be able to spend time with his family and send his kids to college.

[Sheila Villacampa]

@Joel Owens

Thanks for the advice. I'm not averse to selling this property as long as I will not lose a big chunk of the amount I already put in. The 10-12k is same amount I was thinking too to get even. I do have a question, I bought this property as a homebuyer and not as an investor. Since my idea is to fix, live in it for a few, get some equity and move to the next. When I received the deed of the house, it came with a clause that if found out that I sold and reinvest the property I can be fined for 10,000.00. Has anybody ever heard or experienced this?

[Sheila Villacampa]

Crystal Smith
Thanks for sharing your experience. Are you still investing in the South Shore area? This place is actually 2 blocks from the Lakeside Project which is visualized to be te next downtown Chicago. I don't mind the wait since I'm in this for the long haul. I don't want to miss this opportunity for sure hopefully by the time I get to retirement I can enjoy this house. The fixer upper in the listings now are fewer plus they're already in 20-30Ks. I feel like I got lucky getting it at 4k.

[Sheila Villacampa]

Robert Chuang Bill Jacobsen thanks for the advice. I will get more bids. And thanks for simplifying the numbers for me.

I have to weigh in all these factors in my decision. I will let you know how it turns out.

[Matthew Putnick]

I to would be weary about joint venturing with someone that you do not have a long standing relationship with (as it sounds this way from the post).  All our joint ventures have been relationships that we have developed over time (years). Once money and emotions get involved SOME people can change.

It sounded as if your first intention was to rehab it yourself (by hiring a contractor) - why not just keep going with that plan?  Talk to more contractors.  We typically get 3 to 5 bids on each of our projects.

[Sheila Villacampa]

@Matthew Putnick

Thanks for your input. You are right, I don't have a long standing relationship with this contractor. 

Thanks to all who respond to my post. I'm grateful that I have your advice before I made major commitments. 

So far, I have called another contractor and we'll look at the property tomorrow. Thanks.

[Crystal Smith]

@Sheila Villacampa I understand the long term gamble/play your taking.  We still invest in the South Shore, but don't anticipated any benefits from the Lakeshore Development for close to 20 years. So we never consider Lakeside Development when evaluating a deal.  

[Crystal Smith]

@Sheila Villacampa Regarding your Deed Restriction:  1st off there's usually a time limit on Deed Restrictions.  Check the deed closely to see how many months before you can sell the property.  Since you intent is to live in it then there should not be a problem.  

2nd:  If you believe you may sell the property prior to the end of the deed restriction then there's a legit way to transfer a property to someone else and still comply with the restriction.  To do this you'll have to transfer the property to a Land Trust where you are the beneficiary of the Trust.  When it's time to sell the property the transaction actually takes place inside of the Trust by change to the beneficiary.  The public record will not reflect a sale as the Trust will still own the property.  

Chicago Title can help you with this type of transaction.  

[Sheila Villacampa]

@Crystal Smith

Thank you very much for this information. I will check the deed and see if there is that information. Also, thanks for providing that info regarding Land Trust. That gives me some relief knowing there's that option available. Merry Christmas to you and your family.