Could some one explain sweat equity.

Question

I've heard the term sweat equity plenty of times before and I understand it very basically as working your butt off in exchange for discount on the price of the home. But, I really don't understand how a deal is written up and negotiated under these terms. For example, if I bring up the value of a home $20k by putting my time into fixing it up how do I then secure the deal? I've raised the property value 20k and how do I secure the rest of the property?

Matt Devincenzo · Answer

Steven J. I think you may have confused a statement that was likely written here on BP somewhere to mean that "sweat equity" would be part of a purchase agreement of sorts. I imagine you're talking about a rehab and you read something like:

"You find a rehab property and then get a partner to fund the purchase the home, and you perform the sweat equity to get the property rehabbed for sale."

Something like that or similar?

The others above are correct in their description of sweat equity. And no you really can't write the "sweat equity" portion into a purchase contract. What you would be doing is partnering with someone to get a deal done, likely because you don't have the cash to do it.

So looking at the example above, you find this property and get it under contract. Now you need money obviously and shop it around and find your money partner. What you would want is to get a JV/partnership agreement drawn up.

That is what dictates how your sweat equity is figured into the deal not the purchase agreement. It would lay out how any proceeds would get split between you and your money partner. And the sweat equity you provide could be as simple as having found the deal and then managing the contractors for the rehab not that you actually need to perform the repairs yourself.

Karyn T. · Answer

This is actually NOT the way I understand it at all, so I'll be interested in the answers from the pros.

My understanding of "sweat equity" is that you buy a home in some sort of "fixer upper" state, so presumably at a lower price that comparable houses that don't need any work, and then proceed to do cosmetic or other updating / upgrading YOURSELF (as opposed to hiring contractors, etc).  This will increase the value of the house, and therefor the "equity" in it, when you go to sell, and since you did the work yourself, you'll profit more.

I'm all ears about hearing about working sweat equity into a purchase deal, however!! :)

Matthew Paul · Answer

Another term for sweat equity ...................WORK .   If you have the time and the experience , its worth it .

Bill Gulley · Answer

Overall, Matt gets my vote too, I may be the cause of confusion, however I didn't refer to sweat equity.

You can incorporate installment contracts to purchase, sub-2 for example and provide a note while agreeing to make repairs and selling the property later. I've had seller sell a half interest for example, as an owner in title I can then proceed with repairs. The deal is to provide a split with the seller, I take all of so much of the sales price first, my sweat equity and materials and then split amount above that.

Generally you don't try to apply any equities in a purchase contract, but you can. I can be in the seller's shoes or the buyer's shoes in the example above, allowing a tenant buyer or an installment buyer to do work (something to think very hard and long about, BTW, but I have done deals with contractor/construction types). Let's say they aren't for the newbie investor.

Your sweat equity is the effort you put in to increase the value of a property, you don't need to make saw dust and swing a hammer, you could oversee work, plant shrubs, design the landscaping, it's the difference in the actual expenses of increasing value to the value you end up with after work is completed. :)

Engelo Rumora · Answer

As @Karyn T mentioned "sweat equity" is when you do all the work yourself instead or hiring other contractors to do it yourself.

Make sure you buy cheap otherwise the "sweat equity" is pointless.

I prefer to get others to do the work and have more projects going on at once.

Plus the saying goes "jack of all trades and master of none" lollol better to get masters for every separate trade haha

Thanks.

Elizabeth Colegrove · Answer

@Steven Johnson

What you are defining is a whole different matter. Honestly I have not heard that really being done before. The only thing I can think of would be a lease to own.

Sweat Equity is buying the house putting work into it causing the house to be worth more due to its improved condition. Typically this is based on houses that needs renovations.

Could some one explain sweat equity.

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