I'm considering buying a mixed-use, multi-family building in Hampton Roads, VA. The building is vacant and in disrepair. The current owner can't afford the renovations that would necessary to make the building marketable, however, he's interested in maintaining an ownership stake. I'm amenable to partnering with him -- given that he agrees to be a passive equity holder -- but I don't have any precedents to draw from in structuring a partnership.
Assuming the building is worth 100k (which the seller owns outright) and requires 200k in renovations (which I would pay for in cash and then reclaim by refinancing the finished building), what would the terms of a good partnership agreement look like?
Be careful! Someone sort of desperate right now might get glitter in their eyes when the property is renovated and rented out. With an equity stake, they could go to a judge and try to get a bigger stake or claim that you took advantage of them. It's very risky to keep a 'previous owner' in the deal.
Look up what happened to Joe Kaiser, who used to buy preforeclosures and allowed the owners to keep an ownership interest and partner with them.
Joe Kaiser was a scam artist. I'm not interested in crafting an unfair deal. What are some options for a fair agreement?
How well do you know Joe Kaiser? He was not a scam artist. The AG built his case on ********. If you read all the particulars then you'd know that Joe was made a scape goat. He didn't do unfair deals, but the owners saw the potential for much money, when the AG actually knocked on their doors and convinced them that Joe took advantage of them.
Good luck in this, because you'll need it.
Joe allowed the owners to stay in the house. He paid all of the arrears, paid for renovation and then split the profit with them 50/50. Is that an unfair deal? Most of us wouldn't have touched a deal like that with a 10' pole, but Joe trusted that the sellers would do him right. Once the AG convinced them otherwise, they all followed each other and wanted it all. He never had had one complaint until then.
Super. I'm still interested in hearing suggestions on crafting a shared-equity agreement with a property owner if anyone has some. And, to be clear, I'm not interested in profiting from the current owner's unfortunate position, I'm hoping we can build value together.
@Erik Granum I've another idea: Why don't you buy the asset via Seller Financing [Purchase Money option]?
This way, the owner is completely out of the deal.
Here is how you structure the deal:
1. Seller Finance the whole acquisition price: $100k (Loan Details: 30 YR Amortized Schedule | 6% interest | No prepayment penalty), leading to a monthly payment to the Seller of $600. The caveat here is that you baked these stipulations into the contract as well as that you will pay the Seller a balloon payment at the end of Year 2 (if it will take the building to get rehabbed within that time frame].
At the end of Year 2, you would have paid $14,400 [$600*24months] to the Seller [balance is 85,600]
2. You fund the construction with 200k loan yourself. So, we are all in at 300k.
3. Now, this building must appraise for at least 357,000 (REFI LTV 80%) in order to pull out 285,600 in equity out of the building to pay yourself (200k) and the Seller (85,600) by end of Year 2
Hope this helps. If not, I have a template I use to put this deals together.
Let me know if you need any more help.
Good luck Thanks! - Ola
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