Seeking Input: Profit-Sharing Deal on Property Purchase from Neighbor

[Tyler Thomas]

I’m considering a creative approach to buying my neighbor’s half of our duplex and would love feedback or advice from the community.

Background:
I’ve owned one side of the duplex for 9 years. My neighbor bought the other side in 2021 for $450,000. He initially listed it for $650,000 six months ago, then relisted at $625,000. He has dropped the price twice, and it is now at $605,000. Based on comps, I believe the true value is closer to $550,000.

There’s been very little interest at the current price, and I have a strong relationship with the owner, who now lives out of state and is looking to buy another home with his fiancée. I help him out regularly and believe he’s motivated to sell.

My Situation:
With higher interest rates right now, I’m looking to get the purchase price down to make the deal more affordable and sustainable for me. I know everything about the property and the neighborhood, and I’m confident in my insider knowledge.

Additionally, I have over $300,000 in equity in my side of the duplex, which is currently financed at a 4.25% rate. This gives me flexibility to consider options like a home equity loan or HELOC if needed, but I'd prefer to keep my current financing intact if possible.

There’s also major planned development nearby, which could make our lot attractive to developers in the future.

Proposed Deal Ideas:

• Off-Market Purchase: I’m considering approaching him directly for an off-market deal. This could save him about $30,000 in realtor fees if we use a transaction lawyer or realtor for just 1% of the sale price.

• Profit-Sharing Option: I’m thinking of offering him a share of future profits if I sell the property within a certain timeframe. Given the development potential, this could be attractive to both of us. Typically, a smaller percentage (around 5% or less) is a good starting point for negotiations.

• Lower Purchase Price: Because of higher interest rates, I’d like to negotiate a lower upfront price to reduce my monthly payments and overall risk.

Questions for the Community:

1. Has anyone done an off-market deal with a neighbor, especially with profit-sharing terms? What worked or didn’t work?

2. What legal or tax considerations should I be aware of with this type of agreement?

3. Are there potential pitfalls or complications I might be missing, especially with higher interest rates and significant equity?

4. How would you structure the profit-sharing deal to make it fair and attractive to both parties?

5. Should I consider leveraging my existing equity, or is it better to keep my current financing and rate?

Any advice or experience you can share would be greatly appreciated. Thanks in advance!