I got a call yesterday afternoon from a newbie RE investor I will try to para-phrase as best as I can . We are looking to do our first deal . My husband works for a remodeling contractor , willing to do the work but we are short on cash . In your investments do you ever Partner up with others ? My answer : I have in the past but I am very particular who I choose to do business with .
The Deal : ARV round numbers $119,000.00 Seller will accept $45,000.00 as is Not verified yet but the newbie says her husband thinks about $15,000.00 for repairs .
The Kicker : They have $5,000.00 for the deal OK But the seller says if we can get earnest money up front for total $15,000,00 they will drop the price another $5,000.00
My curiousity : I got the sellers name and address went to the Courthouse and low and behold while there is No mortgage on the house there is a $8,000.00 Federal tax Lien and a $6,000.00 + judgement active Somewhat funny that they the sellers were looking for 15 K in Earnest money up front .
My Concern .: While the numbers seem to work , I don't know the seller , I don't know the Newbie investors . They are wanting to take on a partner as opposed to using Hard Money Lender . WHY would I front 10K to make the deal happen ? I have no problem giving my advice and though they SEEM to be nice people in need of guidance I DO have a GUT feeling that this COULD be some type of Scam
My Personal feelings : Do I need the deal ? NO
Would I like to see Newbies succeed on their first deal ? Yes
Well I met the Newbies today for lunch at the Golden Arches trying to express my Negative thoughts and also trying to recall my days starting out . Also trying to explain some other options " Creative Financing " etc; along with stating which documents I would like to see drawn up prior to me even agreeing to consider doing the deal . There seemed to be some hesitation OR lack of knowledge on their part to move forward . So the question remains Ignorance on their part or possible Scam ?
Again My GUT tell me to help them along BUT DON't put any money into the Deal . Your Thoughts Please ?
Run away as fast as you can
I don't think you need to worry too much about whether the seller is a newbie or scamming. I'd skip the partnership idea altogether. However, it sounds like the couple doesn't know how to structure a deal and/or build trust in a buyer. You do what makes sense for your purposes. You either want the deal for a price they will accept or you don't. I'd offer to buy it or not buy it. If the couple that brought you the deal doesn't have a purchase agreement, I'd agree to give them a finder's fee paid at closing and go into contract with the seller. If they do have a purchase agreement, I'd probably have them assign the contract. Everything is in writing and everything is in escrow.
If you've got a motivated seller, get the deal into escrow with refundable earnest money.
Can't say if it's a scam or not. Might be. Might not be.
My concern is that you have two "newbie" investors as you say who are trying to do this deal that your gut is telling you not to do. Since you also mention that you are "short on cash" (and I'm guessing you don't have any that you can afford to lose), I'd lean more towards not doing the deal until you have someone with more experience involved in the deal. Or at least a deal that you feel more comfortable with.
That being said, if you do decide to go through with it, make sure that you do NOT pay the $10k directly to the seller or the other investor. It should go directly to whatever third party will be handling the closing (escrow company or closing attorney).
There will be a ton of deals that come your way in life. You don't need to take risks of such magnitude of it does t feel right. Politely decline
kristine : Great advice !! as I said I don't NEED the deal But would like to see them succeed if possible . My greatest concern being WHY they think it is OK to give the Earnest Money to the sellers . There answer as I posed it to them was " They are going to get the money anyhow " Ignorance or Stupidity ?
I might be willing to let the couple do the work based on a solid contract and payment schedule BUT the last thing I am about to do is write out a Check for $15,000.00 to either the seller or Potential Partner . My position being that He / She that controls the Cash , Controls the Deal .
I really look at this as 2 seperate deals . Buy the house ,Get the occupants owners OUT THEN Fix and FLIP
The Potential Partners Don't Laugh ! it appears they copied a purchase order , hand wrote it on a legal size yellow pad and they think they are Good to Go .LOL
I might be willing to give the seller $100 earnest money and even pay Cash for the house BUT I CONTROL the SALE to me and Control The sale again If I decide to FLIP it
If in fact this was to occur How Much would you think should be paid to the so called partners that brought me the deal ?
Sounds like you'd rather be a secured creditor than a partner. If you want to help the newbies out, you could hard-money lend at a fair interest rate and take a lien. Then, if you want to share knowledge but not step up to partnership level, you could sign a consulting agreement between you and the newbies where they would pay for your advice but also indemnify you if you get anything wrong.
Check with a lawyer in your jurisdiction first though.
James : You raise some interesting points . Can you expound on your comment about " Consulting Agreements " In that context I certainly consider myself to be a NEWBIE
A consulting agreement is just that; you'd enter into a contract with a third party, they would pay you for advice.
James Miller : Sorry I misunderstood the point you were making . reguarding others comments : I am NOT short on cash ! . However If this deal were to proceed all monies MUST be put in Escrow . Not the Seller nor Potential Partner has access to it UNTIL after the closing . At closing the Attorneys can sort out the Tax Lien and Judgement so we start with a Clear Title . That to me means Escrow pays both and are in possession of all Satisfactions Prior to the Seller receiving any funds from the Escrow account .
As far as the consulting goes Not sure what my Advice or Opinion are worth . Obviously quite a bit more when you have your own skin in the game " LOL " !!
Also How much do you consider a "Finders Fee " to be worth ? % of Bought Price ? A flat Fee ?
My feelings are IF the potential Partners put in 1/3 and I put in 2/3rds of the money I control the purse strings . We will document a figure as to their performing the work AND WHAT they receive at Completion of said work . Which will be a seperate document unto itself .
At the completion and Mutually agreed Price They will be entitled to 1/3 rd Net Net Proceeds and myself 2/3rds Net Net Proceeds . That is the only way I will do the Deal .
Bring me another deal if at the end of the first one I am happy I might be interested in doing another one with you . But for now these are my terms take it Leave It
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