Need advice on structuring equity partnership for flip

[Page Huyette]

I have a SFR under contract that I plan to rehab and sell within 6 months. Hard money has not worked out since I don't have the fast-flip experience to justify the risk (all of my rehabs have been much longer time frames).

I have qualified for conventional, but need additional funds for the rest of the 25% down and rehab. Not my first choice, but I am working hard to make this deal move forward, as I believe it is a good one.

I have one person who has agreed to pony up 10k towards what was originally a buy and hold rental deal we were looking at, but I'd like to approach him with this deal instead, as it could offer faster, higher returns. My thinking was to offer two options to the investor:

1. Given return on money for fixed period with points paid at closing or...
2. Profit sharing after sale. Percentage relative to amount given.

I'm going in asking for more than the original 10k that was offered for a previous deal we passed on (perhaps 15-18k) , and want to structure the proposal so it looks as attractive as possible. If he sticks with just 10k, I'll also need to put together this package so I can present to some other individuals as well.

Assuming I'm able to pull this off, I would also expect to hold the property in an LLC with the investors paying the LLC upfront, and receiving their profit through the LLC.

Should I set up an LLC just for this one?

Did I mention I have a signed contract? Would have preferred to have complete financing in place beforehand, but this was a situation where the property came on market, and I knew for sure it was a great deal, so decided to jump on it and get it under contract.

[Dion DePaoli]

The conventional financing is going to require you to have the capital for down payment, 6 months reserves (as I assume you take this properly as an investment property) and still cover the rest of your debt service from your income while supporting the subject property note.

In the event you join a person in an LLC, any member with 10% or more ownership in equity will need to be underwritten on the loan.

It sounds like the seller is not willing to accept conventional financing. Perhaps they are aware of the needed repairs and do not want to mess with conventional financing. Another barrier. Leaving $70k on the table by not injecting $30k into the property seems a bit rash, but seller's do weird things. On a side note, there may be a way to have the seller hold the property and you pay for the rehab and create a split with the Seller for the upside, as an alternative to your alternative.

Additionally, in the conventional financing you will not be able to 'borrow' the down payment. That will go against your combined LTV.

As far as the private money deal goes. I would start with all the dollars needed for purchase and rehab. I would then try and simply strike an equity deal with the investor. If I am in for 50/50, I am not too sure I would offer any preferred rate of return or interest payments. If you loose that conversation, you will want any payments to come off the top and not your portion of the equity split.

You can charge for the construction management and perhaps even a small finder's charge. Provided the investor agrees. Point is, that is not unheard of.

Conventional lenders are not big fans of putting money out to be returned quickly. The administrative costs to create the loan out run short term prepayment in most cases. There are some more conventional type lenders, likely more like a local bank, that may have a mortgage product for this type of deal. ("may...")

In the last post, there is mention of title seasoning issues. I didn't fully understand what was being referenced there. A private lender will not likely have any such restriction. A conventional lender, may have such a restriction where your seller may have to have seasoned title. Then your exit buyer may also have the same restriction if they require financing which would cause you to hold the property for the typical 90 days. You then will also go under scrutiny for the resale price. If you document the rehab well, you may be able to get past this.