I'm going to a family member who is a big time REI. I'm going to pitch him an idea for a property that happens to be right next door to me and is going into foreclosure. The auction is a few months away. I'm asking him to be my cash partner. I've never done a deal like this before and I haven't approached him to do a deal (I'm a buy and hold investor, so this is foreign to me).
I will give the high level summary, but understand that I know for a fact the ARV is correct. This property will be going to public auction in the next few months. My business proposal that I'm sending to him is 7 pages and literally spells everything out. I'm going to not bore everyone with the details, but needless to say, all my numbers presented below are backed up with information.
I know one problem right off the bat is I might not have enough skin in the game for his liking.
Purchase Price: Not to exceed $275,000 at public auction
Rehab Cost: estimated up to $20,000
Estimated rehab time: 1 month light rehab
After Repair Value: $410,000
Exit Strategy: Sell to a retail buyer.
Estimated total time of collaboration: Not to exceed 6 months.
Security Instruments: Free and clear of all loans. Property will be used as collateral in our agreement.
Investment Amount: Up to $260,000 to cover purchase at auction. Rehab would be split 50/50, if required.
Closing: would need funds available the day after the auction date
A) 20% of profit*
B) 15% APY simple interest paid at end.*
* Whichever is higher at the completion of the project
Potential overall profit: $110K ($410K - 300K (assuming closing/rehab + initial cash)) - Closing costs for selling of about 25K.
Total Profit: 85K
My Takehome: 68K
His Take Home: 17K (6%, 18% if done in 4 months, or 12% if done in 6 months)
This house was built within the past 3 years, so there should be nothing wrong with the inside unless the owner goes all vindictive and starts trashing things. I would be handling all the remodeling etc.
My goal is to make this stand up on its own and have him view it strictly from a business standpoint. Is this enough profit for him to get excited about? We're talking profit of around 15K-20K for him over a 4 month window. That's an Annual Return for him of 18%...
Would this deal make sense, or would I get laughed out of the room?
Paul I'm going to preface this with the fact that I have no experience myself, but I really like the variable of his payout being the higher of those two options. That's something I plan on borrowing!
To be honest, I stole it from someone else on this forum :) So go right ahead!
We aren't in school anymore, therefore plagiarism is awesome! hahah
@Paul G. Others may disagree but it’s too little return for too much risk. This is amplified if this relative is truly a “big time REI”. $17K won’t mean much, if anything, but tying up (and risking) $260K might. Here’s what’s worse (assuming, again, they are successful):
1.) They’ll have their attorney draw up documents or at least review: $500 *minimum*.
2.) They’ll get taxed on that short-term profit. And they’re likely at a 40% marginal tax rate (at least) so...
Their “Take Home” is likely closer to $9,900 on the $260K investment. Now maybe your family member will see this an “an easy $10K”. It likely depends how certain they are of the ARV of the property.
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