Structure my Business Proposal - Do numbers make sense?

3 Replies

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

Terms Offered: 

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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