Equity sharing contract
ok, i am starting up a partnership with a friend in virginia to fix and flip houses.
My partner says we dont need to buy the first house. He has negotiated an agreement with a friend like this:
we agree with the owner that the "as is" value of the house is $225,000. my partner estimates that it might take $15,000 to fix up the house including adding another bathroom.
when the house is sold we subtract the as is price and the total repair expenses from the sales price. And we split the profit 60% for us and 40% for the owner.
But i have concerns about how to write a contract and enforce it. The owner is expecting a biddiing war and the sale price will go over $350,000. But the comparables suggest $300,000 max. what if the owner decides to hold out ( forever ) for a sales price over 350k.
or what if the owner decides that we have not done that much work and he just sells the property on his own and gives us some small payment. i know that contractors can put leins on property for specific amounts owed. But we can not name a specific amount now because there are two unknown variables- the final repair total and the final sales price. Can we just file the agreement on the property to cloud the title even if we dont know the final amount we will be owed ?
I have never seen any contract like this ?
Thanks
I see a few red flags here- have you done much work like this before? I don't know your SOW, but rehabbing a house and adding a bathroom for $15k seems unlikely.
How did you comp your ARV? You might enlist the help of a realtor or broker to really crunch those numbers.
This type of arrangement can be done, but you are best off hiring an attorney to help you with the contract, or at least a realtor. I work with several realtors who do these types of deals with homeowners and split the proceeds at the sale. It's not difficult to put some protections for both parties in to the contract, just make sure all parties have a full understanding of the process.
Best of luck!
It sounds like there is way too much that could go wrong here. I would suggest either selling your renovation services to the seller, or buying the house from him As-Is.
Also, as Corby mentioned, a $15k budget is minuscule - you should get a second opinion.
Thanks for your response . I was looking for help with the contract not help with the repair estimate or with estimnating the ARV. My partner has done a lot of work like this before. He is providing most of the labor and he has a very detailed estimate for the cost of materials.
#1 All Forums Contributor
- Investor
- Virginia
@Hugh Smith
I have spoken to my attorney on this type of transaction and it was just way to risky. Language would need to include scope of work, cost of work. Language that any offer over X the seller must accept… but what if he doesn’t? You have to sue and spend $ and in some states may not be able to enforce it.
Also why would a seller with that much equity not get a LOC and renovate to sell? Why would they give up
So much profit.
There is a reason why this is not done- just way too much risk.
Thanks for your response . I was looking for help with the contract not help with the repair estimate or with estimnating the ARV. My partner has done a lot of work like this before. He is providing most of the labor and he has a very detailed estimate for the cost of materials.
It turned out that the estimate of the rehab expenses was pretty close. maybe expenses are higher in other areas of the country. The estmate was 15,000. the final total expenses were a little under 17.000. The property owner was ok with that. My partner added an additional bathroom- shower insert not tub. But a fully framed in additional room. refinshed all the hard wood floors , repainted all inside and deck out back.
What was not predicted was the sudden downturn in the real estate market. The property owner never originally wanted to sell the property for the $225k as is value. He was dreaming that after the house was fixed up it would go into a bidding war like his neighbors house. Instead the fed has been raising interest rates. The house was originally listed for sale at $324,000. Its been reduced by $5,000 every couple weeks. Its not selling. The owner is reluctant to sell below $310,000. So now my investment is stuck there. The real estate downturn may get worse before it gets better. Someone suggested a LOC. YesI did apply for a 1st position HELOC. It took over 3 months. They went into every possible complications and questions about my other properties , sons student loan etc, etc. Have replaced my first mortgage but I still dont have checkbooks to access the additional line of credit yet.
So my first rehab project did not go well . My investment is locked up. We are now working on the second project. I bought a hoarder house that had caught on fire. Fire damage and water damage in january. Outside also a disaster. Overgrown with weeds and bushes. we paid someone to remove over 40,000 lbs of junk from inside the house. My partner is a magician at doing the repairs cheap. The house has a very large attic . He plans to add an additional bedroom and bathroom upstairs with an additional staircase. I expect that it will be hard to sell any real estate in the next year. I am hoping to refinance it to get money out and keep it as a rental. Yes, I bought it very cheap.
Be mindful of taxes in flips. IRS treats you as a business owner and will charge you ordinary income and self-employment tax, could be useful to speak with a CPA / tax planner.
#1 All Forums Contributor
- Investor
- Virginia
@Hugh Smith
Reason why this is rarely if ever done - because of all the reasons you listed.
Sorry to hear about your deal. Yes, these are very tricky. As you are seeing why its not really done and attempts by large firms aren't very successful. Usually it done with taking Title. The only other potential method would have been to file a lien. But, there is no way to force the seller to sell, nor control market events. Good luck with your next deal.