A model to help homeowners and make money

[Kyle Smith]

I have had a real estate investment model in my head for a while and would like to hear other peoples opinion on it, since there may be something I am missing or not seeing. I thought the model up as a way to both help the homeowner and make money, in addition to minimizing the amount of capital one has to invest. Basically, it is a way for a homeowner who has significant equity, but bad finances, to partner up with an investor and flip their own home. 

For example, say a homeowner owes $100K on their home. However, the home needs about $20K in repairs/updates in order for it to sell at the market value of $200K. Assuming the homeowner has bad finances/credit and cannot just go pull equity out of their home to fix it up, then I come in and finance the repairs with the condition that I get x% of the profit after the home sells, where x% may be 30-50%. 

Of course, I would need to somehow secure my equity/investment through a lien or deed (or some other method?). However, in this example I could potentially make $34K-$20K off of a $20K investment, and the homeowner would walk away with $47K-$34K, (these numbers include a realtor fee of 6%). Whereas in order for the homeowner to make the same amount off the sale, they would have had to sell their home as is, needing significant repairs, for $156K-$142K, which would probably be difficult. And in addition, by me doing it this way I only had to put up $20K, instead of actually buying the home and trying to flip it. Hence, if I where to do this with 5 homes I would only need $100K in capital, instead of lets say $500K in capital if I where to buy and flip 5 homes for a comparable profit. 

Now, of course the limiting factor in this model is finding homeowners in a distressed financial condition with significant equity in their homes. However, if they have owned their home for 15-20 years, they probably have significant equity.

I just wanted to share this idea and see what other people thought. It may be genius, or it may be stupid, but any criticism or comments are welcome.

Thanks for your input,

Kyle Smith

[Bill Gulley]

Juan is correct.  Taking a security interest in a property has you wearing the hat of a lender, trying to take equity can put you into predatory lending areas and usury violations.

Structure these deals buying an interest in the property, say 50% using seller financing, the arrangement allows for your cash injection to go to your side of the equity. In this way you are not a lender but a co-owner in title. You also need to belly up with your responsibilities, fix by a certain date, put it on the market, etc. In that agreement you have the power of sale, if a owner partner backs out, they are liable for costs of court and collections of your equities as your cash contribution along with damages at some stated amount. If you fail, then you need to pay as you need to accept risks as well, it can't all be to your favor. Calculated risks, reasonable, fair and customary for the work performed.

Neither a lease nor an option puts you in a position to do rehabs, don't go that route.

Setting the property into an LLC can make sense too, partner with the owner and the terms are in the operating agreement. Once that property is sold, that partner is removed and your LLC can be ready for the next project.

The key is to stay away from being in a lender's position. Concentrate on being the "contractor" partner and having rights to workmen's liens which can force sales. Judgment needs to be employed, having to go to court to patrician a property or force sale is costly and takes time, but with the proper agreements you'll be in the driver's seat. See your attorney.

The concept is a good one and I've done this many times for distressed properties, each deal can be different too, it's never a cookie cutter strategy to get to a final conclusion.

Again, RE basics will teach you the best way to proceed, what liens are available to you, structuring the transaction, powers of sale, title interests and financing from other sources to complete the project. Good thought overall :)