Offering to pay for rehab in exchange for equity in the home

5 Replies

Hey BiggerPockets,

For markets that are super competitive and where property owners are reluctant to sell their homes, it's challenging to get these properties at a discounted market value. Property owners are familiar with the value in their homes, and often price fixer uppers at a premium given the competitiveness and limited supply of the market. I was thinking about an approach where you don't buy the property itself, but somehow creatively acquire a piece of the equity.

I was wondering if any investor has ever tried to acquire equity in a property that's for sale by offering to pay for rehab expenses of a home, and taking a portion of the sales proceeds? The value for the property owner seller in this scenario is that they often get a premium when their homes are remodeled and looking new from non-investor buyers. This strategy would be to get more equity out of fixing the home and give a small fee to the current property owner as a cooperative benefit.

This idea wasn't fully fleshed out so hoping this becomes more crystallized with more discussion.

@Robin Ji I like the innovative way you are thinking. From a business model stand point, this makes sense. Practically, it could be weird. 

1. You'd be coming out of pocket to fix someones property without pay, and your name would not be on the deed

2. You are partnering with someone who may not be very entrepreneurial

3. You'd obviously have a contract, but it could get weird when they close, get paid, and hard to find them if they become shady

Again, I like the idea, but partnering with multiple people could be iffy. If you can find a way to make sure you are covered (putting your name on the title, etc,) then you could be good. 

Just my thought...but you REALLY have to trust the home owner to make this work. 

All the best!

sjw

@Robin Ji , has about a 75% chance of ending up in a long and drawn out lawsuit.  

I’ve had thoughts about this as well.
Yes it comes with potential problems that need to be solved but I like to think of things more like that. Find solutions!

I’m thinking if there was a legitimate contract for the work then one could lien the property to secure your interest. I’d also think about getting the property listed with a realtor up front as well. The tricky part would be if the seller flakes on you and decided not to sell or something of the sort. Thinking out loud, what If you contracted to buy from the owner and secured to right to improve in advance. Then remarket and assign your right to buy.
Anyone have suggestions for SOLUTIONS to the potential pitfalls with this?

I've actually thought about this type of a structure before but realized a few potential issues arrangements like these that made me look elsewhere.

Seller wants to list their house for $500k. It's in fine shape but outdated and not fully renovated or modernized.

You step in and offer to rehab the house. Let's say you put $50k in rehab and the house sells for $625k

Your share should be your percentage of 625k - 500k - rehab costs  - selling costs. However, the problem is that their $500k estimate might not have been unrealistic. Perhaps, due to the state of their house, the price of their non-renovated home on the market would only bear $460k even though they insist on listing it at $500k. Getting the home owners to agree to that reality could get very contentious and not worth the trouble.

Another problem I foresee happening is how much freedom you would have in the rehab. Maybe you think one backsplash would work better than the homeowner's preference or a modified kitchen layout would improve resale value. Ultimately, it's their house and you could encounter a lot of conflicts when it comes to demo, stylistic choices, etc.

The real problem with this is our legal system.  Judges appointed by liberal politicians, as well as elected judges, tend to rule based on their personal feelings, not the rule of law.  And in the situation as described, the judge or jury always sees the homeowner as a victim, and the real estate operator as the shark wanting to make money at the expense of the homeowner.  So you can have all the legal documentation in the world, and still the lower court judges will rule against you.

As you climb the ladder of courts, going up to appeals court and state supreme court, the rule o law holds more weight.  Unfortunately, at that point you'll be out $75,000.00 in legal costs, and tremendous pressure will be put on you by the trail judge to settle out of court.  The end result will most likely be a second or third lien, and when the home owner misses payments, which he will, the cycle will begin all over again.

This of course is providing you have not violated the Dodd Frank Act, the Federal Truth in Lending Laws, local homestead laws, state property laws, deceptive trade practices act, or any of the 1,000 + regulations put forth by the Consumer Finance Protection Bureau.  

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