Rental Property Investor · Raeford, NC · Member since 2017 · 7 posts · 1 vote
My friend wants to sell his house, he's lived in it for over 10 years and he has equity but it needs a lot of work. He wants me to loan him the money for the rehab and take the lead managing the project then we split the profits. What's the best way to structure this so everybody wins?
Are you a contractor, or why would your friend offer this deal to you? Is it because you have the cash necessary to do the rehab?
Sounds like a lot of risk from my point of view. The only advice I would offer is to get an attorney to form an agreement. Do not proceed with a hand shake agreement. Otherwise you might fund his rehab, be his GC, and get left with nothing.
I'd also be very skeptical about the declining market and the recession we just entered. Home values are already starting to fall, who knows where they'll be when you finish the renovation.
Are you a contractor, or why would your friend offer this deal to you? Is it because you have the cash necessary to do the rehab?
Sounds like a lot of risk from my point of view. The only advice I would offer is to get an attorney to form an agreement. Do not proceed with a hand shake agreement. Otherwise you might fund his rehab, be his GC, and get left with nothing.
I'd also be very skeptical about the declining market and the recession we just entered. Home values are already starting to fall, who knows where they'll be when you finish the renovation.
I agree with @Greg R. that it sounds risky the way your friend has proposed the deal. I would take him up on being the project manager and getting a portion of the profits, but he needs to fund the rehab. He can use credit cards or other sources. Or, if he has a good deal of equity, he could get a HELOC.
Another way to make the deal may work is to loan him the money at a rate just below what he could get through a HELOC if he doesn't have good enough credit. But, like @Greg R. mentioned make everything legally binding. The house has to be collateral.
One other option, offer to buy the house from him, treat it as a flip and work out a split that satisfies both sides. I would say at least 60/40 to your benefit since you'd be managing the project.
@Michael Clark, hello. I just did a similar scenario. However, I do not put a dime down on materials, etc unless I (or my company) is on the deed, in other words unless I own the house. You can structure a few different ways but putting the property into a land trust where you are both owners is the only way I would do this. Check out this post. You will need an attorney who understands "creative financing". You should have one on speed dial anyway.
Also, some good questions raised. Are you a contractor or what kind of construction experience do you have? If you don't have any real experience with construction, you have no business taking on this project. And, how are you getting ARV? You need to really know your market. Remodel to what the market will bear not necessarily what you think. Your friend might be better marketing to investors and selling "as-is".
Thanks to all of you for the helpful advice, I am not a GC but I do have experience with light renovations and that's what his house requires flooring, paint, light fixtures ect. He wanted me to help him with this house because he doesn't trust the "as-is" investors. I spoke to him today about adding me to the deed and he said he's good with that so tomorrow we will call the attorney. As far as the rehab costs and the ARV we are working with an agent and using websites to see what homes in the area sold in the past 12 Months. Fortunately for us, his house style is very common in this area and I was able to find a handful of his exact style of house that sold within the past three months. His style of house is currently selling for 210K-225K in the same neighborhood and he owes 50K on it. The house needs about 25K worth of rehab and it will be ready to sell. I'm excited for this deal, will update once we get a little further down the road.
Just structure it like it is... If he needs a loan, then lend him the money and record a Note. If he wants you to manage the remodel, then draw up a contract and have him pay you, potentially out of the proceeds of the sale....
I'm sure its worth getting onto Title and gumming the chain... Besides if he is going to sell really soon, no point having a Title transfer. I thought conforming loans can't be originated on Title which transferred in recent 6 months --- you'll have to check on that..