Funding Rehab For Share Of Profits

John White · 2013-12-17T14:58:38-08:00

Good Afternoon All... I need some advice, as this is my first scenario where I've been approached to fund a rehab. Here are the details: 3 bed, 2 bath cape, 1500 square feet, .68 acre lot (large lot for area). I can purchase the property for $85K and sign a contract with the contractor for the renovation ($30K). All in, I'm at $115K with an anticipated sales price of $150K (he believes closer to $170K, but my comps aren't nearly as ambitious). Here is my dilemma. The contractor has a lease purchase on this property (I've already reviewed the paperwork with the title company) and must close on the sale by February 15th. He is willing to share the profits with me 50/50 if I just fund the rehab. While on paper, it's a superb ROI, how would I structure the deal to protect my share of the profits and my $30K in renovation costs without purchasing the property and taking title? Can I put a mortgage or lien on the property to protect my $30K investment, without taking title? If yes, how would I then protect my share of the profits (I own a brokerage, so would insist upon listing the property when complete) to ensure that I'm not just guaranteeing only my $30K back (which would amount to an interest free loan)? The property does not currently have a mortgage on it. Any and all advice is most appreciated. John

Brian Gibbons

Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes

12y

Oh boy, improving a property you do not have title to is dangerous.

I would want the deed before I put one penny in this.

Can you...

1. Buy the property sub2 from the owner

2. Do the work with your money and his skills

3. You protect your money with a note and mortgage (you get paid back at re sale)

You control the whole thing.

@Jon Holdman and

@Bill Gulley might want to comment.

1 Reply

John White

OP

Salem, NH · Member since 2013 · 66 posts · 19 votes

12y

Thanks for chiming in Brian. Yes, I can buy the property. I also had that same feeling that doing work on a property that I don't own or control somehow doesn't feel right to me. That said, putting $30K into a rehab and getting close to that back sounded appealing to me (but, probably too good to be true). Obviously, by not taking title in my company's name, I save on insurance costs, tax stamps, and those closing costs. That said, I'm not looking to save money to be a fool. Now, as I read your post, it does generate a question. You mention me getting the deed in my name (i.e. purchasing it), but then go on to say that I should protect my money with a note and a mortgage? Wouldn't I already be protected (in terms of the property) because I now own it? I apologize if I'm asking elementary questions. I'm just trying to ensure that I understand the advice I'm being given. Thank you again for offering the advice.

John

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John Moore

House Flipper · East Stroudsburg, PA · Member since 2013 · 1k+ posts · 205 votes

12y

This is not a legal opinion, but where would you be if the owner decided not to sell? You might consider a term loan that would protect you in that event. Food for thought.

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John White

OP

Salem, NH · Member since 2013 · 66 posts · 19 votes

12y

Completely understood @JohnMoore. That's why I probably wouldn't take on the project, without having ownership to the property. I just thought there may be a way to protect my interest, without actually going through the two closings, and that the minds on this forum would know about them. I appreciate the advice.

John

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Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

12y

Don't usually work on properties you don't own, buy it, seller finance it since you're an investor not living in it, you can buy it subject the lease or option. :)

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Brian Gibbons

Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes

12y

@John White

Comparing JVing with a seller vs Wholesaling:

Say you have a house worth fixed up $100K, needing $20K in repairs to get the $100K, free and clear house (no liens)

Seller if they sold to wholesaler, they would need to sell cheap, say $40K, so the rehabber would pay the $20K plus $40K plus closing costs, plus holding costs, plus sales costs, to make say $21K.

What if you just JVed with the seller, brought in $20K, did the work, protected your $20K money, added in a minimum profit say $20K with a note and mortgage, and sold the house, then got the seller the balance?

Seller could make more money than the Wholesaling model? You double your money? You dont need to convey title?

The hic up could be are you lending money or JVing - partnering.

@Bill Gulley might comment.

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Jon Holdman

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

12y

I'm confused. If you just fund the rehab ($30K) who actually pays for the house?

You say the contractor has a lease option, but has to close by Feb 15. What does that mean? His option expires on Feb 15?

If it sells for $150K, less $12K for sales costs (for this property, some of that is a commission you earn, but that doesn't affect the deal itself) it nets $138K. Less that all in amount of $115K leaves a profit of $23K. If that's a 50/50 split, you would get $11,500, which is a long ways from $30K.

If the plan is to leave the house under the lease/option arrangement, borrow $30K from you and sell it then you can't secure that loan against the property. The borrower (the contractor) can't pledge security he doesn't own. I don't think the option would give him that right, either, though I'm not a lawyer.

If the contractor can buy it for cash and you fund the rehab you can put a mortgage on the property. Strictly speaking, the borrower would give you the mortgage. Its can be a "shared appreciation mortgage" where you payment is a share of the profits.

If you fund the whole $115K you can still put a mortgage on it. Same deal. But that's to high a LTV, IMHO. If you do that, you definitely only want to hand over the cash in draws as the work is done.

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John White

OP

Salem, NH · Member since 2013 · 66 posts · 19 votes

12y

Originally posted by @Jon Holdman:

I'm confused. If you just fund the rehab ($30K) who actually pays for the house?

You say the contractor has a lease option, but has to close by Feb 15. What does that mean? His option expires on Feb 15?

If it sells for $150K, less $12K for sales costs (for this property, some of that is a commission you earn, but that doesn't affect the deal itself) it nets $138K. Less that all in amount of $115K leaves a profit of $23K. If that's a 50/50 split, you would get $11,500, which is a long ways from $30K.

If the plan is to leave the house under the lease/option arrangement, borrow $30K from you and sell it then you can't secure that loan against the property. The borrower (the contractor) can't pledge security he doesn't own. I don't think the option would give him that right, either, though I'm not a lawyer.

If the contractor can buy it for cash and you fund the rehab you can put a mortgage on the property. Strictly speaking, the borrower would give you the mortgage. Its can be a "shared appreciation mortgage" where you payment is a share of the profits.

If you fund the whole $115K you can still put a mortgage on it. Same deal. But that's to high a LTV, IMHO. If you do that, you definitely only want to hand over the cash in draws as the work is done.

Thanks for the feedback Jon. That was part of my dilemma. The contractor has a purchase option with the owners (who he knows, personally) and yes, the purchase has to be completed by February 15th. I was considering paying (in draws) for the renovation, but decided that I simply wasn't comfortable paying for a renovation on a property that I have no ownership interest in. Ultimately, after looking at the comps, I've decided that it's a project that simply doesn't make sense for me to get involved with.

John

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Funding Rehab For Share Of Profits

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