Rental Property Investor · Pittsburgh, PA · Member since 2013 · 178 posts · 57 votes
A couple looked at a house I have for sale. They liked what I did and said that they have a house picked out that they cannot finance with their VA loan because of the house's current condition. I didn't think much of it, but they were persistent. I saw a lot of pictures and they told me what they'd want done with it. The numbers, in theory work.
But I wouldn't feel comfortable taking on a house without some assurance that they would buy, so I asked them for $10,000 and an agreement to do the deal. They said that was doable.
I'm going to go visit the property to estimate repairs this Sunday and draw up a scope of work.
Have any of you done this before? Pros/Cons???????
To me, it seems like it would be fantastic to have buyers already pegged if the numbers made sense.
Investor · Cedarburg, WI · Member since 2013 · 439 posts · 150 votes
12y
Dan Costantino I do not have any experience with this, but have often wondered about doing something like that. I think getting the $10k "earnest money" as well as a signed agreement is a good idea. Even if it falls through you would likely have the $10k for your time.
Urbana, IL · Member since 2012 · 1k+ posts · 425 votes
12y
You could do an equity split partnership in the deal. You own 90% of the property and they give you 10k which would be 10%. Use the 10k as the rehab money. Protect yourself so that you can buy them out at the 10k they invested in case you do the repairs and they back out last minute. With both of you having shared equity interest in the property you're both better protected.
If they don't trust you give them that trust by allowing them to put a lien on the property as the 10k. That way, if you back out and try to sell to another buyer they have to get paid off first before you can make your sale. If the other extreme happens, they back out and you're stuck with a 10k lien, you can just pay them off and sell the property to the next buyer.
word of caution: don't do too much custom work. They may love purple shag rug on the walls, but if they bail now you're stuck with purple shag on the walls. If they want custom work they should pay you as a contractor.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Absolutely, doing a custom rehab is like building a custom home, the further away from a spec build to a specific taste or buyer's need the more financial assurances you need.
Common sense should guide you, if a requested feature goes above what would be s spec level, that difference needs to be covered financially. If some requested aspect is detrimental to general market demands the entire cost should be paid and, in addition, an amount necessary to bring that aspect back to market demands.
For example, kitchen cabinets made to ADHA standards for a wheel chair won't be generally marketable. The cost of the custom cabinets should be paid for as well as a reserve to replace them (not necessarily buy new ones) in the event the deal doesn't close.
Most custom amenities can be marketable, but too much can bring the price higher slowing the marketing time and increasing holding costs.
So long as special requests, like colors are usual in the market you can go there without much concern. Good luck :)
Rental Property Investor · Pittsburgh, PA · Member since 2013 · 178 posts · 57 votes
12y
Thanks Dave and Steve.
Steve-Great points. I like the agreement ideas. I like for both sides to be protected. Also, the custom work is something that I might not have thought of. I really appreciate that tid bit.
I am inquiring about financing today. Hopefully, my private lender is good with this :-)
Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes
12y
I wouldn't get earnest money. I would get a due diligence fee, or builders deposit, or whatever you call non refundable monies where you're located. I'm going through a few spec houses right now that got presold in the framing stages. My contract spells out a 300 change order fee, and they have to pay the cost of the change plus fee before we do the change. To protect yourself, that money is nonrefundable as well. I know it seems steep, but trust me, it helps protect you and your subs. The last house I sold in December, the buyer showed up the day we were pouring concrete and didn't like the way we curved the sidewalk and driveway, even though it followed the proposed site plan that she had signed. The guys got backed up a day just reforming the whole thing. Also, I give them dates and deadlines for selections, and it's 100/day when they exceed the deadline. Luckily I haven't had to enforce that one yet. :) This is all for new construction, which is pretty easy to know our budget ahead of time. I've never done it for a flip. Curious, how would you handle it if some unexpected foundation repair came up?