Creative minds needed - how should I structure this deal?

Question

Here's the situation...

Seller is an investor who has run out of money and can't rehab a house he bought. There's a decent spread in the deal and we were going to buy it, fix it and flip it. However, our hard money lender got cold feet and won't fund it. In hindsight, I don't completely blame him, as IF something went south the deal may be a little tight.

The seller is open to partnering up and I fund the rehab, then split the profits or deeding it over to us if we pay him a little bit up front. His underlying loan is a hard money loan though, so I don't like the idea of transferring title and taking subject to, even if it's just going into a land trust that we own.

I'm trying to figure out a way to protect our investment capital on the rehab and then be able to resell the finished product for a nice profit.

My initial thought on the safest way to structure it was to keep the property in the sellers name, attach a lien to the property, get a POA and written agreement so we can sell if he changes his mind or disappears, then rehab and resell. The glaring problem with that idea would be if the seller defaults on other loans or has any kind of financial trouble from the time we start the rehab to the time we resell, another lien could pop up and we would have a problem. We would have to foreclose and payoff the mortgage in order to wipe out that new lien.

Any of the creative real estate experts on here have any ideas? There should be money to made on this deal if I can figure out how to structure it properly and protect my interest.

Sam Ally · Answer

As both Brian & Darrell mention, your first steps should be to review the agreement between the investor & HML then call the HML to discuss what may be acceptable to them, remember they control the deal not your investor. Based upon their business model this could be exactly the scenario they are looking for..i.e. borrower fails to perform on a deal with a solid spread, they take over complete it, sell it, or add to their own portfolio. As investors & a Direct Lender in Florida we have seen many instances where leverage was used irresponsibly and perhaps where lenders have intentionally set up the investor to fail by providing the funds.  Talk to the HML asap!  Good Luck

Darrell Shepherd · Answer

I wouldn't take a hard money loan sub2 without talking to the lender.  Big difference between doing that and dealing with a BofA who isn't hands on.

I'd go back to the orignial HML, tell them the situation and see if they are OK with you taking over.  Might even renegotiate some terms, they probably dont want the house.

If the HML terms are good enough, look at refinancing it.  Be expensive to pay the points twice, but it all depends on the deal.  Give me a ring if you want me to run some pricing, but LendingHome just opened up in Florida, you're looking at 2.5% origination and 9-12% (guessing) on the loan at a 70% LTV through them.

It scares me that your HML backed out because of the spread.  What are your numbers?  If you've got the cash to rehab the thing, whats his problem with funding the purchase?

Brian Gibbons · Answer

Well

@Cheyenne Davis

I would get on title and get private lender money to pay off the HML, then structure the payments with a moratorium and quarterly.

You did not get the numbers but that is what I would do.

ALWAYS get on title.  Be wary of partnering unless the partner is solid and there is enough profit for both of you.