Question about partnering with a seller to flip a house.

15 Replies

The thought of partnering up with a homeowner to fix and flip crossed my mind, and wanted to get thoughts on the idea. These would be people with homes that need some work, and are looking to sell. They would get to sell their home, and make a percentage of the profit from the flip. I would get the benefits of not borrowing money, saving on additional fees, and making a profit. For someone who’s broke (like me! Lol!) this seems like an opportunity. I guess my initial challenge would be covering the cost and possible labor of such a rehab.

What if owner decides not to sell or house doesn't sell? Unless you provide some significant upside to the homeowner why would they do it ? Not trying to be a pessimist but I think you will find the legal aspects of it will turn off homeowners as those who sell as-is don't want to deal with the home anymore and just want it sold. Just my 2 cents

Orlando,

I'm wondering if a possible solution would be to have your name added to the property deed in order to protect your interest. That should have the added benefit of allowing you to obtain a home equity loan to fund the rehab. What are your thoughts?

@Jerry Powers - Sounds like a good idea, and possible (in theory). I would just wonder how many sellers would actually want to do that. I've read other posts similar to my idea. As appealing as it sounds, not many sellers are willing to partner up. Oh well! back to drawing board.

the other thing that would be hard to determine is what is considered the profit. Without having a price that they have sold the house at plus rehab cost how do you figure out where your cost are at. 

To determine the profit, you'll first want to define an acceptable price to both parties. Then subtract all expenses from the sale price and split the profit.  There needs to be enough profit when estimating the numbers to motivate the seller to wait for their money.  

I was thinking about this idea today, and think it can be done. You would have to negotiate the sell now price, then add the incentive to partner together. Let's assume you would buy the house for 70% of the finished value, and the home needs another 20% in rehab. This would mean you would pay 50% of the value today, but would pay 55% within 90 days, or as soon as you can secure financing at 100% of the value. This would allow you to BRRR, but would change to RBR. The homowner is happy, because he has a better deal. Would need him to sign executive rights to the property with a fixed sales price at closing.

I've found that in a situation like this the homeowner is more interested in doing an owner carry on the mortgage. Most escrow companies can help set up the account with ease and then it's just a matter of negotiating the deal. The homeowner locks in a price for the sale, which may need to be slightly higher than you would do otherwise, but if you negotiate a smaller down payment you'll save on carrying costs if you were going to borrow the money anyway. You're legally covered by being a deeded interest so your hard work won't go to waste and your cash out of pocket is minimized. Just another option.

Even, that's an interesting idea, and would makes life a lot simpler. What happens if they back out after the rehab, and before closing, and try to sell the house at the higher price themselves?  

On an owner carry you are closing on the home in a normal transaction, just setting up a financing option where you pay the former owner each month. So to back out they would have to foreclose on you. But they can't as long as you keep paying. 

You aren't starting the remodel until after you close on the purchase. Then once your done with the remodel you list and sell and the escrow company simply gets the payoff from the former owner. If you can use the same escrow company on both ends you can make it really easy by getting a pass-through title policy and they'll already have access to the payoff from the servicing company they sent it to originally

Hi @Evan Wiesner

Is it possible to do a JV with a homeowner / Seller if they still need to pay off a mortgage?

@Lorcan Malone It's certainly possible, but there are dangers in doing so and the perception can get you labeled as predatory by some if you're not careful. 

The idea of an owner carry is essentially that you're taking the brunt of the risk and their return is defined early in the process. If you JV with them there are legal concerns (see your attorney for a rundown) that gives them more control and takes some away from you. So they become a decision maker with money to make on the back end and they may want to protect it. If they don't get the returns you sell the deal with then the rumor mill starts and you could limit your ability to do similar deals in that area again. Basically I would be really careful if you're considering this route.

I have a similar but different question.  We have someone who wants to sell but can't afford to fix up.  I can afford to buy the house and do the rehab, but I'm wondering how you would split the profits (after expenses) and if anyone knows of a contract I could download to address this scenario.  We would buy the house from them (so they can move into the next house), rehab it and then resell, and split profits xx/xx with them in return for selling us the house.  Ideas?

@Angela Boone - I would guess that the logical approach, would be to put everything in writing prior to buying the house. Perhaps work with an attorney. Once all intentions have been made clear and final on paper, then proceed with the purchase / rehab / sale of the house. Once the house gets sold, you can split the profits. Not sure if this could be done, so consulting an attorney beforehand may be your best initial approach.

@Angela Boone - If I understand correctly, you would be taking the risk and doing the rehab so why do you feel the need to split the profits with the current owner? I would simply try to buy the property at a price that is acceptable to the owner yet gives you plenty of room to make a reasonable profit after taking into consideration rehab costs, holding costs, closing costs, and commissions. 

Originally posted by @Evan Wiesner :

... Then once your done with the remodel you list and sell and the escrow company simply gets the payoff from the former owner. If you can use the same escrow company on both ends you can make it really easy by getting a pass-through title policy and they'll already have access to the payoff from the servicing company they sent it to originally

 Hey Evan. Thanks for your input in this thread. I'm confused about the above statement tho. Doesn't the "payoff" come from the investor paying off the seller for the note rather than the "former owner" or seller as you state here? Thanks