Paying for rehab cost. How to get money back at closing?

Question

I’m in Texas and have a family member that wants to do some renovations before selling. Me and my partners will pay for the rehab cost and want to know how to get our money back at closing. My questions are:

How are my rehab cost plus “interest” paid back to me at closing?

Is the seller responsible for all the taxes if I’m being paid?

What type of deal is this called?

Thank for the help!

Jeff Copeland · Answer

If I'm understanding you correctly, you are considering lending someone money to do renovations on a property (presumably to increase its value) before they sell it.

One very safe way to do this is with a private mortgage note.

If you create a second (or third, or whatever) mortgage on the property, you must be paid off at closing in order for the seller to convey free and clear title to the buyer. This is very similar to hard money or seller financing (see https://www.biggerpockets.com/... for an explanation of how this works).

How are my rehab cost plus “interest” paid back to me at closing?

If you mean "How is my payoff calculated"? - This would be spelled out in a promissory note (again, see link above) that you and the borrower sign.

If you literally mean "Who pays me back and in what form?" - The title company closing the transaction will collect (from the seller) and disburse (to the mortgage company, other lienholders, real estate brokers, etc, and the seller) all of the money. They can pay you via check, or with a wire.

Is the seller responsible for all the taxes if I’m being paid?

The seller would be responsible for the real estate taxes on the property up until the date of sale (this is normally prorated between the buyer and seller for the year of the sale), as well as any capital gains taxes on the sale of the property.

Debt financing does not generally have any tax implications; If I buy a property for $50 and sell it for $100, I owe tax on the $50 gain. The fact that I owe you $10 doesn't change that.What type of deal is this called?

Private mortgage financing.

David M. · Answer

@Joe Sanchez

In addition to the above mentioned (use a Note/lien, buy it, make sure they will actually sell), make sure the property is worth it. You can't get "paid out of closing" if the the property doesn't sell for enough --- i.e. there isn't enough money. So, if it won't appraise for you need, you both are screwed and the property is now underwater.

The "big boys" have these sorts of pre-sale reno programs. This isn't new. But, I do believe they take Title to the property.

Perhaps the key is structuring the Note/Lien accordingly. For example, make the Note due in 2 years...

Good luck.

Austin Hughes · Answer

Yeah I agree with the guys above talking about getting a promissory note IF you're going to let your family member keep it as you renovate. BUT - what happens if they decide not to sell after you remodel it? I've seen this happen numerous times. Especially since they're family, that could create a hole in your cash that can't be replaced for a long time. . . I would HIGHLY recommend just buying it from them. Then they're out of the picture and you can make mistakes on your own dime/time and not affect the family dynamic.

Joe Sanchez · Answer

@Will Barnard. I appreciate the response and agree, money can always make people do crazy things.

Will Barnard · Answer

Using a promissory note (which spells out the terms) and a deed of trust which should be recorded with the county recorder's office (which is your debt instrument which liens the title of the property for the amount owed) is the best way to construct this deal you have with your family member. What you all need to be careful about is the what if's!! What if it does not sell for the amount expected? What if they change their mind to sell after it is fixed up? What if, what if. Protect both parties from the what ifs to avoid some uncomfortable situations down the road.

Joe Sanchez · Answer

@Matthew Crivelli if we buy the property, there’s closing cost and holding cost which cut into profits unnecessarily IMO. We also want to maximize the sellers gain as mentioned they are family. That being said this is my first flip or RE deal like this so I’m certainly open to ideas! Thank you!

Joe Sanchez · Answer

@Jeff Copeland thank you for your detailed response! We were unaware this is an option.

Matthew Crivelli · Answer

@Joe Sanchez Why not just buy the property as is with a rehab loan if you're fixing it up yourself anyways?

Paying for rehab cost. How to get money back at closing?

Paying for rehab cost. How to get money back at closing?

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