How do they split the prophets?

5 Replies

Hello All, got a quick question for anyone out there. I have a client who is putting together a spec home, the market in Utah is very good, and new construction is in high demand.

This friend is getting a lot loan from his father-in-law in the amount of $70 in cash (total for the lot) Then he is getting a new construction loan in the amount of $230,000. (all his risk) He is paying the builder (another brother) just like anyone pays a GC.

When it's all said and done, they think they can sell the home for a profit, but they are not sure how to split up the profits, should the ratio be based on the percentages for example 23% to the father-in-law, and then 77% to him? or just pay off the 70K at a certain interest rate? 

haha, I'm sure there is a better way - so just looking for some additional perspective - thanks!  Gary

I would think that since the father-in-law would probably make more profit on getting 23% of the net profit over the interest on the 70K even at a hard money rate it would be best to do what benefits the father-in-law more.

@Gary Thompson If father in law just wants a loan and interest, rather than being involved in the risk and the reward then he should just do the hard money interest rate. If father in law is ok LOSING all of his money and he should invest and then reap the reward. 

In Utah there is documentation that should be signed either way just to define the relationship. 

One issue with doing business with family is defining the relationship. 

Eric Gardiner, Real Estate Agent in UT (#10168425-SA00)

There are numerous ways to structure and protect each party. The father-in-law can be a lender and share in profits via a Shared Appreciation Note and Deed. His money is protected just like a lender, and he can share in profits instead of getting an interest rate. We do this all the time. What he gets is totally dependent on what is negotiated between the parties. But there are many ways to do this. You can give the office a call and we can go over what is best in your situation.

Happy Investing

Jeff

Thank you all for your input - I'll forward to my client and see what they decide, much success!  Gary

Everything is negotiable and everything depends on what expectations the parties involved have.

They could look at it as loan. Your friend pays back the loan to the lender (father-in-law) with or without interest, with or with out principle, total amount due on an agreed upon date (probably upon sale). Any combination is possible.

Or they could look at it s a partneship. This choice changes the situation for the lender into an equity partnership which increases their risk, which deserves a higher reward, in equity, cashflow and sale.

In any case the lender should be on title (like a bank would) to secure some or any colateral.

I am a multifamily real estate business owner and not a legal expert, therefore any agreement should be drawn up and executed by an attorney specialized in your field. You can search them here on BP and connect with them for legal advice and services.

Food for thought. Good luck ;-)

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.