Convoluted Math Help?

3 Replies

I believe I need some help with my math.  Here is the situation:

I have a property that I have purchased and rehabbed.  I'm all-in at about $90k (I ran into contractor issues that ran the rehab higher than anticipated).  The property appraised for $100k a few months ago and I owe $80k on a bank loan.  

Here is where I need help.  I have a partner in other properties that expressed interest in this property.  The math that I came up with is the property appraised for $100k.  If he wants to be a 50/50 partner in the property, he would pay me $50k.  I would quit-claim the property from my company's name to "our" company's name.  At the same time, I would pay down the existing mortgage to $68k for better cash flow and refinance the property into our company's name as well (all of which has been approved with our bank, title company and CPA).  The by-laws of our company state we are 50/50 partners on everything, including debts.

He has different math: His concern is a $50k investment for $16k equity is a gap of $34k on his side. That would imply a $68k total gap over appraisal at $100k at 50/50 ownership.

To be honest, I'm not sure who's math is correct.  Help me BP! :-)

Thanks in advance!

@Rob Scarborough   I would think about it in steps.  You said you have $20,000 in equity and a mortgage of $80,000.  If you want to do the deal without making a profit in the transaction that would mean... he would pay you $10,000 and sign on to a mortgage for $80,000.

You then said you wanted to reduce the leverage down to $68,000.  You would split that $12,000 50/50.  So he would need to pay $16,000 and you would get $4000 ($10,000 for the equity minus the $6,000) at the closing.

Of course you are trying to do a refinance.  That will not be free.  If the total amount of the loan has to stay at $68,000 then expect to pay more at closing for all the costs of the new loan.

I haven't a clue where the $16K and $34K numbers come from. 

However he is buying not 50% of the property,(the bank "owns a significant portion).  He is buying 50% of the equity.

Of course what you decide to charge for that equity is negotiable. If the property will generate 305 cash on cash return on 1/2 of the equity you can charge more for it. I the property will only generate 1 or 2% return, I am not going to pay you much for 1/2 of it. 

Rob, 

Maybe look at it this way... if it's all cash (no loan)... then a 50% buy in would be 50k. What you are after is a combination of debt and equity to TOTAL 50K. If he is an equal partner in debt AND equity (as stated) here is what you get.

Property value = 100k

Debt 68k

Difference (equity) 32k

1/2 debt 34k

1/2 equity  16k

Total 50k

Ergo: he pays you 16k and assumes debt of 34k for a total of 50k or 50% of the property. 

Or as it sits currently 

Value 100k

Debt 80k

Difference (equity ) 20k

1/2 of equity 10k

1/2 debt 40k

Debt pay down (equity  increase ) 80k - 68k =12k

1/2 debt pay down (equity  increase ) = 6k

So, 10k equity + 6k debt pay down (equity increase ) is 16k with the assumption of half the 68k debt or 34k. This is, again, 50k or 50%of the value of the property. 

To sum it up. Your partner owes you 16k cash for the buy in,  and should assume 34k in debt. 

Hope that helps. 

Good luck! 

Jim 

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