How Would You Evaluate this Buyout

2 Replies

Hi BP,

My business partner and I are potentially negotiating him buying me out of a partnership in which we own one house. The numbers are below, how would you evaluate a "fair" buyout price? I know there's many different ways to evaluate what the company is worth, I'm just curious how other people with experience in this area would think through the negotiation.

Initial investment: $15,000 each/$30,000 total

Acquired 1 property for $24,500

Have put about $10,000 worth of work into the property, some demo, updated electric, moved plumbing, new windows, new door, some framing

Current value of property is hard to determine, there aren't any good comps but my gut says it's worth about $40-45,000, will be worth about $60-65,000 when finished

Partner has made personal loans in the amount of $25,000 thus far (I think 4.5%, cannot readily find the agreement), with interest accruing to be paid out when property is rented, refinanced and loan paid in one lump sum. The only money I have in the deal is my initial investment

We probably have about $10,000 to go to get the property rent-able, at which point market rents are around $700-800

Partner lives out of state, I have a bit more "sweat" equity in the rehab than him, about 50 hours worth

We're on good terms, there's nothing hostile about this negotiation and we may not even go through with it, just kicking around some number right now to see if we can come up with something that benefits us both more than staying in this deal together. Will probably partner with him again in the future.

***Please don't tell me how this is a bad deal, I realize the numbers don't really add up to most people's standards. It was a gamble/"fun money" buy for us both as he is brand new to real estate and just wanted to get his feet wet and it was in a market I was a little curious about. This deal is more about the learning process than anything.

In order to evaluate the value you need to include some of the expenses. Taxes, insurance and utilities paid would be subtracted from the 700-800 gross. I use a 1% per month rule so if the taxes are 100 a month and insurance 50 and utilities 100. You would have 450-550 a month when completed. My formula makes it worth 45-55k when completed based only off the cash flow. This is assuming the projects are complete. If not we have to subtract those costs from the number I gave.  I hope that helps you. I know it’s lower than most but that is how I value property. 

Originally posted by @Nigel Guisinger :

In order to evaluate the value you need to include some of the expenses. Taxes, insurance and utilities paid would be subtracted from the 700-800 gross. I use a 1% per month rule so if the taxes are 100 a month and insurance 50 and utilities 100. You would have 450-550 a month when completed. My formula makes it worth 45-55k when completed based only off the cash flow. This is assuming the projects are complete. If not we have to subtract those costs from the number I gave.  I hope that helps you. I know it’s lower than most but that is how I value property. 

Thanks for the response. I'm not super worried about a low valuation, like I said this is mostly a learning experience for us and I'll likely partner with him again in the future. I'm just looking for a way to essentially back up my numbers if I do give him a buyout number