Good Day,
I have just been given a great opportunity to start building spec/rental homes for a client that I did a basement reno for.
He is interested in financing a building project in the $ 250K to $ 300K range. the idea is to either sell the home or rent it out, depending on the market. If the project sells right away, we would immediately start another project and just continue with this format while the market looks strong.
My question is what type of percentages etc. should I expect to make from the deal.
Here is what I bring to the table;
– Residential Lot to build on – Appraised at $60K , paid $49,900.
– General Contracting – managing subtrades, material purchases etc.
– Sweat equity – framing, drywall, Hardwood flooring, finishing
He is willing to finance the cost of the building.
How should we divide any profits at the point of sale and what is a fair rate to charge for managing the project. I was thinking in the neighborhood of 15% on all subtrades and materials.
Please provide me with some insights or similar experiences that I can learn from.
Thank you,
Stage Coach
IF YOU LOVE TO LEARN, YOU WILL SUCCEED!
Replies
I can tell you only that over the years I've been offered the same opportunity several times. I didn't take them up on it. If you take the chance, best of luck.
A great place for Information, Comraderie, and a sucker punch.
Remodeling Contractor just outside the Glass City.
Quittin' Time
Hard to say. One question that needs to be answered is how much just the lot might sell for when the buillt-out property sells. Whatever profit on the land is gained is certainly yours. It should be paid you upon closing, and there needs to be a written agreement about this, so that a check is cut you right in the closing office as part of the sale proceeds.
As to the project, your "partner" is risking all the capital for the house cost, and therefore should be due all or most of the profit on what he places at risk.
Presuming you are going to be functioning as the GC, project manager, and lead carpenter, wearing all three hats and working full time on the project, you and your partner should decide what your monthly salary should be. It should be paid you as regular payroll, either weekly or bi-monthly.
Since you are functioning as GC, you should be also paid either a fixed fee above all costs for materials, services, fees, and labor, or an agreed upon percentage. Start at a minimum of 15 percent and go up from there.
You might also get an agreement with your partner to get a bonus upon successful sale, if the sale number goes above an agreed figure.
He used the term sweat equity, which implied to me that he would not be taking a salary, that would come out of the payoff at the end.But that is not clear.
Stagecoach -
Check the archives. There was a thread on this a few months ago. It's a risk unless you two know each other and understand each other and every possibility real well. I mean real well. Since this person was/is a customer, that says to me that your background is kind of shallow. One thing you need is a written agreement that covers it all. Talk to a lawyer - alone.
Been there, done it. Ain't pretty when the fit hits the shan. Nobody makes money and you argue about who pays the losses.
Good luck.
Don K.
EJG Homes Renovations - New Construction - Rentals
Stagecoach,
I, personally, would not partner with him. I would counter-offer two contracts; 1 for the sale of the land at $60K, interest acruing from date of substantial completion, payable in full on date of punchlist completion if house is not listed at that time, or on close of escrow or in 180 days, whichever is first.
The other contract would be your standard construction contract with standard payments.
His offer has no time limits on the partnership. What if HE decides to rent? When do you get paid profit for construction?
No matter what happens, you are on the hook for all construction risks.
SamT
I've looked at some of these arrangements and often there's not enough profit for one person, let alone two.As a starting point look at the deal and determine if there's enough money there for you to go it alone and finance it yourself and pocket the entire profit. Have you looked at it from that perspective?++++++++++++++++
-Do the thing you fear and the death of fear is certain-
Stagecoach, these types of deals are done every day, all day in every county. It's basically a marriage of someone with funds and no skills or time to invest and someone with skills and time and no money.
Congrats to you. You've just stumbled onto a "no money down" deal that every real estate guru talks about. It's called "OPM"; Other People's Money.
As you've probably already noticed, most in here seem quite frightened about the prospect. I'm probably one of the few that will advocate it. I've used it sucessfully in the past and will continue to use it it the future. I'll do the deal both ways, as the skill guy as well as the money guy. It all depends on my fluidity state.
We recently signed a spec deal. Here's what we offered. We're supplying the land which is obtained on a land contract for $1 from a third party. We paid the asking price for the land. The land owner will get his money when the house closes. Its a zero interest contract.
The investor is fronting all construction costs. All the work will be done by subcontractors. There is a build supervising fee (10k) which we'll earn for supervising the construction. We'll do the framing since that is our specialty. We'll get paid for that just like any other trade. If we do anything else, we'll also get paid for that.
We offered to pay a 10% fee for the use of the money with no split of the gross profits. We'll jointly "own" the property in an LLC. All the details are spelled out in the operating agreement of the LLC including exit strategies.
The risk is if it doesn't sell. The 10% could become a problem after 2 years because there wouldn't be any profit left to split. Of course, if it doesn't sell quickly in the next season, we'll refi it and get the interest down to market rates.
That offer was accepted with only one question: "Is there any split in profits?". Our answer was no, there simply isn't enough room in the deal for that.
The big carrot is the 10% fee. If that particular house sells when it's finished, it theoretically could make him 10 in three months. If we did that for him four times in a year, he'd make 40% on his money. Where else could he get that kind of return on some well secured investments?
We could do these deals with banks but our risks are greater and there's more hoops to jump through. Were basically doing this to provide ourselves with some winter work. If we make a profit, it will be a nice bonus. If the house turns into a dog, we might have to "give" it to the investor as a way out of the deal.
If you can't afford even that small of a risk, you can easily structure the deal to give a profit split and assume no risk. Anythings possible. You have to write the deal to suit you but make it palatable for them too. Our accountant wouldn't consider doing this deal. He wants 18% to fund a deal.
blue
Blue, can you expand upon this so I can understand it?
We offered to pay a 10% fee for the use of the money with no split of the gross profits. We'll jointly "own" the property in an LLC.
I thought you are simply getting a $10K fee for "build supervision," plus the ability to make your usual nut on framing.
What exactly does the LLC operating agreement say re distributions at closing of sale?
And what, really, does the investor get from you that is sweeter than what he would have if he simply hired a GC to build him a house that he could then sell?
I can re-explain.
First, lets all understand that everything, every detail of this agreement is up to me. I can formulate it anyway I want. Of course, the money man has the option of refusing to fund the deal.
We simply decided that we'd pay a 10% per annum "rent" of the money and also agreed that we'd pay a minimum of 10% no matter how fast we marketed the house.
All profits are going to us. No profits are going to him. He gets the 10% interest on the use of the money, we get everything else.
As part of our explanation regarding the construction costs, we made sure he knew that we were paying ourselves a 10k supervision fee for the paperwork and co-ordination of the trades. We also made sure that he knew he was going to have to pay EVERY subcontractor, including us if we framed it. If we are too busy, we'll sub out the framing just like any other builder would. Remember, time is money! We won't allow the basement to sit idle for six months while we find a break in our schedule.
Could he get a better deal somewhere else? Probably. But somewhere else didn't approach him and make the offer, we did. He's not choosing between us and someone else, he's choosing between his coffee can and our building business. Or perhaps he's had his money in a losing stock fund and is looking for a relatively secure investment that pays 10%.
It's a win-win deal for both of us. On this particular deal, we are exposed a little, but like I said, we would bail after holding it for two or three years if the market goes south, which it could.
We were going to make the offer so it completely shielded us and left us with no risk but that would take a much bigger chunk of the profits to get the deal done. This was my first time making that type of an offer and it was accepted immediately. It all depends upon their circumstances so it is important to understand where they are coming from. It's best to find out what they would be happy with before you start flinging around offers. Our "selling" strategy was simple and based upon basic selling skills: ask questions, find a need, then fill the need. We both have needs and both were met.
It's a lot easier than you think. If you can think it, then it can be done. I think many in here have pooh poohed the idea that something can be accomplished using no money our my own, but they fail to grasp that lots of money is being spent, just none of mine. There's a price to pay for not using any of my own cash, but then again, there's a price to pay while idly sitting on the sidelines waiting for some cash or credit to be freed up. This is a typical example of private funding. I've said many times that there is a lot of money invested in stocks that would love to be moved. Just start asking; you'll be amazed at how many people are interested in guys like you and I with skills and a solid work history. They see us as their gravy train. They are right if you do it right.
blue
You're basically getting a construction loan. I'm curious if the percentage on that from a bank would be more than 10%.
I'd say not likely but perhaps close, depending............
That said, there are people with a lot of cash sitting around at 3-4%. Why not loan it out at a risk you are comfortable with?
And it will not tie up Blues credit this way, it being a private affair.
Eric[email protected]
It's Never Too Late To Become What You Might Have Been
If I had to pay 10% for money, I'd be more inclined to just deal with a bank. That way I have complete control of the deal. Someone else's money.... they have control.... all the possible negatives that have been discussed, such as they decide to rent it out, they decide to sell low, they decide to have their daughter move into it.
But then I'm a control freak. I'll pay for control.
David, you're assuming that we've lost control, but that is not the case.
Remember, every detail of the agreement is negotiable. Giving away the control was not on the table. We have control. The investor is buying and selling what we build.
blue
No assumption on my part, really. I've read a lot of threads here and elsewhere over the years where someone's rich client wants to be the moneyman in a spec deal and wants them to be the builder. There have been a lot of cautions about the pitfalls of this, and a lot of them seem like serious perils to me. I've been approached the same way. The only way I would be interested is with an investor as a completely silent partner. If I can build and sell the house without restraint then I'm in. That's probably the deal you have too.
With the 6% bank vs. 10% private money I assume the crux of your deal is the investor owns the land and is willing to throw it on the table. Otherwise you'd be doing a separate deal for the land... a mortgage, a closing, the works.
I was wondering if you would be willing to share some of your blank contracts. For example, I would like to have something for rent to own agreements where I would own the home and lease - rent to own to a tenant. I don't want to pay an attorney for these contracts and would just like to see what someone else is using.++++++++++++++++
-Do the thing you fear and the death of fear is certain-
Yes I do have various contracts including rent to own contracts. I got some great stuff from a local real estate broker named Wendy Patton who has made a career out of lease optioning.
A "rent to own contract" (technically this is a lease purchase) is actually two seperate contracts: 1) the lease agreement 2) the purchase agreement. A variatiobn might be a lease option type contract which then also dictates the option details as well as the lease and purchase agreement.
The problem with using generic contracts is that they might not satisfy your laws governing your state. For instance, lease options were recently outlawed in Texas. I'm sure their is already something similar to take their place but I haven't kept up on it because I'm not in Texas (yet).
Then the next "problem" is constructing the agreement to achieve exactly what you are striving for. Often that entails customizing the agreement in some way. To do that, you have to have a thorough understanding about contract language anyways! If you don't, you probably won't be able to verbalize it properly to a lawyer and the lawyer will saddle you with a cookie cutter "safe" contract for your state.
Reading through the various types of contracts available is a good start, but I'd recommend doing some serious reading by buying some of the books on real estate that are available all over the web and at any bookstore. William Bronchick is an attorney that puts out some great real estate stuff and most of his stuff contains generic versions of the various contracts dealing with options, contract for deeds, leases etc.
What state are you in?
blue
Thank you Blue - I am in Kansas and I have the books and tapes from the author you mentioned. I even have the CD rom computer disk with the contracts on them that you can simply fill in the blanks.He is an excellent resource and recommends keeping the lease agreement separate from the option agreement and I have those in a file folder and I'm all set to go. If I remember correctly you keep the two agreements separate in the event of an eviction - it just makes things simpler.I guess I was just nervous about using something I've gotten from books and tapes and have been looking for someone who's actually gone to an attorney and paid for the documents. The William Broncheck tapes and books even give you forms to use to screen out tenants. They also give you suggestions for placing your ad in the paper and they give you scripts to use when calling someone whos house is for sale.Bottom line is I would like to make money in three places (1) the non-refundable down payment from the tenant, (2) the monthly cash flow (above and beyond my montly payment on the investment property) and (3) the "back end" which is the sale price. I would like to make at least $10,000 profit (over what I've paid for the house and any the total of the repairs and improvements I've paid for).I'm anxious to try this system out and just dont' want to make any mistakes. Several months ago I wanted to "test the waters" and I ran an ad in the paper saying I had a "rent to own" property and the phone rang off the hook! I couldn't believe it. Some of the calls even came from some good, down to earth people that I would have enjoyed doing business with.Thanks again.++++++++++++++++
-Do the thing you fear and the death of fear is certain-
Mr Fixit, you sound like your in a great area for that particular segment of the business. Good luck in your endeavor.
You might be interested in looking at some of Wendy Patton's stuff. I met Wendy at our local REIA meeting when she was making money only doing lease options. Now, she's figured out how to make a ton of money other ways but she still knows and delivers "real" information regarding lease options. I get a kick out of the big fees people have to pay to go to one of her "bootcamps" because I know I could knock on her door and partner up in a deal with her any day of the week. The deal she makes with all money partners is this: they put up any/all money, she puts up none. She does all the negotiating and buying and leasing, and takes half the profit. She would probably do this deal with you if you called her! I haven't been to a REIA meeting in more than a year and maybe her terms are changed, but I kinda doubt it. It's a good deal either way.
Your challenge is to learn to negotiate the best deals; it doesn't sound like you'll have any trouble marketing your properties. If you are in a market that is appreciating, it'll be piece of cake for you on both ends. For negotiating info, I'd suggest Peter Conti. His systematic approach to negotiating for propertys is the most logical, simple that I've ever seen.
I would highly recommend running your contracts through a knowledgable atty in your state. Finding the right atty regarding your endeavors might be challenging. I'd start my search using your local or state REIA (http://www.nationalreia.com/) resources. Once you've developed a relationship with a competent atty that specializes in your particular segment of the real estate business, you'll have a much better chance at actually collecting if something goes wrong.
Also, don't rule out using an attorney or at the very least, a title company for closings, including the closing of leases. The use of an attorney in deals like these solidifies the deal in the minds of your clients (both the buyers and sellers). It adds credibility to you and offers significant protection in the case someone thinks they got a bad deal and decides to cry foul and claim that they were suffering from duress when signing the contracts.
Not many real estate advisors will advocate for the use of attys because of the upfront costs, but if you are looking long term, the fact is that you'll probably get a lot of business by referral if you remove yourself from the closing process and use the professionals. Your goals of 10 might easily inch up to 20k and more by instilling professional practices instead of doing everything on the cheap. Think how our images are as contractors when we do all our paperwork and everything cheap and out of our truck, as compared to properly doing things in a professional office enviorment. That same image is applied to investors and the results are predictable.
blue
Excellent advice - I've taken some notes and will use your recommendations. You sound like you're well-versed.One last thing. I've looked at the numbers and can make a nice return on my money doing these lease options.What's interesting to me is, if I buy the property right, the BUYER will benefit as well and this becomes a win-win situation:(1) The Buyer will own the home the day he moves in. He can do anything he wants to the home (repairs, updates, decorating, remodeling). (2) The Buyer will get in quickly and without the headaches of traditional financing (fees, loan costs, doc prep fee, underwriting fee, appraisal, etc). (3) The down payment applies to the purchase giving him some equity immediately.(4) He can repair and rebuild his credit over the next 2-3 years while owning a home as he makes each payment on time.(5) After a few years he gets bank financing and I cash out. He owns a home at a fair price.Agree?++++++++++++++++
-Do the thing you fear and the death of fear is certain-
You pretty much summed up all the advantages of a lease option arrangement Mrfixitusa!
I would caution about letting the new buyer have total free reign regarding making capital improvements though. Too many people tear out the kitchens, baths and trim and never get around to replacing them! You have to maintain control over those issues till the deal closes, then the mortgage company inserts their controls in the mortgage documents.
blue
That said, there are people with a lot of cash sitting around at 3-4%. Why not loan it out at a risk you are comfortable with?
And it will not tie up Blues credit this way, it being a private affair
That's exactly right Eric. Frankly, my credit is already tied up and it won't be freed up till something sells. Also, I'm not comfortable with taking on any additional risk in the form of a bank loan. By using private money, I'm avoiding taking on some additional monthly cash flow draining outlays. They are at risk. Their money will be taken out of the mattress, or out of the income producing stock funds instead of me making payments.
As a result of this reduced risk, I feel comfortable speccing something in such a distressed economy that our state has.
blue
Banks are doing construction loans at about 6% around here.
blue
1. If a client came to me, I'd discourage the idea, but at least recommend both parties have a lawyer who will draft an agreement. Expect to pay a few grand in legal fees.
2. One of you needs the money from the house more than the other, so one of you wants to take that low-ball offer and the other wants to hold out for top dollar.
3. The house doesn't sell at all.
4. The money guy doesn't really have the money-can you be sure he will be able to finance the project? I'd insist the $$ be placed in a segregated account before you start.
5. Being partners is like being married-are you really in love (figuratively) with this guy?
6. Are the potential benefits, i.e. whatever money you'll make above what you'd be making doing something else, sufficient to outweigh the potential risks?
If a client came to me, I'd discourage the idea
Of course you would: that's what lawyers do.
I'd discourage the idea, but at least recommend both parties have a lawyer who will draft an agreement. Expect to pay a few grand in legal fees.
Thankfully, I've already invested enough in legal fees and have a few LLC documents lying around the office. At this point, all I have to do is swap a few names. Ironically, we were talking to our CPA about this deal, discussing the tax implications regarding entities for the investor and he pulled out the last LLC spec deal that he did. After reading his operating agreement, I decided to use his agreement.
Should the investor get legal counsel? Certainly. I would hope that he wouldn't need two grand to have a lawyer read through the operating agreement, since most of the articles are boilerplate anyways on a small deal like this, but I've seen lawyers do some very questionable billable hours "studying" LLCs. In fact, the last time that I had an investor take my LLC to his lawyer, the guy claimed that he needed to have some senior partners "more experienced in business matters" look over the paperwork. After burning up $1100 dollars, they advised the investor to make a very stupid, needless change in the voting percentages. Of course they requested that they re-read the paperwork after the changes were made. And again of course, the lawyers advised against doing the deal.
Well, the investor went ahead with the deal and is/was tickled pink. He fronted about 130k and got it back along with about that same amount in equity. Not a bad return on a years worth of rent of his money. At the time, it was a very risk free deal too.
The most ironic part? That particular llc was drafted by a lawyer in duplicate for twin parcels. The other landowner was doing a similar deal with a different party. That party also took the document to their own lawyer. He charged them $200 to review it. The most astonishing thing was that there were about 15 different errors discovered in the document by the $200 lawyer. None were discovered by the "senior partner more experienced with business matters" shysters. They didn't even discover that there was a clause referring to another clause that DIDN'T EXIST! .
I've learned to not trust my lawyers and accountants from these and other experiences. I've learned that it's best to read the entire document yourself, word for word and understand what every thing means. Yes lawyers are important, but if you don't have a very good relationship with a very large and fair lawyer firm, those thousands will fly out of your wallet and be wasted.
Shall I tell you about another of my wonderful lawyer stories where my lawyer didn't properly read a title policy committment? I learned a lot about lawyers after forking over 15k to fix the situation. My substandard lawyer must have gleefully been thankful that the statute of limitations on lawyer malpractice was only two years because I didn't discover the error until I went to sell in six years. I've now learned how to read title policys too.
blue
Some people are experts in everything and don't need professional advice in anything. More power to them.
By the way, the statute of limitations on legal malpractice doesn't typically start to run until the client discovers, or reasonably should have discovered, that he has been injured as a result of the lawyer's negligence. In real estate matters, often the limitations period doesn't start until the property is transferred. Check your own state's law, of course.
This is a great and very informative topic. I have been trying to structure a deal along these lines and am constantly getting negative advice and reasons why I MUST give the control and MOST of the profit to the $ investor, as though what I am bringing to the table - building and design experience and project management experience - are of little value.I like your perspective and the way you think but I am confused about the following:You wrote:"We simply decided that we'd pay a 10% per annum "rent" of the money and also agreed that we'd pay a minimum of 10% no matter how fast we marketed the house.All profits are going to us. No profits are going to him. He gets the 10% interest on the use of the money, we get everything else."First Question - So, you get people to put up $100K or $200K just to benifit $10K or $20K for use of their $ for up to a year? Everyone I have spoken to would laugh at this offer. If you are doing 4 projects with this same fund and are paying 10% per project - well maybe, but they are still risking their money 4 times and you have to sell each developed property immediately for them to get this return.Later you wrote:"Well, the investor went ahead with the deal and is/was tickled pink. He fronted about 130k and got it back along with about that same amount in equity. Not a bad return on a years worth of rent of his money. At the time, it was a very risk free deal too."Second Question - Well, that makes more sense from the investors side, however where/ how did the 10% "rent" become $130 in equity? Were you able to build a $1.3 million home with $130K? Seems unlikely.Please tell me what I am missing.FrankieThere he goes—one of God's own prototypes—a high powered mutant of some kind never even considered for mass production. Too weird to live and too rare to die.—Hunter S. Thompson
from Fear And Loathing In Las Vegas
Frankie, you mixed up two different posts and concluded something that wasn't factual.
The current deal is the one where we offered 10%. The other deal was a much different deal and that one didn't include any clause that payed interest. Instead that particular investor actually bought an interest in the LLC and therefore ended up with an equity position that benefited him to the tune of a 100% return on his investment. I learned about structuring deals from that one because I wasn't smart enough to split the controls and I actually ended up suffering from "too many cooks in the pot" syndrome that others are warning about. That's probably why I keep stressing that "I'm making the offer and I'm going to put in as many clauses and structure the deal exactly how I want it."
Don't let the naysayers dissuade you. If someone laughs at you for making the offer, find out what they think will be "fair". It's possible that the difference between their "fair" and your "fair" aren't too far apart. If someone got his money tied up in a 5% money market fund because he's scared of speculating in the stock market, a 10% offer doubles his income, doesn't it? Then, if you do two of those deals in a year with that same money, doesn't his income increase fourfold? That's not chicken feed when your talking about someone that is fronting 200k. That represents a difference in income of 30k!
All you have to do is show the numbers on paper and let them decide for themselves.
If you are dealing with people that are generally making more than that, you might have a hard time selling your proposal. So, no big deal, move on.
blue
I have been trying to structure a deal along these lines and am constantly getting negative advice and reasons why I MUST give the control and MOST of the profit to the $ investor,
I suspect that you are hearing this advice from people other than the investors that you approach. The last meeting that I attended discussing investment opportunity with a Dentist went something like this: "Oh, I'm glad that I won't have to be involved in any way with the construction/devopment process. I'm much too busy with my dental practice and I don't have any experience at all regarding construction or building...".
Every investor will have their own criteria regarding security and control. Some you will be able to work with, others you won't. That's okay, you cant be everything to everybody.
blue
Thank you for the reply and clarification.You have got me rethinking my presentation approach. My interests lay in buying a rundown property, way undervalued due to its condition, kitchen or lack of sufficient bathrooms. Renovate it and flip or turn into rental property and repeat using the equity created. What follows is the comment/ concerns my potential investors have. a) All agree to purchase the property and assume the loan, if even needed. All properties are under $125K. Some have been as low as $40K.b) They all want a minimum of a 50% share in the project.c) Half of the people I have approached or who have approached me, think it fair that I provide the materials - since they purchased the property and taken on a greater financial burden. d) They will pay the subs but any work I do myself is considered as my sweat equity. I am expected to do as much as possible. HA!e) I get no compensation for supervision. That is considered as my sweat equity.f) Earnings are split at time of sale. If property is rented, earnings are split after taxes and mortgage is paid and my equity interest remains as equity. The feedback I get is: a) If the investor is paying for the property, materials and the subcontractors - including me to supervise - why should I be given even 50%, let alone the lion's share? b) If these are the terms, the investor should instead develope the property themselves. It seems they need a contractor not a developer partner. I respond:a) Developing the property themselves will cost them a lot more due to related overhead and GC profit requirements and greater supervisory cost. b) They will also have the burden of finding a property without the benefit of sufficient knowledge of what to look for, what to lookout for, and how to develope the property. c) Why would I forgo being paid weekly or monthly for less than a 50% interest, especially if I am expected to provide materials?Some how, this falls on deaf ears.Apearently I need to think along your terms and find a different class of investors.Frankie
There he goes—one of God's own prototypes—a high powered mutant of some kind never even considered for mass production. Too weird to live and too rare to die.—Hunter S. Thompson
from Fear And Loathing In Las Vegas
Frankie, a lawyer/investor once told me: He who owns the land, controls the deal. I was young then and didn't understand it but with age, I've come to appreciate it.
You probably are going about this all wrong. You might be able to get some of those investors off of their position but you'll have to take a disciplined course.
First, lets get the numbers straight on these beat up old houses. You should be buying them for 60% of the fixed up true market value, less the construction costs. Use a rehabbing contractors numbers unless this is high end work. They work cheap.
If you can get those numbers, tie up the property.
Now, create an offer sheet showing the costs and fixed up fmv. Show how the difference will be split. Show how long the money will be used for. Briefly explain the exit strategy if this is a flip. Use any figures that suit you. This will be a take it or leave it offer.
Make five copys of this offersheet. Number them 1 of 5, 2 of 5, 3 of 5, etc. Deliver the sheets to your top five hard core investors and explain that you need an answer in 24 hours. In the sheet, be sure to include a return time for the sheet if they take the deal or leave it. If they take it, be sure to include a spot for them to sign and tell them how much of a deposit the deal will require. The deposit goes to your company, the one that is on the purchase agreement.
If the numbers are sweet, the investor will have to take a hard look. He will know that there are four other investors thinking about doing the deal. This will put pressure on him. The fear of losing a deal creates a very powerful force. The very short deadline for making a decision also commands action.
If none of those investors take your offering, call a hard money lender. They can easily be found in any city. They'll do that deal with a high interest rate, and a few points up front as long as you've bought it right. They'll need to know that you've got it at that 60% of fixed up market value to fund your deal.
If you floated that offer around the REIA meetings that I've attended, and asked for investors/loans, you'd have to wear body armor to keep the guys from hurting you.
It's all in the numbers. Your investors have the right to demand whatever they want, but you don't have to play on their field. If you've got the deal tied up, you can take your "ball" and play elsewhere.
blue
Smslaw, I almost forgot to touch on your good points after going on that rampage about lawyers:
2. One of you needs the money from the house more than the other, so one of you wants to take that low-ball offer and the other wants to hold out for top dollar.
It's set up so that we get paid for our construction as it occurs. The investor gets nothing until it sells, only the bills. We both have incentive to sell as quickly as possible. We will in fact take a lowball offer as long as it nets us a gain and pays the interest tab.
3. The house doesn't sell at all.
Now you've hit the nail on the head about risk. Remember, nothing ventured, nothing gained. If it doesn't sell at all, the interest tab will eventually overtake any ability to make a profit and pay the interest. I think there is a two or three year window before all is lost. If the region suddenly experiences deflation, the house could very well become worth less than it took to build.
Okay, we've acknowledged that this is a possibility. When was the last time that it happened here in Michigan? I think even in 1980 when the oil crises sent our economy into depression, the repossed new homes sold for what they had in them.
In this event, the investor will end up owning the new home. We'd have to walk away and take nothing. With that said, I should mention that everything that gets specced somehow manages to sell, even in this poor economy.
4. The money guy doesn't really have the money-can you be sure he will be able to finance the project? I'd insist the $$ be placed in a segregated account before you start.
Thats a great point. In fact, that's your best point. There will be a business account opened up in the LLC's name. In this particular case, with this investor, we aren't that concerned because or our personal knowledge/relationship with him. I'm sure that after he deposits the 30k in the account for the basement, that he'll be interested in getting the rest done. We do have provisions for finishing it without him if he stops funding the deal. In that worst case scenario, we'll have to head to the bank or another private money person.
It wouldn't be pretty, but I think I could find a bank or other private money lender to fund the necessary money to finish a house that had so much equity and no loans out on it.
5. Being partners is like being married-are you really in love (figuratively) with this guy?
Wrong. The guy better love us. He has no say in anything other than to put the cash in the bank. Remember, we made the offer. The details were geared to make us happy, not him.
6. Are the potential benefits, i.e. whatever money you'll make above what you'd be making doing something else, sufficient to outweigh the potential risks?
That is always the basic fundamental question whenever anything is negotiated. It all boils down to the market, the deal, the available funds, the rate of return if the deal isn't done. In short, everything has to make sense.
blue
We recently signed a spec deal. Here's what we offered. We're supplying the land which is obtained on a land contract for $1 from a third party. We paid the asking price for the land. The land owner will get his money when the house closes. Its a zero interest contract.
Interesting post Blue.I've had many conversations along this topic with myself. Looked at a couple of fixers this past week with an "investor".
I'd say the land owner gave you a pretty sweet deal. I want to know what compelled him to do such a thing.
Was it a hard lot, slow market?? And no time allowance to close was stipulated??
I can imagine a land owner perhaps holding paper, and perhaps interest only till a set or estimated closing date, but in a good market ans economy as in where I live, I would be hard pressed to find such a generous owner.
Can you tell us a bit more about how you constructed the land part of the deal?
Eric
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Edited 12/16/2005 11:05 am ET by EricPaulson
Actually Eric, it wasn't a very hard task to get the landowner to do that deal. Nothing "compelled" him, he just agreed because we asked. It helps that we personally know this particular land owner, but that is really not a big factor.
Is it a hard, slow lot? Not really, but it should be noted that nothing in Michigan is on fire. This particular lot is a five acre country parcel. The landowner owns it free and clear and it was bought as in investment. When he cashes it out, it will represent a capital gain. While it sits idle, it represents a tax liability. Remember, we agreed to pay full market price. The lot wasn't for sale, but we thought he would agree to let us build on it. He did because he knows us, knows we'll build a nice home and the worst thing that will happen to his property is that it will have a nice house on it and be worth a lot more!
You bring up a good point about a deal like this not working in a hot market, but don't automatically discount the idea. It still will work in a hot market but you might have to adjust your thinking a bit. Instead of simply offering today's market price, you might have to offer next years market price to induce the seller to accept the terms.
On the other hand, if you're truly in a hot market, it makes it that much easier to get an investor to fund a deal that you want done because they know the deal will sell when completed. In that scenario, the investor will just have to front the land purchase money too, but the returns will justify it, just like they ALWAYS have to.
blue
I'd say the land owner gave you a pretty sweet deal. I want to know what compelled him to do such a thing.
I for got to add this thought to the last reply.
I've called on a lot of properties for sale that were overpriced or in some way a bad deal. I'd venture to say that I could probably get more than 50% of these types of sellers to agree to a spec deal on their property using the terms I described above. I'll certainly know whether I can back up that claim in the near future because we just ordered a bunch of signs and we ordered them so we could start planting them on vacant properties that have been sitting idle and for sale for the last year. I intend to plant as many "will build to suit" signs as possible in the coming months. We'll be optioning the properties. The buy clause will either be the lc deal, or a cash buyout. Either way, I'm only putting up one dollar for the right to plant our signs.
blue
Might ought to read Boss Hog's Spec House From Hell thread.
"All men's miseries derive from not being able to sit in a quiet room alone." Pascal