Found a partner, Good Deal?

Question

So I found somebody who is an experienced real estate investor who needs somebody with some credit.  She has a short sale under contract for 79k and another investor to fund 10% down and rehab costs.  My role would be to use my credit to get the property in my name.  I would not be required to put down any cash.  She wants a 2k assignment fee and will partner on the deal.  Here is how it breaks down.

1425SF house, 3/2/1
79k+2k(assignment fee) + 12k(rehab) = 93k
Quick sale price of 118k; comps at 125k
Potential Profit of 25k (Not including holding costs, if any)

Money Partner gets 20% = 5k
Flipper gets 40% = 10k
I get 40% = 10k

Does this sound like something I should do?  What are the risks involved for me?

Thanks,
Mike

Account Closed · Answer

If I understand this right, she was going to let you buy the house for at leasst $10,000 over what she had it under contract for, charge you an assignment fee on top of that, and she's going to take 1/2 the profits besides.

I think that personally, I would have trust issues with her.

It's fine when investors make every penny that they can, but as far as I am concerned, it is not OK to screw every penny that you can out of your partners. Partnership is supposed to be a trust relationship, and I am not seeing the trust in this deal.

Either find a deal like this one on your own, or buy the assignment outright from her and then stay away from her.

If you are a beginner and unsure of what you are doing, I suggest that you finsd a partner who will take better care of you.

It's fine to give up some of the profit to get some help with the first deal, but the experienced guys here are saying they aren't interested in a deal like that one. If it is not a good deal for us, perhaps you should examine more carefully what you are getting out of it in exchange for what you are putting into it.

I think the deal is thin. One bad calculation can reduce the profit substatially, and the profit is being split, so you are taking all the financial risk for not a lot of return.

Mike Cartmell · Answer

She was not under contract for 70k, She was under contract for 79k but could not find anybody to assign it to so the bank dropped there price.

Mike Cartmell · Answer

So the price has been reduced to 70k now.  And we are going with hard money to finance the 10% down and rehab costs. The money would be received up front before the purchase of the house.  I've watched this lady flip several homes and she has done a good job and flipped in less then 2 months on them.  She has never used a realtor to sell any of them.  So there is no commission.  She markets the heck out of these homes from day 1. This is how it breaks down.

70k purchase price
4k closing costs
15k rehab
4 points to hard money of $1,040 (4k+15k+7k)*4%
90K Total Invested

118k Sale Price

Potential Profit split 50/50 is 28k

What am I missing or confused about?  Please talk me out of a deal that might be a mistake.

Heather Pelletier · Answer

Looks like the experts on bigger pockets saved another newbie from making another mistake.   :superman:  You guys are great for taking the time to share your knowledge.

Heather

Mike Cartmell · Answer

Thanks guys.  Thats why I came here first.

Jon Holdman · Answer

So, notwithstanding you being the credit partner, this is a very thin deal.  At 93K vs. $118 sales price, you're at 79%.  If you stay at 70% for purchase plus rehab (and, in your case, the "assignment fee"), your potential profit will be about 10-15% of the sales price.  Figure closer to the 10%, but maybe you're getting a conventional mortgage.  So, if everything goes right, maybe $12-15K profit is it on this deal.  No way is there $25K here to split up.  That's "flip this house" math.  You're omitting all the closing costs when you buy, holding costs (go price a "vacant house" policy), and closing costs when you sell.

Rest assumed that someone will have to come up with several thousand additional bucks before you get this into sellable shape.  So, the three of you end up with $97-$100K invested, and net $108K if you sell it at $118K with no seller concessions.

If it really structured as a split of the profit, then maybe you get $5K.  Watch out for it being structured so the others get a specific amount, which could leave you on the short end.

The worst that could happen is that they start the rehab, then walk away.  The "money guy" puts a lien on the property for the materials and labor he's invested for the rehab.  Maybe a second lien for the down payment.  You end up owning a house that's worth less than $79K because its been ripped to shreads, buy has 93K of liens on it.

This is a very weak deal.  Find a better deal and one without all this monkey business.

Mike Cartmell · Answer

Forgot to mention I have 26k in reserves.  She is a full time flipper so does not qualify without a steady income.  The money partner I don't know much about.  But I would definitely find out before doing the deal.

Richard Warren · Answer

What could go wrong?  Quite a bit.  The deal doesn’t work out as expected.  The property goes into foreclosure and your credit is trashed for the next 7 years.  You need to ask yourself why they need your credit, why isn’t theirs any good?  That’s a red flag.  Is a $10k gain worth the risk of ruining your credit?  It may not happen that way, but it could.

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