Partnering on a flip

[TJ Thompson]

I'm planning to partner with a local REI on a home flip. As we've worked it out so far, here's how it stands t play out:

1. She found the house, presented the comps, and proposed the repairs which I've agreed to.
2. I pay the full purchase price of the house and half the repair fees.
3. She pays the 2nd half of repair fees.
4. She closes on the house with my money (because that was the initial deal) and then turns over the note and deed of trust to me. She legally owns the house, but I own the note and it's secured against the deed.

Is this the right way to handle this? Anything I should look out for? I guess I should get the note when I first lend the money, right? But it won't be secured until she closes on the house, right? I trust her, but let's just assume I'm wrong, what's my exposure? In general, what else should I look out for?

One other thing I was thinking about is that the money I loan for the repair work will be unsecured. Should I do it "pay as you go" so there's no chance of that money disappearing?

Thanks!

[Jon Holdman]

You should insist the closing be done with a title company. You send your money for the purchase to the title company. They do the paperwork and distribute the money. They generate a deed with the seller as grantor and your partner as the grantee. They also generate a deed of trust with your partner as the grantor (borrower) and you as the grantee (lender). Both get filed with the county. You probably want your lawyer (independent of your partner) review both the note and the deed of trust. You definitely want to review these before the closing.

In your position, I would insist she bring in her chunk of money to closing. The way you do this is to include the full amount of the repairs as a "repair escrow" item on the HUD-1. You bring in the purchase price plus half the repairs, she brings in the other half. You instruct the title company to issue one or more checks made out to her for the amount of the repairs. Those checks are given to you, though, not her. She does the work and once you inspect and approve it, you hand over the checks.

Typically, this would be at least two checks, but could be more than that. You might consider giving her some small portion (no more than one third) of the money up front. But I would not do this for the first deal.

By having her put her money in up front, you reduce the risk of her disappearing with your money and leaving you holding the bag on a house that's worth less than what you put in.