Friendly private lender

[Anthony Melillo]

New to biggerpockets. I am working with a neighbor friend who is lending 2/3 of the money to purchase my first property with cash. I plan on living in this single family home for 4-6 years then selling or possibly renting. I recently submitted an offer of $26,600 on a foreclosure and waiting for response. If accepted the deal would go as follows. I give my investor $10,000 towards purchase. Investor buys 25% of purchase price as "equity" $6,650. The total I owe investor is $9,950, which we agreed upon a 10 year note at 6.5%. The property needs $15k in rehab, investor pays 25% of rehab costs and I pay 75% out of pocket. I am doing all rehab myself. When the house is sold my investor gets 25% of the profit. I would appreciate any input on this deal. Cost of this property after repair totals at high end $43k (40 square foot) on 1064 sf house. Comparable houses in area being sold at low end of (50 sf) = selling price of this property at $53,200 low end. Any advice, comments or input is welcome. Good day

[Jon Holdman]

If you're $10K is going to the purchase, there is absolutely no need to "give that to the investor". That money, along with the investors money, goes to the title company (or attorney, if deals are closed by attorneys in your area.)

So the idea is you put $10K into the deal. The investor puts the rest. If you buy for $26,600 the total purchase price is going to be something like $29,000 +/- with closing, upfront, and pre-paid costs. So, the investor's putting in $19,000, I think. The investor retains 25% ownership, which amount to $7,250 of the total amount. That means you own the investor $11,750 by my math. I can't see how to come up with your number of $6650 and $9950.

Given that 25% ownership, I see the 75/25 split on rehab costs.

Honestly I don't know if this violate any regulations or not. Perhaps @Bill Gulley will comment. The investor is loaning you money to buy the house, simple as that. They're also retaining partial ownership. All that should be formalized in the documents for the house. Otherwise, problems can arise down the road. Does the investor actually own 25% of the property or do they have a "shared appreciation mortgage" that will given them the extra payoff when you sell? What if you decide not to sell, how does the investor get paid off? What if you die? What if the investor dies? Gets married or divorced? What if you do a shoddy job of the repairs and the investor decides they no longer want to give you money to do them? What if you do an excessively great job and spend a lot of money unnecessarily? How does your labor factor into the deal?