Help Analyzing a Deal

[Jorge A Amaya]

Hello BP!!

I was approached by an Denver RE Broker/Investor asking to partner up on a deal. Here is the info and options he gave me:

Under Contract at $675,000 - Currently a 1 story home w/basement. 

(he's getting a construction/Reno loan @9% int. I believe) There are many things to hammer out still.

Reno Costs: $350,000 - $475,000 (Estimated by Construction Cm.) Estimated completion is 8 to 10 months. Possibly a year.

Estimated Resale: $1,310,000 (confirmed by an appraisal) Could be more/less depending on where market will be in 8 to 10 months.

The project entails remodeling the 1st floor and adding a 2nd floor to increase sq footage. REI showed me comps for similar properties anywhere in the 1.25m to 1.7M. One of reasons why he needs someone is because the lender is asking for more money down/experience than what had originally agreed, neither him or his partner have the additional funds to close and he can tentatively lose his earnest money.

He's asking me to:

Option 1) Lend him 100k HML with a 10% interest plus a 10% of the net profit

Option 2) Partnering up on the deal and investing 50K to 100k and splitting the profits (we have not discussed how to split the profits) 

In either option, I would be the treasurer, keeping the books, writing checks, etc...

Question

1) How can I protect myself (having a second on the property?) if I chose the HML option.

2) If I Chose to partner up, should my name be on the deed? I don't think they need me on the loan note in order to qualify. Again, many things need to be discussed still.

He would oversee the construction, handle contractors, he would also be living in the property while it's being renovated. 

Considering that we have not discussed how we would split the profits, what would be a reasonable amount

Any thoughts or comments are greatly appreciated.

Thanks in advance for your input!!

[Bill S.]

@Jorge A Amaya  so the question on these types of deals is not how to split up the profits but how to handle losses. How do you handle it if things go bad? What if they get half done and run out of money or costs go way up and they need more money? For me having a note on the property would be best. Part of the ownership means you could get drug into their financial mess if it goes badly. 

As a word of caution, the reason the bank is requiring more money is because the market is slowing. That price point currently has the longest time on market in our market. The time frame and scope of this project is challenging to say the least. A scrape and new home would be easier, and quicker. 

Finally, if you do a hard money loan. Does your friend or his partner own any other real estate that has equity? If so would they be willing to cross collateralize? 

The best approach is to protect yourself and your money. Make sure the structure of the deal has you making money if they are successful of if they are not. That is the approach of a true hard money loan.