Help---PML wants 80%-20% split!!!

[Steven Blanton]

Hi,

I am a new investor and actively looking for deals. I have researched some of the HML's and didnt' really like to percentage of "skin in the game" that is required upfront. So, I decided to go the PML route.

I approached a close relative as a PML. He is single and makes well over $300K/yr, lives like he makes $30K/yr, and has a pile of cash in the bank. He doesn't invest in REI, stocks, bonds, etc. Just keeps his money in the bank. I initially approached him and sold him on the idea of loaning me the purchase price plus rehab costs at 10% interest for 6 months with no money down. During this time I would rehab and sell the house OR get a convential loan based on ARV and cash him out. He was very open to that idea and I was super excited.

However, he called me back within an hour and said that it's not fair that I would end up making more money on any deal that I used his funds for.  So, he now says the only way he will do business with me is if he gets 80% of profits on the 1st deal, 70% on the 2nd, 60% on the 3rd, 55% on 4th, and 50/50 on the 5th deal from then on.  

I tried to explain that that is not typically how PML's or partnerships work in REI. I reminded him he isn't making anything now and what is wrong with making 10% on his money and that I am doing all the leg work marketing, negotiating, rehabbing, project managing, and selling. Worst case it doesn't sell in 6 months and get his money back plus 10% when I cash him out with a refi. He doesn't seem to care since he knows he has the upper hand and requiring no skin in the game.

I am pretty PO'd to say the least.  Is there anything I can come back with to get the negotiations more in my favor.  I mean I don't want to but my hump for 3-4 months on a rehab and sell it for a $40K profit just to see $8K go into my pocket while $32K goes into his just for loaning the money that is backed by a secure investment.  Any thoughts please???  Thank you!!

[Randy E.]

Originally posted by @Steven Blanton:

  I reminded him he isn't making anything now and what is wrong with making 10% on his money and that I am doing all the leg work marketing, negotiating, rehabbing, project managing, and selling.  Worst case it doesn't sell in 6 months and get his money back plus 10% when I cash him out with a refi.   

...

I am pretty PO'd to say the least. !

 Where should I start?

First, he may not be making "anything" now, but he has zero chance of losing anything.  However, if he decides to fund an inexperienced real estate flipper's very first flip, he stands to lose tens of thousands of dollars.  The worst case scenario isn't that he gets back his investment money in six months with no profit.  The worst case scenario is you purchase a house for too high a price, end up hiring the wrong contractors, they rip you off by overcharging, insisting upon advances and by doing shoddy work -- and you can't refi in even nine months because the house is still a construction zone -- and you ask him for yet more money so you can finish and try to get him back something.  I'm not saying that will happen.  I'm saying it could happen.

Don't be PO'd.  If you display any sort of attitude to him, he may take that as a sign you're not mature enough to undertake a venture of this sort and magnitude.  At least, not with his money.

If you can't get him to agree to terms that make you happy, search for another source of funding.  His money isn't the only money in the world.

Good luck.