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

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

Steven Blanton
Hoschton, GA · Member since 2011 · 22 posts · 1 vote

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!!

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Randy E.
Rental Property Investor · Durham, NC · Member since 2014 · 1k+ posts · 1k+ votes
10y
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.

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  • Randy E.
    Rental Property Investor · Durham, NC · Member since 2014 · 1k+ posts · 1k+ votes
    10y
    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.

    8Reply
  • Steven Blanton
    OP
    Hoschton, GA · Member since 2011 · 22 posts · 1 vote
    10y

    Thanks for the Randy!  I understand where you are coming from and that is where he is coming from as well.  Still, his terms are very unreasonable to me.  And no, i didn't let him know I was angry at his sudden change in heart.  Bottom line is, this guy is my twin brother and he is just sticking it to me because he is ultra competitive, doesn't like the idea of me making more than him in a deal that he funds, and even more simply put...because he can.  

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Steven Blanton   agree with Randy... this is totally reasonable ... your being extremely short sighted... not sure why we have this I want it all mentality NOW. 

    after 5 deals your partners.. ever heard of apprenticeship... and working your way up.

    you pass on this and Earn nothing. and if you could get a HML you would do it.. so here you sit make a post like this and look for others to jump on your band wagon.. someone =with no money and is just going to find the deal and do the work is DIME a dozen frankly

    take the deal get in the game quit worrying about it.  Many would do this for free just for the experience 

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  • Steven Blanton
    OP
    Hoschton, GA · Member since 2011 · 22 posts · 1 vote
    10y

    Jay,

    I appreciate your frankness.  Really I do.  I probably should be willing to be more flexible in this situation.  I look at it differently since the PML is my twin brother who knows my integrity, tenacity, and hustle.  I do believe my time is very valuable though along with my ability to find the deals, negotiate the deals, work with the GC's, market the property for sale.  

    I can easily qualify for an HML, have outstanding credit, and even some money in the bank with a great full time job that pays well. He just has a lot more! I'm willing to put some money in to marketing and finding deals, and overseeing the rehab so I think 80-20 is not a good deal for me. I sincerely thank you for your thoughts though.

    0Reply
  • Stone Timber
    Investor · Chicago, IL · Member since 2015 · 35 posts · 12 votes
    10y

    Dude.......

    Going to make this as simple as possible: IT IS NOT WORTH THE HASSLE!!  And this coming from your twin brother???

    Walk away, go the HML route, or look for a smaller deal. There will be loads of other deals, this one just isn't yours.

    1Reply
  • Dev HornPro Member
    Flipper/Rehabber · Arlington, TX · Member since 2013 · 1k+ posts · 2k+ votes
    10y

    Most PMLs and HMLs do not loan 100% of the capital needed for the project.  If your bro is willing to do that, this graduated deal could really work in your favor.

    HML/PML lenders often charge more than 10% and they'll add 2 points and a loan origination fee, so that is really HARD money.

    If you can get 100% from your bro at 10% and no points or fees, that is SOFT money.  I think you should consider his offer, perhaps come back with a little more aggressive ramp down to 50/50 as a negotiating position, but he is in the catbird seat on this.

    Now, I won't even bring up the challenges you might encounter when doing business with family members... =)

    5Reply
  • Jason V.
    Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes
    10y

    @Steven Blanton - It's his money, and he can do whatever he feels like with it, even if that means filling a silo and sledding down it for fun. 

    Don't like the terms of a deal? OK - nothing to get mad about, just go find a better one. 

    I get the impression you think he should "help you out" just because he's your brother and allegedly doing well for himself. This is just my experience, but I rarely find myself wanting to do business with people like that. Besides, if you're offering such a great deal, other folks with money will be jumping at the chance to do business with you, and then you can rub your Brother's face in it. Try posting on the Marketplace section here, and you might be surprised.

    I try very hard not to do business with friends or family, because I want them to stay friends and family. I've worked with Brothers who ran a busines together, but refused to talk to each other. Fathers who disowned sons because of how they ran the business once they took over. All sorts of ugly, ugly stuff - and that's just not worth risking to me.

    3Reply
  • Dave Hurt
    SC · Member since 2014 · 303 posts · 183 votes
    10y

    I was just about to mention what @Dev Horn did...if you two are hyper competitive and constantly butt heads...the terms of the deal notwithstanding, you may want to think LONG and HARD about doing business with the twin brother!  Good luck either way!

    2Reply
  • John Stovall
    Americus, GA · Member since 2014 · 22 posts · 18 votes
    10y

    My guess is that the average gain on a "newbie" flip is close to zero. Even though I rehab for long-term rent, I'm so much better on my 22nd one than my first one! If I was flipping, I would guess that I would have broke even on the first one and made my higher profit on the last one. I now know, for example, the types of homes I can do well, and those I don't do well. 

    So let's say you're like me, and on your first 5 homes your profit is $1000, $4000, $10,000, $15000, $16,000. (This is truly what I would think I would make on first ones if I had flipped instead of rented.) In this scenario, you would actually do better with your brother's deal than if he loaned you money at 10%. And at some time in the future, you should have the capital to go your own way. (Disclaimer: I actually made $20,000 on my first flip before I started doing this seriously. Now, I understand what dumb luck it was. I now realize the people who purchased it probably overpaid because they are trying to sell it now at the same price with no luck.)

    Of course, I would be thinking like you if I started today, but with hindsight, I think I would take the deal.  I'm not sure I would fund someone new to the business at 100% -- it's very rare --   and you may be MUCH better at me in the beginning. I think several of the guys are telling you that we wish someone would have funded us, and taken the risk, when we started just to gain the experience.  AND, I think they are also telling you that if there is a better deal out there, take it.                             

    2Reply
  • Jeremiah H.
    Investor · Tavares, FL · Member since 2015 · 110 posts · 24 votes
    10y
    What stops him from stopping the deal or changing the terms once you get to 50/50 split?
    0Reply
  • Richard Dunlop
    Investor · Detroit, MI · Member since 2014 · 755 posts · 462 votes
    10y

    Just have someone else fund your first four deals.

    If you can't find a better funder then maybe your risk reward ratio is skewed in your favor and needs to be adjusted till the person with the money agrees with your evaluation.

    Pledge something of value to alleviate the risk to the lender.  If the amount of confidence you have in your abilities won't let you risk your personal residence why would an investor risk his money?  

    1Reply
  • Steven Blanton
    OP
    Hoschton, GA · Member since 2011 · 22 posts · 1 vote
    10y

    OK.  thanks everyone. I had just gotten off the phone with my brother when I made the post and was just a little annoyed that he was sold on my initial presentation and then flipped it on me. I think I've heard enough to realize I'm probably not as objective as I should be.  I'll take your inputs going forward and make the best of what I've got now(which aint that bad) and turn it into something better.   I guess I was a little annoyed that I felt like my own brother was getting the better end of the deal.  If you have siblings you know what I mean. 

    Happy investing!

    0Reply
  • Gloria Mirza
    Real Estate Agent · San Jose, CA · Member since 2015 · 172 posts · 66 votes
    10y

    If you have some money in the bank, my recommendation is to put some skin in the game and perhaps pay for 10 or 20% down and guarantee him to be paid first when the house sells or is refi. That reduces his risk which might translate to better terms. If that doesn't work my recommendation would be to find the best terms you can with a HML, present that to him and see if he can beat those terms. If he does then great, if he doesn't, go with the HML.

    0Reply
  • Jonathan Makovsky
    Investor · Fairfield-New Haven-Hartford County, CT · Member since 2013 · 825 posts · 413 votes
    10y

    @Steven Blanton I am going to echo a lot of the previous thoughts. My comments are also on the presumption that I will not opine on your personal/familial situation (I don't know your family dynamics) and regardless of family or not, you must strip the emotion out of the deal.

    Think about your question in basic Economics 101: What is the supply (capital partners) out in the marketplace for the demand of your deal? 

    If you have a great deal with tons of demand you can start dictating the terms and tell a lender/partner to pound sand because they are out of line from the other deals you have. 

    However, if the demand for your deals are low/non-existent because you're inexperienced (nothing wrong with that - we all started somewhere) and have little to no cash to put in the deal (again we all started somewhere) then you might need to take what you are given and start building from there.

    If after a couple of deals you prove that you have a great skill-set of finding deals, operating them successfully, and hitting great numbers you can (in other words) tell your brother to get lost with those numbers he's offering. But first, you need to have demand for your deals and unfortunately in this game you almost need experience to be trusted, so this deal might be best through your brother (who let's not forget is seemingly taking ALL the risk).

    0Reply
  • Account Closed
    Real Estate Agent · Richardson, TX · Member since 2014 · 511 posts · 161 votes
    10y

    @Steven Blanton Have you considered going to your local REIA meetings and finding an experienced investor? You might be able to get better terms and you shouldn't have any problems financing the project if it's a great deal.

    0Reply
  • Steven Blanton
    OP
    Hoschton, GA · Member since 2011 · 22 posts · 1 vote
    10y

    Daniel, Yes I am in the process now of attending several meetings over the next month or so.  Have already been recently as well. Thanks for asking.

    0Reply
  • Bonnie Rakes
    Investor · Ponca City, OK · Member since 2016 · 46 posts · 15 votes
    10y
    Originally posted by @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.

    GREAT COMMENTS... 100%... other factor, i would count on cash out loans at ARV... sounds like those late night marketers... not to say they don't have some really beneficial ideas, you have to evaluate them by today's markets and realities.

    0Reply
  • Bonnie Rakes
    Investor · Ponca City, OK · Member since 2016 · 46 posts · 15 votes
    10y

    what i find to be a good DIP YOUR TOES venture, if getting property under contract to wholesale. As an investor, I worked with a newbie... since he had no money to work with, he would work an agreement for a fixed term to buy a property. He paid about five hundred option payment to a private seller for an option contract. This means he would agree to buy in that time frame or lose his option money. His option contract indicated that it was "assignable". He found an under market priced property, got the option, and sold the option contract to us for $2000. He made $1500 on $500... 300% return. We still got a good deal on a rental property.

    0Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y

    @Steven Blanton - This is risk premium. No one but your bro is going to go to 100% LTV on a flip, period.

    Here's our friend investopedia, almost textbook line-for-line describing the terms you are being offered by your brother: 

    > 'Risk Premium"

    > The return in excess of the risk-free rate of return [this is the money in your brother's checking/savings account] that an investment [lending you money is an investment] is expected to yield. An asset's [the note your brother would hold, secured by the flip that you may botch, is an "asset"] risk premium is a form of compensation for investors who tolerate the extra risk [investing in flips at all is a risk, going to 100% LTV is a HUUUGE risk] - compared to that of a risk-free asset - in a given investment.

    Most people do not have a lot of assets in literally "risk free" places like a federally insured savings account earning 0.1%/yr. The fact that your brother has MOST of his assets there means that we should EXPECT him to have a higher risk premium charge than ANYONE that has money in the stock market, or even gov't bonds.

    This is the same thing that you as a flipper have, btw. You're not going to take the huge risk that is a flip unless you see huge upside potential. That difference between what you put into it and what you expect to sell for is your risk premium - what you are charging your eventual buyer for that big risk you took.

    I will also add this: everyone here thinking of real estate investments thinks they are an investor. The person lending you money does not think of themselves as a lender, they are only lenders from YOUR point of view. From THEIR point of view, they are the "real" real estate investors. You folks are taking on projects, your lender is literally making an investment with a projected rate of return, not too different than buying a government bond. As soon as I hang up the phone with you, my mortgage buddies and I instantly start describing the entities you think of as "lenders" as "investors." 

    > "Hey Joe, know of an investor that'll do jumbo 80/10/10 with a 5/1 ARM first mortgage, primary residence, SFR, 780 FICO and 18 months PITI reserves?" .... "Ya, XYZ Bank will take that investment all day long! Probably at like 3.75% though even though it's a 5/1 ARM. Subordinate financing for them is 250 basis points."

    Pop quiz hotshots: the difference in rate between a long term gov't bond (lending money to gov't for a rate of return) and your 30 year fixed rate mortgage on your primary residence (lending your family money for a rate of return)... what's one term for that? You guessed it, we call it "risk premium." It's more likely that you won't pay than Uncle Sam, so the investor is going to charge extra to invest in you instead of Uncle Sam.

    1Reply
  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    10y

    @Steven Blanton He has all risk and you have no skin in the game. It doesn't really matter if he is your brother or not. It is your first deal, you have no track record, etc, noone can verify that you can deliver. If I am gambling with a 100% finance, I would not pay a dime, however, I can give you what you need to progress, a track record, experience, and a chance to earn on the next one. By the 3rd deal, you will be able to pick and shop around with someone actually listening. On top of that, if you go 80/20, you can eliminate interest, it will be an all cash transaction which eliminates all holding and interest, and probably some acquisition costs. Why would you refi and give him cash back? You think you qualify for an HML, can get at an expensive rate, can perform and deliver rehab without stepping on a hole, can sell, and still earn more than "8k", why are you here posting? Take the leap! Now it is your money, therefore your rules.

    The more money you have, the more money you want, your brother is no different. I'd rather let it sit on the bank and lose nothing than gamble it unsafely.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    If you have some cash why not just flip paper?

    Forget the risk of rehabbing and selling. If for instance you spend months rehabbing a property to have to split 50/50 and sell off to deal with a home buyer possibly and TRID then making 20k in 3 months time might not be worth it.

    Think how many contracts at 10k to 15k profit per shot you could turn over in the same time.

    A lot of investors have moved away from rehabbing. Too many newbies in the starter rehab and sell space overpaying. That has made margins go down from 25k to maybe 10k in some markets. Investors then with larger cash start renovating move up home or they just go to buying and selling contracts or properties right away with doing no work to them.

    It's all about how hard you want to work for the return involved. When you get enough money you can do what you what when you want to. 

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  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Steven Blanton, I see you have calmed down somewhat. If you really believe you have the skills to obtain a $40k profit on a flip (if you had "free" money), it's time to hone your ANALYTICAL skills to calculate your profit against the cheapest Lender costs you can find. Do a real-life Lender research. How much CAN you borrow? What ARE their Interest Rates? How much "skin" CAN you put in the game?

    THEN, offer those same terms to your Brother (including him knowing how much YOU are prepared to spend of your own money) - ask him how that compares with what he will get out of his own Bank for the same dollar deposit - and if he won't come at it, just prove him wrong - by succeeding in your project (with your other Lender)! Then, do it again. And Again. 

    Will he then come to you, asking to lend YOU money? If so, say NO! Cheers...

    1Reply
  • Joel Florek
    Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes
    10y

    @Steven Blanton From my experience, anyone shelling out their own money to someone who doesn't have much of a track record will want to take everything and have you sign on the dotted line in blood. Once you have a track record of successful deals you have the ability to present a portfolio of past deals and people will be opening their wallets to hand you money at 10%, 8%, maybe even 7% or 6% if there are other benefits.

    I ran into a similar situation as I was trying to buy a 16 unit apartment building. I really only had the ability to come in with $10k of my own cash. But I found the deal, did the evaluation, and setup a relationship with banks for lending on the property, just needed the down payment. I was even going to be responsible for all the maintenance and management of the property, but would get paid a fee for that. I worked with a number of potential investors and all wanted to take 80% or more of the deal from me. I totally understand, and while they were excited about the deal, 10% or 12% preferred return and 50% of profits weren't enough for them. Needless to say I didn't give up, found a way to work with the owners on a seller financed wrap and am still able to close the deal yet I get all the profits. The seller financed portion needed for the down payment was at terms of 2% for 10 years with a 3 year balloon. Not long amortization, but low interest rate for quick equity build up.

    I kept good relationships and these potential investors now know that I will scrap to make a deal happen. Instantly they came back with responses saying to keep them in mind for the next deal I find and that they would want to hear what I have to offer them. While every investor will always want as much as they can get, if you have a track record of success the terms will only get better and better for each deal you go after.

    Good luck, make the deal happen one way or another! You may want to try a preferred dividend with a 50% of profits clause to allow you to get better terms if its a big win and protect him to get all or most of the winnings if its not that good of a deal in the end. There are many ways to play this game!

    0Reply
  • Adrien C.
    Property Manager · Griffith, IN · Member since 2015 · 1k+ posts · 913 votes
    10y

    I was in a similar situation when I started my business and asked for a PML from my parents. It wasn't much ($35K) and at first they were on board. However, when it came time to send the check, things changed. For a dozen reasons (mainly lending money to siblings and hassling to get it back; next time I'll be first in line and not 4th), they changed their mind. I didn't worry about it. I figured out a way to start my business without their money. But I did make an attentional point to talk about my successes. Once they saw that I was doing well and making money, their views and assessment to the risk changed. Now I make them money too though the interest I pay them. 

    0Reply
  • Drew Shirley
    Attorney / Multifamily Investor · Houston, TX · Member since 2009 · 173 posts · 136 votes
    10y

    If you aren't putting any money in the deal at all, it's going to be tough to find a 50/50 split right out of the gate.

    What I usually see in terms of splits is a preferred return to the capital investors (7-9%) and THEN a 50/50 split of the remaining profits. 

    Or

    A 3% acquisition fee to the syndicator, then a 70/30 split of profits (70% to the capital investors). 

    And 80/20 is certainly not unheard of, although I wouldn't do a deal for 20% unless it was a monster.

    0Reply
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