Give Seller some equity now rest after flipping

[AC Cooley]

Hi,

I have a private lender that is willing to loan up to $150K for purchase and rehab. I found a deal for a single-family in a Chicago upper middle class neighborhood where the purchase would be $140K and rehab would be $80K and conservative ARV is $350K. High end comps are $400K. The rehab is that high because for the neighborhood the rehab would have to be relatively high-end.

The mortgage balance is $90K. I am trying to think how I can structure the deal where I can give the seller $10-$20K of his equity now and the rest after I flip the property. I know no money down is best but for a deal like this I see no reason not to put some money down especially if I have a private lender.

Should I take over the $90K mortgage subject-to with $10K down with a $40K promissory note due in 12-18months?

Thanks in advance for your replies

[Bill Gulley]

welcome to BP, AC! I see you did not put your location in your profile, so when you ask questions, we have no idea what state you are in. It matters as state laws disctate what kind of deals you can do.

If it is allowed, a sub-2 transaction or a contract for deed can provide the interest conveyed to allow a buyer to do repairs. A lease-option will not without another contract arrangement, like to a construction company.

If you are working with a CG, you can contract with him and then get a rehab contract from the owner. You can assume mortgage payments in the rehab contract. A good rehab contract will include a lien for the total amount due and a note for the amount as well. You can even have a quit claim deed in escrow to ensure the power of sale in the event the seller skips out on you (or dies). I have also used POAs (Specific Power of Attorney to sell the property)This way the seller sells A to C and your rehab contract is paid off at settlement. No, mess, no fuss, no seasoning issues in the sale to C.

What I like about the last strategy is that I have no ownership responsibilities, no insurance requirement, no tax liability during the rehab period, no liability if someone gets hurt (except as an employer with subs depending on the Rehab Contract). There is no due on sale issue with any lender. It's also easily understood, you fix it as a contractor and sell it and I pay you a fixed amount, I, as the seller keep what's left over. It's also cleaner for your Realtors from the lsiting side.

Good luck