Real estate partnership advice

[Brandy Carrero]

Hi All,

My partner and I recently purchased a home, acquisition was 130k after closing. He put about 90k into the home in renovations. It gets a little tricky because my partner is also my boyfriend. He was expecting to get his 90k back after refi. He did not, and only received 46k from "our" refi on "our" home. He believes I still owe him 45k to receive the 90k he put into the house to make it "equal". Technically, if we used a HML for acquisition and I give him the 90k back in renovations - how is that equal? He basically didn't put any money in the house if I pay him all that back. But he believes that if we would've paid 220k for the house after renovations - which is the 130k + 90k then we would square out. But at that point, I'd be paying a higher mortgage instead of him taking my proceeds from our business.

What should I do?

Whom should I talk to?

We can’t seem to get on the same page so I’ll need professional/expert advice

Thanks!

[Scott Krone]

@Brandy Carrero Sounds like a difficult situation. It is not clear to me if this is home was purchased for "business", "personal" or perhaps "both". If it is a business home, than it is important to understand the business structure, roles and responsibilities, etc. When there is a "capital partner" and a "doer partner", than I suggest you assign a value for each. Time is money and money is time/value. Both have value and need to be accounted for. Either way, I typically don't suggest funding a property with 100% debt - especially HML. Upon sale, both parties are then compensated accordingly.

If this is a residence, again what where the expectations.  If the goal was neither have cash in the deal, then who was responsible for mortgage payments, and other expenses.  So there is the initial costs and then the monthly "cash flow" expenses.  If you expected him to have all his cash in the deal, and you make payments, what was the projected payment for his cash?  If he expected to get all his cash out, why are you paying all the bills.

If both, then both situations needed to be worked out prior to starting.  Either way, I think it is important to work out the structure of a partnership before you enter one, so as to address both parties goals, challenges, and expectations.

[Brandy Carrero]

@Scott Krone thank you so much for your reply! This helps a lot. Just to clarify, this house was purchased as our first home. You’re absolutely right, we should have worked out the details in the beginning! This was our first partnership activity and there are a ton of lessons learned from this scenario. At this point, I’m trying to understand what’s fair for our situation. I thought giving him half or allowing him to keep the 48k from the refi would be sufficient. But he’s seeking the other 40k that he put into the house in renovations. All he cares about is getting his money back and we just split the mortgage and bills in half but that just doesn’t seem fair to me. Now we are working on a duplex and he expects me to pay him back after the refi on that property (this is a business one) 

[Scott Krone]

@Brandy Carrero I will continue to respond in a public forum for the benefit of others seeking to have real estate partners. Whenever we enter a new venture, we look at the capital stack. This is the Sources and Uses. The Uses outline all the expenses. The Sources are where the money is coming from to pay the expenses. It is not Income, it is typically a combination of "equity" (CIF - Cash in Fist) and "debt" (loan - HML, PML, traditional bank). A partnership needs to identify who is doing what in both the Uses and Sources. Who is doing the work to complete the project, and who is providing the cash, credit line or guarantee. They each have a value.

A person doing the work typically gets paid - right?  A broker who finds the property, makes a commission.  A GC gets paid a fee for the construction or administering the construction.  Equity gets paid with a rate of return on investment.  Debt gets paid an interest rate.

So, I would first suggest looking at those to determine who did/does what, and the value associated with those.  Your comment, "I thought giving him half or allowing him to keep" says to me your expectations don't match a traditional partnership.  His having money down is worth a value.  It is not a matter of giving, it is a matter of costs.  It costs him to have money "tied" up, if he is not using it to make more money (unless he gets a higher value of the profit upon the sale).  If he is paying half the expenses in addition to his equity tied up, where those the expectations going into the venture?

The question of "fairness" is related to value.  I can't advise if it is "fair or not" because only the two of you know what work was done to increase the value, what the value of that work is, and what terms you have agreed to split the profits.

If it was me, and I had all the equity in the deal, pay half of the expenses, and then receive the same split on profits - I would not feel that is an equitable terms.

[Ian Walsh]

These are tough situations to deal with.  If there isn't anything in writing, you will have to come to an agreement and then likely put that in writing. 

[Odie Ayaga]

@Brandy Carrero sorry you find yourself in this situation. Seeing as this was purchased as a home for the two of you it's difficult to really say what you should or shouldn't do as an outsider. Best I can say is what was the perceived expectation going in regarding the repairs? Did you get the notion that he was paying for repairs, but that he would be reimbursed in some form down the road? Were you under the impression that he was funding repairs as a part of your commitment to each other and that it didn't matter if he ever got the money back? Is this meant to be a live-in flip such that he could get his repair money back at sale? Those are where I would start to consider the situation. You should definitely determine between the two of you if this is ultimately a business or personal transaction because if he's insistent on getting his money back now that sounds to me like he is looking at it as a business transaction and if you are looking at it as a personal transaction that could be a considerable  obstacle for your relationship which may be the main thing to consider.

[Brandy Carrero]

@Odie Ayaga you hit the nail right on the nose! This is exactly what happened! So I’ll give you the back story. Originally he purchased this home as a commitment to us. He did everything without me (as a surprise). Which I’m completely thankful for. The issue here is originally he was expecting his money in return when we refi. This home was originally a foreclosure that he purchased and we would live in. His expectations of this home was that he would buy the house, renovate it with his money and once we refi he can get his money in return and we would pay the mortgage on that amount. Unfortunately he did not run the comps as he should have and put too much money into the house. That was his mistake. Again, I was not originally part of this deal but it is our primary residence. Now that things did not work out as planned, he is expecting me to pay him back the money he originally put into this house out of future projects we are working on. I don’t think that’s fair that I have to pay for his mistakes. We pay 50/50 on the mortgage, our bills, everything and now I “owe” him the money that he put into this house since his first plan didn’t work out. What are your thoughts ??? Thank you for your reply!

[Darius Ogloza]

When you bought this house as equals you had each had a basis of $65,000.  Assuming the improvements resulted in $1 of value per each $1 spent, you each now have a basis of $110,000.  You have been enriched by $45,000 and you plainly owe him that much.  Now, whether he also deserves payment for the renovation work he performed and, if so, how much, is a separate matter.

[Odie Ayaga]

@Brandy Carrero my interpretation of the situation would be that you don't owe him anything other than half the mortgage payments going forward. He bought the house and made the rehab plans without your input. If on refinancing he takes a loss that's his loss to take just as if he made a gain it would be his gain to keep. You didn't buy the house as equals and therefore you didn't have a basis in the house. Your only basis is going forward.

[Brandy Carrero]

Those were my thoughts exactly! He doesn’t think that but that’s where I am. Now we have to hire someone to understand this situation and come to an agreement. I refuse to pay him. I had no say in anything. Any suggestions on who I should seek for advisement? A real estate lawyer? A professional that could help with this? Thank you again for you input! 

[Odie Ayaga]

It sort of seems you're past the point where a lawyer would've been beneficial unless your intent is to sue each other. Are you both still together living in the property? I'm assuming based on what you told me that he was originally on title alone and that following the refi you're now both on title? If that's the case it sounds more like he's the one in need of a lawyer if he wants to proceed further. You've presumably made it clear that you don't intend to reimburse him in the way that he is asking so unless he is planning to sue you for it I don't see what there is for you to do further. If you're planning on proceeding forward on real estate projects with him then you'll address how the proceeds are divided in your operating agreement.

[Brandy Carrero]

@Odie Ayaga thank you, I truly appreciate the advice. Id like to come to an agreement but we can’t see eye to eye on the situation. We still live in the property but I’m looking to start off my own venture on future projects and just hire him as a contractor moving forward. Thank you again!!

[Odie Ayaga]

No problem and best of luck!