Multi-partner Deal Question

Vanessa Brostovski · 2009-08-12T09:48:42-07:00

Seems like I've been full of questions since deals come up now that I'm in real-estate investing! I have another question for those of you out there....there is a good deal that has come up for me and my partner and the confusion is coming from how to deal with private money. In this scenario, some if not ALL of the funds for the deal will be from a private (not HARD) money lender that we know. However, since this is a rehab deal and will be sold (not sure if it'll be held for 1-6 months), how do you pay out your private money lender? Contractually, do you promise them a certain percentage? However, what if you don't deliver on that certain percentage, i.e. 10% profit on their money, if the deal goes sour after you have purchased it? I guess, without getting specific legal advice, how does it work with the amount you pay back to your private money lender. For example, if they give you $80,000 for the deal and your numbers don't work out when you sell the deal, and you'd promised them $8000, ? That's basically what I need to know, to ensure that no relationships go sour in the process.

Scott M.

Real Estate Broker · Rochester Hills, MI · Member since 2009 · 2k+ posts · 2k+ votes

17y

When you say private do you mean a friend or family memeber?

Private money is the wild west - whatever you all agree on is what you agree on. You can try and have it both ways - meaning we will pay you what we can and when we can - but if they are a "true" private money source VS friends and family then they will have a contract that you will need to abide too.

Most require monthly payments - most require they be paid first - and you will end up with brusied credit and reputation if the deal goes sour.

In the end - if the deal does go sour - they will prob. get the house and you get hurt in the process.

if this is friends or family - think twice as it may cost you a relationship.

0 Reply

Jon Holdman

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

17y

If you structure the deal with a specific payout, it's a loan. You're committed to that amount. If your profit is less, you have to come out of pocket. Same as with a HML.

The alternative is to do it as a profit split. Typical split for a money partner would be 50/50. So, regardless of the net profit, the money partner gets half. If it ends up with a loss, you'll probably have to eat that.

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Vanessa Brostovski

OP

Real Estate Investor · Lincoln, CA · Member since 2009 · 28 posts · 1 vote

17y

Scott, yes I was referring to a family member in our particular case with this deal. Although we do not have to do a contract with him, we want to make sure that, like you said, the relationship doesn't go sour. Based off the numbers on this deal, the concern is being able to walk away with some of the profit after the rehab and paying our family member back. One of the scenarios is that you can end up with nothing, of course, and the private lender can get back their money and their percentage...but you put all the work into the deal and paid carrying costs...etc. So, I see how you can say its the wild west, because it is pretty iffy. However, I am strapped for my own cash to put in and my credit is GOOD but I can't get mortgage loans right now, so using OPM and making a deal win-win for both parties is the challenge I face.

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Vanessa Brostovski

OP

Real Estate Investor · Lincoln, CA · Member since 2009 · 28 posts · 1 vote

17y

Jon, thanks for your quick response as well. This wouldn't be a scenario where we are obligated to do a contract, but I'm sure he wants it to be a good deal and we are taking the risk of paying out of pocket if we go negative OR just breaking even enough to pay him out as I said above. So...we have to do a lot of work on looking into the deal and holding costs...

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Herm M.Pro Member

Real Estate Investor · NorCal, CA · Member since 2009 · 273 posts · 43 votes

17y

.there is a good deal that has come up for me and my partner and the confusion is coming from how to deal with private money.

Well if you're afraid that you may not be able to pay back your private lender his interest....then you can't conclude that it's a great deal.

Anyway...do you have any connections in Yuba City?

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Steve L.

Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes

17y

In the past I have structured deals giving an investor a percentage of the upside of a deal.

Here is my typical blanket terms:

These are not legally binding and you should consult a lawyer (which I am NOT) before structuring any agreement.

- Investor would receive original investment plus profit back within 5 business days of the sales escrow closing.

-The investor will be provided with full accounting on all revenue and expenses with regards to this property.

- In the event we do not sell the property for a profit, investor will receive their original investment back only. They will not participate in the losses.

- Owner will not charge the project for personal labor or expertise.

- In the event the property is not sold in 12 months, the property will be appraised and the investor will receive payment based on the appraised value.

- The investorâ€™s principal amount will be personally guaranteed by me.

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Multi-partner Deal Question

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