Funding Rehab For Share Of Profits

[John White]

Good Afternoon All...

I need some advice, as this is my first scenario where I've been approached to fund a rehab. Here are the details:

3 bed, 2 bath cape, 1500 square feet, .68 acre lot (large lot for area). I can purchase the property for $85K and sign a contract with the contractor for the renovation ($30K). All in, I'm at $115K with an anticipated sales price of $150K (he believes closer to $170K, but my comps aren't nearly as ambitious). Here is my dilemma. The contractor has a lease purchase on this property (I've already reviewed the paperwork with the title company) and must close on the sale by February 15th. He is willing to share the profits with me 50/50 if I just fund the rehab. While on paper, it's a superb ROI, how would I structure the deal to protect my share of the profits and my $30K in renovation costs without purchasing the property and taking title? Can I put a mortgage or lien on the property to protect my $30K investment, without taking title? If yes, how would I then protect my share of the profits (I own a brokerage, so would insist upon listing the property when complete) to ensure that I'm not just guaranteeing only my $30K back (which would amount to an interest free loan)? The property does not currently have a mortgage on it. Any and all advice is most appreciated.

John

[John White]

Originally posted by @Jon Holdman:

I'm confused. If you just fund the rehab ($30K) who actually pays for the house?

You say the contractor has a lease option, but has to close by Feb 15. What does that mean? His option expires on Feb 15?

If it sells for $150K, less $12K for sales costs (for this property, some of that is a commission you earn, but that doesn't affect the deal itself) it nets $138K. Less that all in amount of $115K leaves a profit of $23K. If that's a 50/50 split, you would get $11,500, which is a long ways from $30K.

If the plan is to leave the house under the lease/option arrangement, borrow $30K from you and sell it then you can't secure that loan against the property. The borrower (the contractor) can't pledge security he doesn't own. I don't think the option would give him that right, either, though I'm not a lawyer.

If the contractor can buy it for cash and you fund the rehab you can put a mortgage on the property. Strictly speaking, the borrower would give you the mortgage. Its can be a "shared appreciation mortgage" where you payment is a share of the profits.

If you fund the whole $115K you can still put a mortgage on it. Same deal. But that's to high a LTV, IMHO. If you do that, you definitely only want to hand over the cash in draws as the work is done.

Thanks for the feedback Jon. That was part of my dilemma. The contractor has a purchase option with the owners (who he knows, personally) and yes, the purchase has to be completed by February 15th. I was considering paying (in draws) for the renovation, but decided that I simply wasn't comfortable paying for a renovation on a property that I have no ownership interest in. Ultimately, after looking at the comps, I've decided that it's a project that simply doesn't make sense for me to get involved with.

John