Nees help Understanding sweet equity seller financing option

[Tavish File]

We have been proposed a deal where we would renovate the sellers duplex from a 2 to a 4 and while doing that, our sweat equity would earn our down payment To purchase the property through them. Has anyone ever done a deal like this?

[Kevin Sobilo]

@Tavish File, it sounds like you would be working to pay MORE money!

For example, lets assume the house is worth $100k now. So, you could purchase it in cash or maybe with a $20-25k down payment.

Once you rehab it and maybe put $50k of "sweat equity into it", it would be worth $200k, but they would sell it to you for $150k seller financing after the down payment.

So, on the surface it sounds great because you aren't coming out of pocket, but in reality if you have the means to close the deal in cash or with any kind of financing like a hard money loan you would likely be better off. 

[Peter Mckernan]

Quote from @Tavish File:

We have been proposed a deal where we would renovate the sellers duplex from a 2 to a 4 and while doing that, our sweat equity would earn our down payment To purchase the property through them. Has anyone ever done a deal like this?

 Make sure the contract is tightened up for sure. The reason I say this is that if you go to fix up the place and make improvements without getting the right contract into place, the seller could change their mind and keep the property. 

-Make sure the contract states:

-what you are doing for the "sweat equity"

-Options for parties on both selling, equity, refinancing, etc.

-How long is the hold period, what would the seller/you be putting in with cash if any

-What is the % of equity gained 

-Can any party get out early

-What the risks, and who has rights to the deal

[Alfredo Orfale]

It should be spelled out clearly in the contract, and your legal council should be the one to look it over before signing. It should the sale price, if payments are being made along the way, 100% of those to go towards the purchase price.

What you add with your "sweat equity" is yours to keep, not the seller's. They already agreed to the sale price and payment terms. I don't believe the seller can back out of the deal in the end, but you could have a clause that you get back your payments and sweat equity, through some split of the ARV, if for some reason they "change" their minds. It's all about the negotiated deal and how the contract is written.

[Chris Seveney]

Quote from @Tavish File:

We have been proposed a deal where we would renovate the sellers duplex from a 2 to a 4 and while doing that, our sweat equity would earn our down payment To purchase the property through them. Has anyone ever done a deal like this?

The way you would need to structure this is two ways:

1. You have a contract to renovate the property (assume you are licensed) and the buyer will pay you that amount of money to complete the work.

2. You have a contract to purchase the property. 

The issue you may also run into is from a tax perspective, but I am not the expert on that.

This seems too complex honestly and one of those, you cannot figure out what could go wrong until its too late scenarios.