How to JV with owner to rehab/flip the property?

Question

Hi Fellow BP members,

There is this property for sale (4000sqft on a 0.6acre lot) that the owner (an elderly woman) inherited free and clear. It needs a lot of work to be done - probably a 100-150k rehab work which she couldn't afford/manage. Similar property on the street sold for 700k last year and the neighbor is a million dollar property.

I'm thinking of approaching the owner for a JV where I will fund the rehab and then she can sell the property and we share the difference between her asking price and the final selling price after rehab.

What is the best way to structure this deal so that both party's interests are protected.

Any advice?

Bill Gulley

Rick H. · Answer

@Jonathan C. Elderly has other implications as to capacity. Be sure you discuss your plans on different days to assure yourself she is consistently engaged in the meeting of the minds,

There are a number of reasons being a 1/2 record title owner is ackward. I can list them, however I'd rather get into solution mode.

My preference is to put property into a title holding trust, you and your partner as beneficiaries subject to a simple operating agreement. You agree on who will be trustee, preferably you or a neutral 3rd party.

This arrangement had the benefit of ease of operation, permits, construction management, listing and sale.

Brian Lemonds · Answer

can we simply make a contract to purchase at a discounted price, put the house in the company name and have the agreement state that homeowner and company split profits of the sale? we would be on the title as the owner until the sale is complete and money distributed.

Jonathan C. · Answer

The part I am concerned about - which I think is also the owner's BIGGEST concern is putting a stranger on the title. To us investors it may sound simple just being a half owner on record just to have an avenue to do improvement on the property BUT to the elderly owner, it will be very hard to explain (be it seller financing or title holding trust) and convince her because she will most likely see it as "losing" half of her interest in the property. Unless she get paid cash upfront for half equity of the property, I really doubt she will be willing to go into any kind of arrangement having someone else on the title.

Perhaps like what Bill says about a contractor's build contract - is it possible for me to find a  licensed contractor to be under contract with her with these terms and then I have an agreement with the contractor on the side?? Will that work?

How about a Power of Attorney or some sort of an agreement that will legally allow me to come in and help her improve the property without any changes to the title?

Thanks again for all the valuable comments.

Bill Gulley

Brian Gibbons · Answer

Hi @Jonathan C.

How about

1. Buy on a 1st private mortgage

2. Give a note with a moratorium (no payments) now of $340K payable in 9 months

3. Say worst case scenario in $600K less rehab of $150K, get private lender money for $150K.

4. Sales Costs are 10% or $60K

5. Say you want to profit $50K

6. 600 - 150 - 60 - 50 = $340 note.

7. If there is any more, in the JV agreement tell her you will split the difference.

Bill Gulley · Answer

Yes, it takes skill to have an owner take a note for part of their equity, you must be the expert in the room, but not so much that you scare them. Trust is key, demonstrate knowledge and good will, show the money that goes into the place, and this is how it is done to obtain legal authorization to get the work accomplished without the owner putting up money for the repairs. I have done this, you may not hit a homerun your first time at bat.

BTW, you can also loan her the rehab money if it meets the minimum loan amount to be secured by RE.

Investors need to stay away from using a Power of Attorney (POA) without a very good understanding of "Laws of Agency" and the fiduciary responsibilities an agent has to a principal. You will be in conflict of your profit goals in dealing with a principal having a POA! Know too, a POA may be revoked any time by the principal and your powers expire upon death. Gurus and flim-flamsters talk up saying get a POA, they are giving bad advice as there are other authorizations, contracts and verifications used in finance and RE better suited for anything they suggest, investors do not need POAs.

Yes, work with a contract if you can, it's often the cleanest way, easy to sell the deal to an owner, advance construction funds, you can have two lien positions to work with as a "lender" and a contractor. :)

Jared Lichtin · Answer

@Bill G. I was going to say seller financing as well.  Maybe 20-50k in cash would be enough for her to take you seriously, with some interest on the back end after the sale.  @Jonathan C. that certainly seems like a good opportunity. Did you post a link in the Marketplace forum?

Bill Gulley · Answer

Are you, or do you have a contractor, is a license required for rehabs in that area, probably is.....?

A contractor can simply do the build contract under the terms you described.

If you don't have a license, you can buy a one half undivided interest in the property, become 1/2 owner and do the work. She can seller finance the 1/2 interest with proceeds being used to pay off the loan. You can force sale being a 1/2 owner.

Use a contractor as a third party you can work with, they will have rights as to filing workmen's liens if things blow up, like she dies. If she is elderly, address the estate angles as this project and sale at that price level could go over a year. Look at the average marketing time in that area and plan on holding it awhile.

For construction work, you need a license (probably) or to be on title, leasing interests or options don't give you the authority to build, rehab or encumber the property with material and labor liens. Good luck :)

How to JV with owner to rehab/flip the property?

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