Up-Front Investor/Buyer Partnership?

[Mike Herring]

Hello all,

I've been looking into rehabbing a fixer-upper in my area.  However, this one would not be to flip - it would be for me to live in.  I've reached a point in my life where I know what I want out of a home - the flooring, the appliances, countertops, fixtures and hardware, and so on.  So the problem with going turnkey is that I immediately see where I would have made different choices.  I could never bring myself to purchase a completely finished home, then proceed to pay someone to rip out brand new flooring, cabinets, moulding, and replace them with something that's a different style or color, but of no higher quality than what the flipper had put in two months ago.

I could buy some land and get a home custom built, but that's easily $50-100k in added costs, from expenses such as a site plan from a civil engineer, utility hookup fees, impact fees, grading, excavation, pouring a foundation, and so on.

So the remaining option is to find a home needing TLC (but which is generally structurally sound) where much of the interior is going to be ripped out anyway, hire a contractor, and do the work. However, an experienced flipper is going to know the market better than me, be able to ballpark rehab costs better than me, have a deeper relationship with the GC, etc.  So I've hit upon the idea of trying to partner with an investor shortly after he/she has a house under contract.  The relationship might work something like this (let's call the investor Ralph):

1) As early in the process as possible, I view the house and write up any desired changes to the interior framing, and my desired flooring, lighting, hardware, tile, cabinets, appliances, siding, etc.  

2) Ralph negotiates a contract with the GC as he would if this were a normal flip - with whatever finishings he would have used to appeal to the widest variety of buyers if I were not in the picture. Let's call this the "base" contract.

3) Right after Ralph and the GC have agreed on terms for the base contract, I negotiate the sale price of the home with Ralph.  At the same time, I submit my desired changes to the base contract to the GC, and negotiate the payment for those changes directly with the GC.

4) Once the negotiations in #3 are done, Ralph, the GC, and I simultaneously sign our three contracts.

5) As the work progresses, Ralph pays the GC according to the base contract, and I pay for the changes.  Ralph and I split the costs of any repairs that had not been uncovered by the initial inspection.  To the extent my changes extend the project timeline, I also pay Ralph for all or a portion of his additional carrying costs.

6) Upon completion of the project, Ralph and I close on the contract we signed in #4.

OR, if the above is too complex:

1) Instead of calling for a completely finished house Ralph's contract with the GC calls for a ready-to-finish house. (I.e., instead of installing new flooring after ripping up the old, Ralph's GC merely makes sure the subfloor is suitable for the type of floor I plan to install.  Ralph's GC installs hookups for all of the appliances, but does not install the appliances himself.  And so on.)

2) Ralph's GC is now paid only by Ralph.  Ralph and I negotiate the final sale price and split unforeseen overruns as in the first scenario.  Once Ralph's GC is done, Ralph and I close.

3) I hire my own GC to finish the house.

Does this kind of partnership ever happen? Anyone here done it?** Is this something an investor might consider in order to lock in a profit earlier in the process and avoid the risk that the market tanks while the renovations are ongoing and/or the house is mispriced and languishes on the MLS? Or would no investor in his right mind willingly agree to all of this added complexity?

If this is a nonstarter, is there any other way to get at what I want to do that I haven't thought of?  Would love to hear thoughts from folks who have been around the block a few times.

**: (By "it," I don't mean the precise steps exactly as laid out above to the letter.  I'm not a real estate attorney or a contractor, so I'm sure there are multiple legal and practical reasons why you couldn't do things exactly like what I could think of when writing this post.  But I'm confident that an experienced RE attorney and GC could figure out a contract that gets at the splitting of costs and risks that I've described.)