Good Deal? $600,000+ Family Flip Strategy and Contract Terms Help

[Caleb Clapp]

I've finished my first solo live-in flip (Mindy Jensen style) and have the option to take on a much larger project, my parent's partially renovated home. They got the garage and bonus room above it down to the studs before deciding to move in with another family member. They will not be able to complete the renovation and have offered to let me take it over so they don't lose the potential profit from the property. I have 13 years of residential remodeling experience, operate a one man residential construction LLC, and have a mentor with 30 years of residential remodeling experience that includes 4 flips.

Here are the Deal Details:

• $450,000 = Property Value before renovations began
  
• $350,000 = Current value of property
• $220,000 = Current Mortgage held by parents
• $160,000 = Cost of making sale ready
• $380,000 = Parents total investment
• $500,000 = After Repair Value (conservative estimate)
• $120,000 = Profit of project
• $(10,000) = Loss of current equity

Here's the Scope of Phase 1:

1. Finishing current 1000 sqft renovation
2. New 1000 sqft garage
3. New 100 ft driveway
4. Renovating 1,500 sqft craftsman barn
5. New septic system
6. New water well

Additional Information:

Despite that the property could sell currently for $130,000 net and the estimated profit will only be $120,000, my parents still want to continue with the project. One of the reasons is that the $160,000 cost of project includes adequate compensation ($5,000/mo) to me for working the job while providing experience that will help my long-term buy and hold strategy. Another reason they are interested in continuing is the property's multiple exit strategies and high appreciation potential because of planned infrastructure improvements. I'll outline the exit strategies and division of profit/loss options below. As for value appreciation, the area is expecting to have a new high school built in 2023 only 2 miles from the property and the local zoning is encouraging larger high-value properties by restricting density to 1 house/acre. Lastly, the property is on 3.6 acres that is already split into 2 parcels. The 1 acre parcel only has an orchard and landscaped forest while the 2.6 acre parcel has the house, barn, utilities, and lots of untamed fir trees. My parents also own an adjacent cleared 2 acre lot that is not part of this project but may be a future build site for new construction.

To be clear, there is no need to sell the property now or in the next 5+ years if the current mortgage is covered through renters or paid off. Additionally, I have been given full autonomy to use the property for legal income purposes including partial unit rental, rv parking, storage, horse boarding... anything that offsets project or holding costs. My wife and I already self-manage a condo. 

Here are the exit strategies once the renovation is complete:

• Option 1: I buy and move into the property at the remaining mortgage price. My parents earn 4% annually on the $160,000 project costs and $130,000 equity (current value minus mortgage) until I sell the property or am able to refinance them out of the full $300,000+ amount.
• Option 2: I help secure additional funding and a 2nd phase begins where we renovate the existing 1,500 sqft and build a second floor to increase the overall house to nearly 4,000 sqft. My parents keep their $500,000 invested.
• Option 3: The house is rented out. I help secure additional funding to build a stand-alone ADU (1,500 sqft 2+ Bed 1.5 Bath) on the 1 acre property costing $250,000. The two properties are sold together for $900,000 or separately for a total of at least $800,000.
• Option 4: My parents sell the house for the $500,000 estimated value. 

Division of Profit (or Loss):

At project end, whether from sale to a third party or resulting from a permanent ownership change between Parents and Me, the following items will be settled in the order listed below.

1. Remaining monthly salary due to Me
2. Parent's mortgage gets paid off
   Parents’s project costs (plus interest if applicable) get reimbursed
   The first $100,000 of profit is split 30% to Me and 70% to Parents <-- (Their insistence)
   All remaining profit is given to Parents until they are reimbursed for their original equity, then the remaining profit is split 50/50 between Parents and Me.
   

Questions for Discussion:

What aspects of this deal do I need to reconsider or develop further?

Is there a dominant strategy here?

Beyond a contract outlying the above terms, what other items need to be in place to secure both party's investment? (in the event of death, incorrect estimates, financing issues,... )

Thank you sincerely for reading this long post and for any insight you are willing to provide. 

Caleb

[Victor S.]

yes, get some confidence in those numbers first (including your ARV value). these numbers do seem to work, even at 160k, pending your exit value is correct at 500k. i'd consult with some local heavyweights like @Will Barnard that have experience with expensive/extensive builds, tho.