How Do I Structure This Deal?

Question

Hey everyone I need some advice on how to structure this flip... so I’m a realtor and have a distressed seller who has a house they need to get rid of. It would make a great flip but I don’t have the liquidity right now to buy the house and flip it and I don’t want to wholesale it. Listing it wouldn’t make sense for them because they are under water on their loan so they won’t net enough to pay it off and they can not come out of pocket. I do have the ability to get a hard money loan for the rehab and would like to present them with the option of allowing me to flip their house which would net them enough money to pay off their loan and just move on from their situation. How would you guys recommend structuring a deal like this?

My main concern here is me rehabbing the place and they basically just say well screw you I’m keeping it now and not paying you for those rehab costs. How would you guys recommend securing my interest in the property while still protecting the seller as well where they know if I don’t come through for them then their money and home is safe. (Not that I wouldn’t but I always want all parties protected fairly and equally)

Account Closed · Answer

Then, I'd honestly wonder if this would be a good investment.  If it would require fixing up to sell it to cover their mortgage, this just doesn't sound like a good investment.  If you buy it at a discounted price, then put in what's necessary to get it sold or rented, it seems to me you're just buying their problem.  I could be wrong, of course.

Account Closed · Answer

Are they still living in it?  They may just already be prepared for their credit to be trashed and to file bankruptcy - after they have lived in it as long as they can while it's in foreclosure.  If that's the case, you're going to have to figure out something to offer them that would be sweeter than them just staying put for a year or however long foreclosure would take.

Before going into more detail, is the seller living in this place right now?

Adam Upchurch · Answer

Following. My brother has been wanting me to find him homeowners in situations like this.

Hmm... I think it would be fair to split the Difference between current value and ARV.

So 210k minus 70 = $140k.

Minus 40k construction would leave $100k Before closing and such.

It may seem like you’re screwing them because they will only walk away with like $15k, but you’re actually making them like $50k more than what they’d do without your help. That’s a great deal IMO.

You seem like a nice guy, so maybe give them 10k off the top. Which is only $5k out of what you’d make.

James Billings-Kang · Answer

[DISCLAIMER: This is not legal advice.] I would retain a lawyer to draw up an agreement between you and the homeowners. It could be a simple contract that outlines what each person brings to the table (the homeowners agree to the future sale of the property and all sides agree on the allocation of the sales proceeds). If you want to strengthen the contract and soften your risk, you can have the homeowners agree to offer collateral.

Wayne Brooks · Answer

@David Nacco Well, if the numbers work....you could buy it sub2, agreeing to pay them whatever dollar amount ($5k, $10k, $20k, % of profits, whatever) upon the sale of the flip.  With you becoming an owner, there are no net listing issues.

Wayne Brooks · Answer

Not sure it makes sense if they are under water....you’re starting in the hole. And a HML isn’t going to loan rehab money in 2nd position, especially if it is under water.

Under water=short sale.

OF you can get a HML and it really makes sense, then buy sub2, with all the proper disclosures.

David Nacco · Answer

@David Nacco typo, sorry $75,000 leftover, 55,000 after closing costs

David Nacco · Answer

@Sue K. They owe 100K and could only sell now for like 70K current condition. If we put $40,000 into it it could sell for around $215,000. So after paying off the mortgage and rehab costs there would still be a $65,000 spread, probably left with around $45,000 after closing costs conservatively which we would split 50/50.

David Nacco · Answer

@Sue K. They are not living there and they are also not delinquent. They are able to pay the mortgage they just have nothing left to maintain it or to rehab it. It was their prior home and they kept it to let their kid live there who later ended up having drug problems and basically just wouldn’t pay them and trashed the place over time and because of the condition it’s now in they couldn’t sell it for enough to cover their loan without fixing it up. They just want it gone so they can stop worrying about it.

David Nacco · Answer

@James Billings-Kang Thanks! I definitely plan on having an attorney write up the contract

How Do I Structure This Deal?

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