notes

[Marilyn Adams]

I am doing more income stream deals and want to know if this is a good approach for a passive investor for a jv partnership deal. Any inputs would be appreciated. We are putting a tenant buyer in the house for $5000 down and $895 per month. purchase price $110,000

Investment $75,000

monthly cash flow for investor (roughly) $500 a month

1-2 years collect the monthly payments until the date of sale.

At which point they get their principal back plus (roughly 10,000-15,000)

It's a jv partnership deal...not a lending deal. I've done jv deals on flips, not on rentals or rent to owns. Advise (even brutal in need be) appreciated. Is it a good deal for the investor? Any adjustments before approaching?

[Dion DePaoli]

This thing screams predatory deal.

First thing first, what you are describing is a bond for deed or land contract or installment contract.  You can call it what ever you want but that is what it is if you pass property liability to the buyer.  It is absolutely not "safer" or more "secure" for either party.  Those are antiquated instruments used primarily as predatory devices.  This one seems no different.

Secondly, I don't see any JV'ish thing here at all. I see an investor acting like a lender in equity and that part I am not even sure it is being done correctly. What is your role OP?

Find the property.  Find the buyer.  Determine the credit risk on the buyer?  Welcome to needing an RMLO license.  You are negotiating credit between a borrower and a lender (in equity as the title owner).

That prompts me to ask structurally how do you earn any money, specifically?

If the investor purchases the property for $75,000 and then the property is sold to a new buyer at $110,000 in an instrument.  Writing or negotiating that instrument is a licensed event if you are not on title to the property.  If it recognized as a lease you need a real estate license and if it is recognized as a credit contract you need an RMLO license.  Do you have either?

Your payment skimming will be an issue.  I am guessing the $395 after the investor get's his $500 is yours.  You have no capital funding the deal and you have no equity if you are not on title.  So you are just skimming payments with no actual investment being made.  An issue onto itself. 

Further, in the thread I don't see where the amounts contributing to the pay down of the obligation are discussed.  So buyer/borrower pays $895 per month.  How much goes to paying down the $105,000?  

A 24 month interest only balloon?  - That exact example is used as an example of predatory terms in Dobb Frank commentary.  

It is not just as simple as giving or not giving principal credit for payments.  It goes into who can take deductions and enjoy the equity appreciation.  Those types of structures, which this one sounds like it would have also, are problematic in enforcement.  You are in fact equity skimming the buyer/borrower by passing all the liability to them and giving them no equity for it.  

If they are deemed to have been earning (or paying for) equity, then you will not simply be able to evict.  They will have to be granted a redemption and the process will look like a foreclosure not an eviction.    

In that process the buyer/borrower can likely bring up the idea that they could not afford to pay.  Either the monthly payment or the balloon event.  If they prove that, the selling parties (the whole lot of you) could owe all the money back plus damages to the borrower.  

All in all this is a bad idea and structure.  Stop trying to be creative in finance that is going to get you into serious hot water.  Nothing about the structure described here is safe or secure for any of the parties.   I don't see a way you put this together without it being a huge red flag as described herein.  

Caveat Emptor.