How Do I Partner with the Seller on a Fix n Flip?
Woodland Hills, CA · Member since 2015 · 23 posts · 7 votes
Hi. A friend of mine has a residential SFR with an ARV of ~$400k in Southern Cal here where we live, and is asking me for help to fix n flip so she can cash out of the property.
She owes $257K. I have the cash for the rehab which I estimated about $30k.
Let's say for round numbers the potential profit is $100k. First I will take my $30k back so then there is $70k left over. I will factor in realtor commission etc afterward.
First Question: What is a fair way to split the profits with her? Considering I am putting up all the money for the repairs and managing the rehab.
Second Question: How do I write up a contract for something like this since I am not buying the house? How do I secure my position? Does anyone have such a contract I may use as an example to structure this type of deal?
Any other suggestions are most welcome. Thank you kindly for your support.
TODD - I am a HML and I have lent money to an owner of a primary residence to rehab a home for resell. You need a Deed of Trust (DOT) for 2nd position in this situation. The LTV is there, so no worries about that. In CA (as I recall - it was 15 years ago I lived in So Cal), you do not need a lawyer, just Escrow Co to complete the transaction.
I would write a Promissory Note with your friend for $30K (or whatever you intend to invest in the Rehab) at a Hard Money rate like 25% FLAT for UP TO 6 months. The Note could clarify you are responsible for managing the Rehab and a failure on your part to get it done within 6 months does NOT obligate Borrower (your friend) to any additional interest expense. You could also state in the Prom Note Borrower MUST sell the property within 1 Yr (FLIP) and that proceeds will reimburse Lender (you) for any Principal and Interest FIRST and any remaining balance after all costs/fees is split 50/50.
This is just one way you could do it. The DOT would have to be recorded with the County for only $37,500 ($30K + 25% Flat Rate Interest) and that is your official legal recourse. You can't record a DOT for "estimated profit." The Promissory Note would be your recourse in the event your Borrower (friend) satisfies the terms of the DOT ($37.5K) but not the Prom Note (50/50 split AFTER debt is paid). In that case, you have to take her to Sup Ct for Breach of Contract for your split profit. I am just recommending you make $7500 more than your friend due to managing the rehab - you could drop the Flat Rate Interest to 10% or 15% or whatever you think is fair to give you the lion's share of the profit split.
That's one way you could do it. Your DOT protects your hard money and 2nd position loan interest when she sells the property. If you have to force her to sell (Foreclosure) because she does not even honor the DOT amount (decides to stay in the house for whatever reason), you end up with the house and OWE the 1st position lien, but my guess is you would have no prob selling it to cover yours and the 1st position plus profit.