Looking for advice on a half duplex deal

[Alex Rearmice]

I was introduced to a guy locally who bought a duplex with his partner for $70k with the intent that they'd live in the bigger side (700 s.f.) and rent out the smaller side (550 s.f.) for $700 a month. They each put in $35k and then, so far, about $7k each fixing it up - new windows, new doors, water heaters, electrical, exterior work, etc., much of it requiring city permits, which they got. It's about 80% done. Anyhow, one partner now wants out, and the other partner needs to buy him out, and that partner intends to keep living there and wants 100% ownership of the duplex. He is looking for a $50k mortgage as private money to pay off his partner and to have some $ leftover to finish up the renovation. I saw the property today, both sides, and can see it's within $2k-$4k from being done, the most expensive thing being to finish off the electrical work (it passed rough electrical already). They are $84k into it, and it should be worth at least $100k for sure when it's done, and more like $125k by my estimation.

This guy wants $50k and has called some banks and says he finance it that way, 30 years at 3.5%. I don't buy that. He's out of work right now and will be finding new work soon. I don't know his credit score. He says he only has about $2k to put into it right now, and his partner wants $ to get out of the partnership, or he may file some sort of suit or something for separation from the deal soon. So it sounds like this guy needs funding fast. He is adamant about not wanting a new partner.

From my point of view, if I did the $50k at 10% interest amortized over 10 years, it'd come to $79.3k. That works out to 4.62% compounded annually, so that's not a great return in my eyes for the risk. And I don't even want to do 10 years, but that would be $661/mo, which would fit with the $700 rent pretty closely. He wants 7 to 10 years, but I'm thinking no more than 5 years.

The good thing is: if I'm in first position for $50k or less, then I may have the future ability to take over this $125k property. So that's a good out if he should fail to perform. But I hope he does make it, and I'd rather be compensated justly so as he makes all his payments and eventually has full ownership.

I'm inclined to only do $45k, which should pay off his partner $42k to $45k (he hinted at this number, based on materials and labor done), and let him handle financing the remaining materials and finishing the work himself (he indicated that his family might help him out a little bit, but not to the tune of $50k).

I'll stop here and ask, any ideas on how I might proceed? Is there some way to structure this as simple interest + points? I'm also concerned about not providing financing until all the work is complete and all the city permits are signed off. I'm open to any ideas. Let me know if I left out any crucial details. I know I'll need to learn more about his credit score, credit problems, outstanding debt, etc. And if I hold a first note, I need to have some alert system in place in case he ever tries to take out a HELOC or a 2nd note that would dilute or harm my 1st position - I think I'd want to build that into the legal agreement.