How can I make this deal attractive to a money partner

Question

Hey Everybody,

I was emailed today by another wholesaler that has a property under contract. He is selling the property for $140,000 needs $10,000 in cosmetic repairs. The comps in the area are between $240,000-$250,000. Originally he contacted me to bring him a buyer. But I been looking at the numbers and I am thinking of taking this one on myself.

I found a hard money lender willing to lend me the money for the purchase and repairs. The lender does not require any documentation so they require a 35% down payment which is roughly about $45,000 give or take.

I would like to bring in a money partner to put up the $45,000. If I were presenting this deal to you. How could I make it attractive enough for you to want be involve (ie interest rate, terms etc.)? The rehab will take bout two weeks. The average days on the market in that area is about 61. I plan to market the property during the renovation phase to gain interest. I believe it will be a quick sale. If it is not I have built in cushion to compensate for the additional holding cost.

Any thoughts would be appreciated.

Jon Holdman · Answer

Tamara Sankey if you're actually looking for a loan you will need to post in the Seeking Financing... forum.  That requires a Pro or Pro Basic account.

You're looking for a no-risk way to make this happen.  You're either going to have to give a personal guarantee or put some money in or both.

A wise HML will not let you have a second.  If you have a second and the deal goes bad, the HML's position is greately weakened.

Only a very foolish investor would sign up to be in second position.  You have no experience, no track record, and none of your own money into the deal.  The risk is huge.

The value is probably not what you think.  A wholesaler is offering you this deal.  That alone tells me the ARV they quote is high and the rehab estimate is low.  That's always the case with numbers a wholesaler gives you.  Its just part of the game.  You have to do your own evaluation and come up with your own numbers.  There is no way you buy for $140K, do $10K worth of cosmetic work and then sell for $240K.  Those number are just not realistic.

Realistically, if you want to do a deal like this you need to find a money partner who can fund the entire deal.  The customary split would be that you do 100% of the work, the money partner puts in 100% of the money and you split the profit 50/50.  You do not get any payments for the time you invest.  Your payment is the profit.  Since your relying on your contractor for his experience, he will also not get any payments for his time.  The two of you will need to work out some split for your half of the profit to compensate him.  His subs who are doing the actual work would get paid.  But that General Contractor role he's filling is normally the role you would do as the "worker" partner, so, again, that's paid out of the profit from the deal.

Eric M. · Answer

If Ibrahim was offering those terms, I would call him and take them immediately.
If it were my money, to get me interested you would let me do the deal and then I'd give you 25% of the profits.

Ibrahim Hughes · Answer

Jon you do bring up a good point. With the numbers being as stated, why wouldn't the wholesaler either sell retail OR sell for more $$$ instead of leaving so much meat on the bone.

Tamara I wouldn't let the unlikeliness of this deal run you off.  You do need to re-check the rehab numbers. With $10k in repairs the seller is telling me that the mechanics (electric, plumbing, roof etc.) have been recently updated and its strictly just a cosmetic rehab.  If that's the case I would triple check the ARV.  Make sure the square footage, taxes, bedroom and bathroom count are all in line with what's been selling.

If the countertops, cabinets and appliances need replacing then that's a new kitchen.  What about the flooring? I'm assuming the bathrooms need replacing as well? With the mechanics being up to date then this just might be a cosmetic job. But if the electrical and plumbing are dated, including a dated HVAC system, then you are looking at more than just a cosmetic job.  How old is the roof? I would also try and have a trusted and experienced rehabber look at this deal for you.

Jon Holdman · Answer

Your purchase plus rehab is 62% of ARV.  No, that's not typical.  That's a screaming deal. With just cosmetic work, why isn't the seller just selling retail?  If deals like that are typical in your area, fix and flippers must be making money hand over fist.

Justin S. · Answer

If this deal is a real, you can likely find a HML that will lend 100% of acquisition.  Also if the deal is real, it is likely gone by now.  A 100K gross spread with 10K rehab is phenomenal.

Ibrahim Hughes · Answer

Keep in mind I was open to those terms subject to the proposal (including her resume), property walk-through and my interview with the rehabber.   No experience along with not having thought out the exit plan throroughly and my risk goes up as do my need for a higher return/reward. Your offer to do the deal yourself and give her 25% of the profits in light of not having the experience is not unreasonable providing that she gets to work hands on with the rehab.  It gives her a good opportunity to learn on the job.

Also, I expect whoever makes this loan is likely not in real estate and probably a corporate 9-5er with extra cash and looking for something more agressive than a mutual fund or bank CD.  That's the profile of the investors I've worked with over the years.

Tamara Sankey · Answer

Thank you everybody. All your comments and concerns have been well received.

I know a rehabber that lets me come on his projects to shadow him, so I will reach out to him and see if he can evaluate the deal from a rehabbers point of view.

I am definitely not trying to play with anyone's money (that will get you shot in Atlanta lol) but I honestly have the desire to rehab and have been looking for the right deal and this seems like it's the "one". But I will take a step back, consider everyone's feedback and market the property to my buyers list.

J Scott · Answer

If this wholesaler is any good, I don't believe these numbers.  He should *easily* be able to list this deal on Craigslist and sell it to a seasoned rehabber for $150-160K and make an extra $10-20K...why would he want to give you the option of jumping in the middle and skimming $10-20K in equity from him?

Is he just really nice and happy to give away money?

Ann Bellamy · Answer

I'm with Eric Michaels.  If the deal were in my area, I wouldn't consider lending the downpayment, you have no experience and no cash.  I'd not take a second position in any circumstances, and certainly not behind another HML.

So Eric's solution is a good one, maybe your first HML could consider Eric's idea

Joel Owens · Answer

It's always easy to assume things when it's not YOUR MONEY on the line with someone with no experience.

Rehabbing isn't as easy as people think.Until you have owned a property you generally don't understand how all the little things add up in time and money.

If it's that smoking of a deal just take the assignment fee and go to the next one.

If you wan to learn to rehab then maybe working for a flipper would be good to get experience first.

How can I make this deal attractive to a money partner

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