How to Buy a Friend's Home

Question

A friend of mine recently took a job that will move him from Atlanta to Charleston, SC.  He has lived in a nearby neighborhood for 20 years.  His home is very dated and probably one of the worst looking homes in the subdivision.  He has to sell fairly quickly and won't have the time or money to invest in updating or renovating much, if any, of the house.  As it sits the house is probably not worth more than $175k but the comps in the area go up to around $240k.  I expect the house needs $50k of rehab work.  I would like to buy and hold the property but I need to get the house at a price that doesn't affect our relationship.  What they owe on the house, I'm not sure.  What are your thoughts?

Russ Scheider · Answer

The average cash-buyer will pay $240,000 x .70 = 168,000 - $50,000 = $118,000 maximum for this house.  In our business, it costs money to get into a property (closing costs), It costs money to hold a property (interest on borrowed money or opportunity cost on our money), it costs money to rehab (usually more than we think) and it costs money to sell the property (commissions and closing costs/buyer concessions).  In a rapidly rising market, some investors will pay more in anticipation of appreciation, but I call that "gambling".  Just my 2cents.

Bobby Holley · Answer

@Tom Mole Now that's the kind of advice I was hoping to pull from this scenario.  His house is going to be a tough sell at a retail price.  So, the JV partnership concept sounds like a great route to take.  Would that mean the seller is still paying on the current mortgage?  I wouldn't foresee him having the ability to carry 2 mortgages.

Tom Mole · Answer

So, @Bobby Holley, how much would you offer on this property if it weren't your friend? This may be your friend's home, but this is business, not friend-ness. Treat your business as a business. If after you figure out your numbers, you feel compelled to be "nice" to your friend, well, I can't blame you.

BTW, why wouldn't your friend have a problem selling at a "friendly" price? Why is your friend leaving for Charleston? Isn't he getting a better job? Maybe he wouldn't really mind you took this dumpy property off his hands quickly for a lower purchase price. Well, have you asked him?

Are you concerned that you might regret your decision either way. Look for another path. Does he need the money from the sale of the property right away?  If you're friend wants a higher price than you as an investor can pay, would he consider a JV partnership? It might work like this. You put the title into a land trust or LLC. You fix it up and rent it out, You operate it and take the cash flow as compensation for operating the project. When you sell the property the proceeds are split in some TBD equitable fashion.

Probably he will want the proceeds of a sale right away (most seller do, or at least think they do). So, how much does he owe on the property? What would his transaction and tax costs be if he were to sell? What would be left after costs if he got his price from someone from the retail market sector? Could you offer him that for a greater share of the equity in a joint venture?

The bottom line is that you don't want to piss off your friend yet you don't want to be taken advantage of. This is a bit of tight rope, which is why we usually don't advise doing business with friends. How good are you with running the numbers? Can you boil it all down to digits? If not, do you know someone who can? This would take the friendship issue off the table. The numbers don't lie and they are not swayed emotionally. With numbers it's just business.

A fair price is simply one that all the parties can agree to and still sleep well at night.

Happy holidays!

Jacqueline Carrington · Answer

Ask what would be the lowest he'd take from you in order to pay off the mortgage (if any) and not have to worry about doing any of the repairs.

Account Closed · Answer

@Russ Is anyone really getting this type of discount in Charleston, especially close in to the peninsula? I'm not sure those numbers will hold up in this inflated market.

Russ Scheider · Answer

Rhonda K. short answer is "Yes".  I quit my 100k job in 2014 to join my wife's tema and buy houses full-time. We have bought/rehabbed/sold or assigned contracts on 35 properties in Charleston area within the past 2 years.  10-15 of those properties are in West Ashley, James Island, or Park Circle. We have never bought (or put a property under contract with the intent to assign) with less than 30% equity, and we usually get 35% equity.  It takes an enormous amount of hustle,  a large marketing budget, and excellent negotiation skills, but that is what we do.  The inflated market just means that we have to invest more in marketing, hustle more, and negotiate harder.  My team made over 1500 offers to score those 35 high-equity property purchases.  Charleston is a TOUGH market right now on the buy-side.  Several of my local investor friends are looking at Columbia, Greenville, and Charlotte now because Charleston is so competitive, and sellers know they can put nearly anything on the MLS and it will sell.  You have my phone number if you want to call me to discuss further.

Bobby Holley · Answer

@Russ Schneider What types of marketing do you do?  What seems to work the best in a seller's market?

Max T. · Answer

Maybe you can assume his mortgage or take over payments via subject to. Then split profits from the sale after deducting your costs.

Scott Huggins · Answer

Golden rule in negotiations is don't be the first to talk price.  He who speaks first loses the negotiation.  I would first ask him what he will take for the house considering all the work that needs to be done.  His initial price might surprise you and be lower than what you might be thinking.  If not then go from there with your cost to buy, rehab, hold and resell and show him on paper.  It needs to be a win-win for both of you.

Good luck and let us know how it went!

Matt M. · Answer

Have some "buy your house for cash NOW" guys throw him some offers. Offer $5k or more above it as long as the numbers work.

How to Buy a Friend's Home

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