DON'T EQUITY SHARE with a person losing their home

The third part of your comment or question is, you're dealing with someone who might have an equity share with, so if profits go above a certain amount then you're going to pay her more, this is normally a dangerous strategy and the reason why It’s dangerous is because it requires accounting and accountability. 

Now if you are looking at a long-term project where it's going to go more than nine months you could be headed into the start of a down cycle. So the first thing you want to do is look at how long is she going to stay in the home, then the second thing you would be looking is, how long is it going to take you to do the renovation. Your timing is critical when a market starts to fall, you have to flip quickly so you may change your trajectory into this project.

So as an example if you go in and do renovations on that property and it costs you more to renovate it, or it takes you longer or you sell for less than what she thinks you should have sold. This creates a situation where she has all kinds of opportunities to dispute on what you did. So in a general rule it’s a bad idea to do anything with any kind of equity share with a person who's losing their home, or selling it to you at a discount. So that you can make a profit, what you can do is give three options and make two of the options look really bad so they won't do it.

The first option is I’ll pay cash to walk away and that may be a relatively high number, if you want them to walk away so you can do the deal. The second option can be I’ll split profits 50 50, and then you run through the numbers, here's the conservative comp value, or here's the estimated renovation costs, as high as you can get them to where your risk is covered because that's what you want to do. Renovation always costs more than what you thought it would. So make sure you hit the high side of the renovation, the low side of the conservative comp value which brings your margin down, and then you set her expectations up, that the amount she will get will be less than what she would on a cash walk away.

Some other third option in all three of those scenarios you want to present two that you know she's not going to pick. If she does, it even does you better but you really want to focus her on the option that you want whatever that may be cash to walk away. Other method you can use, such as; “I’ll give you x amount of dollars a flat rate if it sells for this, or I’ll give you this if it sells for that”. So stay away from situations where it's a long-term relationship that can break down over time.

In that particular case it took her two years to sell the home. She finally sold it on a lease option because it was a nice home on one street, in an area where it normally didn't sell. So it took her two years to sell the home. She went out on a lease option with that guy and that deal is now in court. Based on the fact that those two are fighting it out and the reason is she didn't get in writing, he had given her facts that were improper but it was a long-term deal. That's where you start to get in trouble, when you take a long determined situation that's connected somehow with the closing. And in this particular case he agreed to be paid off when the closing occurred. Since the closing happened way later, that's what killed the deal or ended up in litigation. So the timing was too far out and he expected that she would sell sooner, he was frustrated by the transaction. That's a small example, but it's a really good one from the perspective of how much a little thing can blow a deal apart. So if you have an equity share position now, you're even into a greater risk.