All Forum Posts by: Megan Hirlehey

Hi BP,

My business partner and I are potentially negotiating him buying me out of a partnership in which we own one house. The numbers are below, how would you evaluate a "fair" buyout price? I know there's many different ways to evaluate what the company is worth, I'm just curious how other people with experience in this area would think through the negotiation.

Initial investment: $15,000 each/$30,000 total

Acquired 1 property for $24,500

Have put about $10,000 worth of work into the property, some demo, updated electric, moved plumbing, new windows, new door, some framing

Current value of property is hard to determine, there aren't any good comps but my gut says it's worth about $40-45,000, will be worth about $60-65,000 when finished

Partner has made personal loans in the amount of $25,000 thus far (I think 4.5%, cannot readily find the agreement), with interest accruing to be paid out when property is rented, refinanced and loan paid in one lump sum. The only money I have in the deal is my initial investment

We probably have about $10,000 to go to get the property rent-able, at which point market rents are around $700-800

Partner lives out of state, I have a bit more "sweat" equity in the rehab than him, about 50 hours worth

We're on good terms, there's nothing hostile about this negotiation and we may not even go through with it, just kicking around some number right now to see if we can come up with something that benefits us both more than staying in this deal together. Will probably partner with him again in the future.

***Please don't tell me how this is a bad deal, I realize the numbers don't really add up to most people's standards. It was a gamble/"fun money" buy for us both as he is brand new to real estate and just wanted to get his feet wet and it was in a market I was a little curious about. This deal is more about the learning process than anything.

Hi Bill,

I've experimented with minimum commissions on low-priced properties myself. Personally, I'd rather lose the listing/client than bend over backwards for someone who will not pay me what I am worth and/or lose money on a listing. The way I see it, it is not my responsibility to take money out of my own pocket to fund the sale of someone else's property (which is essentially what happens if you spend more than you earn on selling a listing). I set the expectations early on that I am a professional, my time is just as valuable as any other professional's (doctor, lawyer, etc), and I will protect it and charge accordingly.

When deciding if a listing is worth it, you have to factor in the opportunity cost. You don't get paid unless the property sells, so you are already taking on a risk by doing a lot of upfront work over the next 30ish days, just to possibly lose the sale to auction anyway. How much time, energy, fuel/mileage (this is huge if you live in city with bad traffic/commutes and the property isn't nearby), resources are you going to spend to try to get an undesireable property to sell quickly? What will you spend, in dollar figures, on marketing alone for this specific property? How much do you have to earn to break even on this property AFTER splits and taxes? 

That being said, if this guy is about to go to auction, my guess is that he doesn't have much wiggle room to begin with, and it's unlikely you'll reach an agreement. 

If you really want this listing, I would still charge the minimum commission, but show the client in real numbers (some people think this is distasteful, but I don't personally care. I have no problem disucssing actual numbers with a client if it makes them understand the process and why I get paid what I do) the value that you will be providing to get the place sold quickly, and what expenses you'll be required to front to do so. If he still does not think you deserve $xxx for your services, then it's not a good match and you have to move on.

The exception to the above argument, is if this is a client you have or hope to work with in the near future who has plenty of other business to give you. It may be worth it to take the hit on this property to open the door to bigger opportunities with said client down the road. However, that is a judgement call only you can make.

Good luck!

Having the foundational knowledge of reno work is a legit argument, I know because I do a lot of the work on my properties on my own. However at what cost? If you take the $50k contractor job and the income/work is not consistent, you will have a hard time financing which will stunt your progress. In addition you will have less cash available to build your portfolio with or cushion the inevitable unexpected expenses you'll encounter. So right off the bat, this is a riskier option. In addition, if the contractor job is a lateral move in the way of pay, then the assumption is that you can live on your current income, so if you were to take a higher paying job and do not increase your cost of living, you can funnel all of that extra money into your investments, which could catapult your investing activities forward at a rate much faster and with much more security than you can achieve with a lower paying job. Over time, you'll leanr things like negotiating and the going rates in your market by default anyway as you connect with and hire contractors. 

These are the things I would consider when making this decision - define your ultimate goal, then only say yes to the things that move you definitively toward that goal. In the world of investing, extra cash almost always wins that argument

I suppose it depends on the market, judging by all of the responses saying it's in "bad faith." I don't know your market but in mine, there's nothing wrong with renegotiating the price (assuming the contract you signed allows for it, and allows a "get out of jail free" clause to back out, the standard contracts in PA do) or even backing out of the deal. You made an offer based on certian "knowns" and have since found additional "unkowns" that affect your numbers. If you can't make the numbers work based on the new information, then it is not a "win-win" and the seller shouldn't expect you to take a loss out of "curtesy." If the seller was so serious about implementing an iron-clad "as-is" sale then they should not have allowed the inspection period in the first place. What is the point of paying an inspector and wasting everyone's time if you cannot adjust based on the results? Like I said, may be a market thing, but it's common around here and definitely not out of line. When I have clients in a similar position, I advise them of the expectations and the risks associated with trying to walk or renegotiate based on the terms of their specific contract, but I would never "discourage" them from doing what's best for them, even if it means losing the sale. As a fiduciary, it is illegal, and it's my personal opinion that it is also unethical. 

A few questions to clarify:

1. Is the contractor job salaried (It sounds like you are using the term "contractor" to mean an actual contractor who runs a job site, as opposed to an individual who works on a "contract" basis)? Or is that $50k an estimate of what you may earn based on who good business is? Essentially, how stable is the income for the contractor position?

2. Do you currently have a large cash position or assets to borrow against (is your current rental mortgaged?) for down payments? If you take the contractor job and it has unstable income, it will be very hard to get a loan

3. What is your ultimate goal? Do you ultimately want to be responsible for any rehab/maintenance work associated with your rentals, or do you want a "hands-off" passive portfolio? There's no reason to sacrifice extra money from the $70k job to learn skills you don't ultimately want to use. Instead, use the acquisition process to form relationships with other contractors who already know what they're doing to hire someday to do that work for you

Assuming the interest rate on your loans is low, I would make normal payments toward the loans and invest the rest. You have to be intentional though and make sure that the investment you're buying will actually earn more than the interest you are paying on your loans. For the purpose of analysis, paying off any kind of debt carries with it a "gaurenteed" return in the amount of the interest on the debt (because compounding works both ways). So when you are analyzing your deals, you have to ensure that the return you are going to recieve on any given deal beats that of the "gaurenteed" return you would receive by making extra loan payments, or else you are essentially losing money.

While I completely understand this feeling of frustration (anyone and everyone who has ever worked hard does), this is an emotional response. You cannot allow your emotions to govern your business decisions (that is what got you here in the first place). It sounds like other than being "annoyed" at their spendy lifestyle, you don't have any other legitimate complaints about them, so you have to look at this from an objective, emotionless place. 

They owe you money, they are current on rent AND repaying that money under the terms you have agreed to, and they are taking care of your property. They are holding up their end of the bargain, even if it is not to the standard you would prefer. I agree with the other posters on here who say to talk to them FIRST and try to change the terms of the repayment agreement to recover some more of the money they owe you. If they will not agree to that, then looking at this objectively, you'll be out of about $1,600 by the time you list in March. In comparison, if you try to evict, not only will you no longer be receiving the current income of the rent and repayment they are paying, you will be on the hook for the cost of the eviction, the subsequent vacancy, AND you run the risk of angering them enough that they destroy your property, to the tune of thousands of dollars or more. It is "annoying" as hell, but sometimes that is just business. You're still walking away with a an easier lesson than a lot of landlords learn when they find themselves in this situation. Good luck!

The indoor pool (or any pool..) would be a hard "no" for me for a potential rental property (you didn't say what type of investment you are looking for), and a strong red flag for a flip.

I have a pool in my personal residence so I know first-hand how much work they are to take care of properly, I would never trust a tenant to take care of it. I would consider it for a flip, but with a very large margin because it is still a risk to me. The one circumstance I would consider a pool to be a benefit is if I was planning to use the property as an AirBnB, in which case I would factor in the cost of paying a professional to maintain the pool, as well as contact my insurer to ensure they will cover the liability and at what price.

If you are a new investor, and your gut says no, I think it's worth listening to. New investors rarely have the resources to absorb such risk and anything that could potentially go wrong with something like a pool.

Hi Ashley,

I try to evaluate decisions like this based on the spread, how much of a guarenteed, "built-in" ROI will I recieve by paying down the debt in question vs. how much can I earn in the given investment? If your interest rates on your loans are higher than that which you could recieve from the investment, it would make more sense to pay down the loans first. The nice thing about debt payoff, in addition to the mental relief, is that it provides a guarenteed ROI in the amount of the interest attached to the debt. Nothing in the market will provide a similarly guareteed return, however there are of course "good" options.

Depending on your cash position, you can split it up too, pay off the highest loans, say whatever is over 6% (or whatever you decide) and then use the remaining cash as a down payment for a rental (ideally, to house-hack if you can swing it with your current living situation). In addition to reducing your debt, depending on how your loans are structured, you will also reduce the amount of cashflow "out," maybe even significantly enough that the cashflow "in" provided by your new rental will cover what remains of your student loans. 

RUN. Like everyone else said, sooooo many red flags. I started using Cozy last year, which allows tenants to pay rent by bank transfer so you can see when a payment has been scheduled and then the funds are deposited straight into your account a few days later. So far that has been working out. In addition to someone who is writing bad checks, it alleviates other annoying things like picking up/depositing a rent check, "it got lost in the mail," etc. In addition, like everyone said here, never accept a full year's rent upfront. If someone feels they need to pay that way because they have bad credit or something, have them use a cosignor instead.