There’s a danger in this particular approach with so called “shared appreciation mortgage”. I once withnessed a case where the lender in that relationship got into troubles with IRS. IRS looked into lender’s assets and discovered the equity in the property created by this loan with “equity participation”. IRS further proceeded to put a $1.2 mln lien against the $800K value property. Moreover, the lender was also indicted on the racketering and telemarketing fraud charges and the feds were about to confiscate the property altogether. The original partner got grey hair over the course of that relationship.
So as you say, the best partnership is no partnership, but a straight lender-borrower link.
Perhaps, if the party with funds wants the equity in the business, share of stocks without much voting priviliges would do, assuming the size of the business justifies that.
My first posting! I have a low 6-figure line of credit, but no expertise. A family member has 4 years expertise doing foreclosures/flips in a large market with title co. and escrow co. contacts who respect his work. We want to join forces. Question: should I as the investor treat him like an indep. contractor, should we partnership 50/50, or should I compensate him a flat % rate (25,35,45%?)? Should we (or I) incorporate? I accept the consequences of dealer status, but are there better options? He is negotiating a potential 35K deal now (6/5/00) and a flip is immanent. I am looking for a career change in the next 3-5 years. Thanx in advance-I’ve noticed responders are very kind.
Gregg, If you are going to partner with someone (partnership, LLC, etc.) it is important that you put everything in a written contract. I am the managing partner of several partnerships with others who are investors and I’ll be happy to e-mail anyone who e-mails me with a request a copy of one of my partnership agreements.
When you get into writing down all the problems and how to solve them partnerships fall short. Consider loaning the money and secure with a deed of trust. The note would be a participatory type with an interest rate built in plus a cut of the profits. Do it deal by deal to see how it works.
If you do partner… be careful because you can ruin a good relationship! My husband became my partner after a few years and it caused a few ripples in my sails to say the least (I had another partner for several years before he came on board the real estate ship. I think he had to see if I was going to make any money at it first!). I have a good contract with him…I wear it one my left ring finger and he likes my cooking (when I have time to cook!)! I find it easier to go buy everyone new underwear at Walmart rather than wash clothes! TeHe! We all have 100 pairs so I don’t have to wash but once every 3 months!If I had a six figure credit line I could buy … Hum… that’s a lot of underwear!
(seriously)If you can have him mentor you you might better do your own deals. I was fortunite to have a perfact partner when I got started but I was lucky! I did try doing deals with other people and have gotten burned. My husband has to deal with me and if he ever crosses me… well, there is no greater fury than a womans scorn! Just be wise and be careful! Lori