Be careful with your plan to buy something with a contractor friend. I know someone who did and they set things up wrong. Their plan sounded similar to yours with them buying the home and their contractor friend fixing it. They really messed up big time in one way. They were paying the holding costs. As it turned out their contractor friend did not devote the time to the project that he had originally planned to. He went into it thinking that the timing was right as it was going into the slow time of his year. The only thing is - that work kept coming up and he never devoted the time to the project. Really, what did he care since he wasn’t paying the holding costs. Their friendship almost didn’t survive the deal. In a situation like you are describing - if you buy the house make the contractor 100% responsible for holding costs associated with the mortgage or loan. That will give him a very big incentive to concentrate his enery into the project. Good luck.
How do you determine how much a private lender or partners get for their money when doing real estate deals. Or do they usually determine themselves? Thanks.
I liked one of the preceeding respondents 18% agreement. I started out with an arrangement like that. However, what if you flip a home very, very quickly. Your investor who made the whole deal possible gets a pathetic return after having committed his/her money for an indefinite period of time. Here is a real example. I borrowed $30,000 with a commitment on the investors part to lend an additional $60,000 (I was buying a home for $27,000 in a $150,000 neighborhood). The other $60,000 was for fix up costs so that I would have had $90,000 into the property. As things turned out the roofer I had over while I was in the process of buying the house referred me to two guys who bought it from me for $63,000 two weeks after I bought it. If I had paid just 18% interest I would have paid him $207.00 ($30,000 * 18%/52weeks * 2) for the use of his $30,000 for 2 weeks. Remember to, he had committed to loan me up to $90,000. Instead, using the 10%interest & 10% of the profit formula he got close to $4,000 for a two week loan of $30,000. Obviously, he was very happy. So was I. I made more than $35,000. If you use this formula - it is important that you count the interest paid as one of the expenses of the project in determining the projects profit.
Re: Is There A Formula-For splitting Profits - Posted by John (KS)
Posted by John (KS) on December 09, 1998 at 11:55:33:
I think it depends on the investor. I started out by borrowing $5000 from a private investor and I offered to pay him 18% interest. After he handed me the money and we had the note signed, he told me “NEVER OFFER TO PAY 18%!” I told him, “I GOT YOUR ATTENTION DIDN’T I?” I had told may friends and aquaintences about my ideas for investing and no one offered to loan me anything till I mentioned 18%. It may be high, but I got the money I needed.
I have got a plan with a buddy who does construction. I will find a home that needs work, I will buy it and pay for all materials to fix it up. He will fix it up, then we will split the profit 50%/50%.
I have a private lender who will lend me 97% of purchase price with one days notice. All he does is a drive by and thats it.
I pay a 1% fee - i.e. on 100,000 I would write him a check for $1000.00. He lends me the money at 18% with no payments till I sell. So, I put up a $3,000 deposit, $1,000 to my lender and I own a 100,000 house for $4,000. I fix and flip - mostly within 90 days so I usually pay $5,000 to $6,000 for almost 100% financing. He is happy and so am I. I had 10 deals on the go at one time this year thanks to this arrangement. Its costs me big - but I have the ability to do 10 deals instead of 2 or 3 at a time. Plus if the world collapses tomorrow I don’t have my personal funds (or neck) at risk.