My first REI opportunity

[flettl2]

I know nothing about REI but a sudden opportunity came up and I was wondering what I should do.

I recently bought a townhouse in a new build area (no driveways, grass, fences etc), and a house down the street was bought by a REA/REI pre build, and now he's trying to sell it. He's only got one offer on the house, it's lower than he's willing to go, so he was wondering if I wanted pay for the fees to keep the house running (mortage, house insurance, utilities, etc) until April when the area will be completely developed. He has too many properties right now and can't manage and pay for them all. Most people buy in May-April, and there will be a hospital being built across the street by then in a developed area, he figures he can get an extra $50k on the sale. (Selling now for $465k, could be up to $530k in April).

It will cost me $2k/month to keep the place running, from Dec-April is 5 months so I will invest $10k.

We are trying to negotiate a reasonable ROI I can get where we both win, what should it be? What other factors should I consider?

 

[invst4profit]

Primarily you need to consider what he has invested in the property in regards to his costs to date.

You would then have many options. You could for example agree that from the sale you pay all legal, real estate and mortgage costs then you both receive back your respective personal costs and then all the profits are split down the middle.

Or you could get more creative. If you take the position that he is desperate demand a even larger portion of the final profits, say a 75/25 split, from the sale after expenses. Or you could take the whole enchilada.



Of course he may not need you at all leaving you no negotiating room or the market could tank leaving you with a major loss if and when it sells.

I would suggest that his numbers may be overly optimistic for the spring and what you are receiving is a unrealistic sales pitch. You need to research the market if it is your intent to share the risk on this property.



Your best bet may be to negotiate for him to pay all your costs to time of sale and X dollars regardless of final sale price if you are not a risk taker. How much is really up to you and likely not the same amount that I would ask for as it would be a matter of leverage to greed ratio if I were approached with his offer.

 

[flettl2]

He bought it for $360k, he put down a 35% deposit. Then he probably put in about $20-30k on upgrades, granite counters, pot lights, appliances, hardwood etc.

 

[Thomas Beyer]

Give him a second mortgage for 12-15%, with a minimum one year payment if he wishes to pay you early. That way you are protected if things go sideways. Nothing will be fully built out by April .. That is only 5 months away in Canada with slow winter construction. Perhaps April 2013.

 

[flettl2]

Can you explain more about giving him a second mortgage? What am I taking 12-15% from.

I realize by April they still won't have fences since the grass needs to settle for a while, and they likely won't have the second layer of asphalt put in for the driveway. But it still will be a lot more developed than it is now, most people don't want to move into what looks pretty much like a construction site.

 

[GaryMcGowan]

[quote user=flettl2]Can you explain more about giving him a second mortgage? What am I taking 12-15% from.



You offer him a second mortgage for the amount of $$$ and you charge 12-15% interest per year. You could structure it with an annual balloon payment on the interest. When the mortgage is paid out you could charge a 25% lenders fee. (10,000 x 0.25 = 2,500) You would of earned the interest payments plus a the lenders fee. You will also charge him all the legal fees.



Thomas does make a good point with the second mortgage option. It secures your money and if he defaults you are in a position to take over the property.

 

[Thomas Beyer]

[quote user=flettl2]Can you explain more about giving him a second mortgage? What am I taking 12-15% from.


You intend to give him money.



Money between two parties comes in TWO forms: equity or debt.



Equity is part ownership, i.e. you participate in growth or loss of property. Debt carries an interest rate (fixed or variable, or tied to asset value i.e. an equity participating rate of return). Debt comes in two forms: secured or unsecured. A secured loan is called a mortgage. It is secured on title and with legal language against the property. A 2nd mortgage is in 2nd position behind the (lower interest rate) first mortgage. Thus, the first mortgage has to be paid first on an asset sale, then the 2nd. The 2nd has higher risk as there may not be enough value in the property to satisfy the debt.



Find out what % of return for you money is reasonable and acceptable to you and the recipient. Then structure a deal around it.



A second mortgage at a high interest rate seems most prudent in this case.

 

[kir]

A lot of conditional things with this developer. I would just determine the actual value as of now, then determine the loan to value ratio to see if it's actually 65% (or whatever the downpayment was). Then decide if you want to give him a small loan.



Since a willing buyer already offered at a lower price...do you think this is an indication of the market?







Kir.