Hello, I am just starting on my first real estate development deal without much experience.
A financing partner asked me to leave my equity in the deal. Can someone explain this concept to me better?
I project to have a profit of $1,000,000 on this deal that we would split 50/50.
Thank You
Leaving equity in a deal
If you project to make $1,000,000 from the deal, your partner in the deal expects you to leave the profit in there for a while. If not, you either have to sell it off quickly, both take the profits, or he has to come up with funds to buy you out.
I don’t think he has money to buy you out. Would that be $500,000??
I done deals where this came up, though I do not want long term partners if they’re not family members. My guess is you guys have not gone through with the deal yet.
Once I had a partner in a flip, needing some rehab, nothing down deal. He found the deal, invested nothing, but wanted to split 50/50. I was the money partner, and I agreed so long as we could make a 50K profit. The seller gave us an assignment, but we have to close on it if we could not find a buyer and close in six months.
At first we found a buyer, paying us $60K more. We celebrated when the buyer got a mortgage and closing date. But as luck would have it, he lost his job a week before closing. Deal cancelled.
What now??
We’re contractually obligated to the seller. I incurred 20K at this point, though it started as nothing down. I had to get a mortgage on it to close. Fortunately, before the deal, I spoke with him about what would happen if things go wrong. I agreed to give him a few dollars if that happened, if he can’t leave equity in the deal and remain a silent partner.
He felt he left 30K equity, but it made no sense for me to invest 30K more to buy him out. Finally he agreed to take $2,000 for his trouble, a bird dog fee. Lucky for me, the housing market crashed a year later, about 40%.