Equity participation - Posted by Mike O


#1

Posted by Bill Gatten on December 07, 1998 at 20:07:11:

Mike,

Would suggest placing the property into a land trust in your name, and letting the seller keep a percentage of beneficiary interest in the trust, representing his “share” at the end of the agreement.

The Beneficiary Agreement would stipulate the percentage of net profit to be shared between (among) beneficiaries.

The way I do it is this:

  1. Agree that after (upon) closing, you will place the property in a land trust in your name and assign a portion of the beneficiary in it to him (your seller).
  2. Execute an Assignment of beneficiary interest for the 40% (or whatever percentage you settle upon… 40% sounds reasonable) to the seller
  3. Create a Beneficiary Agreement stipulating that at the end of the agreement, he gets his 10K and 40% of the net profit on sale and you get the rest(i.e., refers to the net profit after loan pay-off; after a return of your intial contribution [closing costs and down payment], and aftr any costs of disposition.

The Bene. Agreement stipulates that upon the termination of the trust (in 3,4, 5 years), 1) the loan will be paid off; 2) the costs of sale will be paid; 3) you get back the money your started with; 4) he gets back the $10K, and 5) the rest is shared between you, with respect to each party?s percentages of beneficiary interest held.

E-mail me personally on the issue if you like.

Bill


#2

Equity participation - Posted by Mike O

Posted by Mike O on December 07, 1998 at 12:51:44:

I’m new to investing, but love this site.

Here’s the deal (my first) in investing. I have been dabbling for about 1 year.

Property is 1 family, in a now low income area, revitalization of the area is underway, new light rail shopping plaza, anchor stores the whole nine yards.
Owners are partners, asking 49K all cash. I went to a mortgage broker that will lend me 47k, with 5% down. I will borrowed the money for down payment and closing costs, mortgage rate is 8 3/4%, my credit is on the comeback.
So far I’m using OPM to do the deal, I have some money for cosmetic repairs, and landscaping.
Now the problem: Upon inspecting the property, which I originally only eyeballed, there needs more work to get the house up to rentable standards, I’m guesstimating about 10K, the owners are firm on the price, but the representing partner just told me he would be willing to do an equity participation. I will realize the monthly cash flow and all the necessary management stuff, and he will take a 40% split of the equity in five years. When we sell the property. He doesn’t want any monthly payments just the equity profits.I don’t know that much about equity participation, but it seems to me I’d get my 10K for fix-up costs,back to the property for one minute, its a 1 family with 5 bdrs,3stories, and I’m thinking about making it a 2 fam, once I check the zoning for the area, to increase my cash flow. A CMA I did shows that 1 fams in the area sold for an average of 74K in the last year.3 years ago the VA appraised the property for 59K. The property is in Jersey City,NJ, I have great contacts to do the necessary repairs, and I need to know how to structure this deal, or at least the equity participation part. My monthly cash flow will be about 350.00. I hope I included enough info, and sorry about the length of the post.

Maybe I just need reassurance, but I don’t want to screw up my first deal.

Thanx a bunch for any help.
Mike O


#3

Re: Equity participation - Posted by Bud Branstetter

Posted by Bud Branstetter on December 10, 1998 at 10:48:55:

Mike,

Exercise caution when dealing with an investor you don’t know. It appears the condition has already been misleading. Will the place qualify for a new loan? My preference are not to use loans for buying unless you are buying a lot of equity. 49K purchase plus 10K fixup with appraisal of 59K(3 yrs ago) does not sound like a great deal. If you do an equity share you would base appreciation on an appraisal after the fix up.

To say that the average SFH sold for 74K is almost meaningless. It’s like saying the average temperature in December if 50 degrees. What I want to know is what the tempature will be at 3pm tomorrow. What will this house sell for.