# Structuring a deal with an Investor on a Spec House



## RMB48 (Mar 31, 2014)

I have a few investors wanting to build spec houses. On one current one that I am doing, the investor is fronting 100% of the costs, I am doing 100% of the work and accepting 100% of the warranty coverage and in exchange we are splitting profit 60/40. 

It has gone great so far. Well enough that we have found ourselves some promising lots in a great up and coming neighborhood and we are setting up to do a few more. 

My question is have any of you ever structured a deal like this where you are able to recognize profit during construction on the draws rather than 100% of it on the back end? 

Currently, my dilema is that my residential business is new and currently on the side. I have a regular day job working for a commercial contractor. To build this amount of houses this far away (45 min drive) from where I work is impossible and I need to be able to quit this day job. I can't do that and wait on this profit to hit months down the road. So I'm trying to think of a way to get paid as the house progresses, but keep it fair to my investors.


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## mako1 (Sep 1, 2013)

Explain that to your investor in place of us.100% of the warranty on you may turn into an issue down the road for you.Hope it does not bite you in the ass.


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## NJGC (Apr 5, 2014)

Should be able to ask the investor to float you a portion of your projected profit.....good luck, hope it works out.


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## EricBrancard (Jun 8, 2012)

For me to take 100% of the warranty responsibility, I would also need 100% say in material, direct labor and subcontractor selection. I wouldn't want someone who is taking 60% pressuring me into a cut rate project that I have to now guarantee.


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## RMB48 (Mar 31, 2014)

That's how we do it. All they do is buy the lot and pay the costs. I picked the plans, made the budget, negotiated with subs and selected all of the finishes. The permit is under my name, the for sale sign has my logo on it. The buyers are purchasing it from me. So I carry the warranty.


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## Warren (Feb 19, 2005)

I think you would do much better if you just got a construction loan. Your taking on all of the liability anyway.


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## GovtContractor (Dec 4, 2014)

Just curious here, since this is out of my realm. 

Are you on title? What happens if the home doesn't sell? What if the investor defaults on the loan?


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## CarpenterSFO (Dec 12, 2012)

I have a few questions: 

When you say that you're doing 100% of the work, what does that mean? Who executes the construction? All subs, or do you execute, or have a crew?

What are you getting 40% of? You say the profits, which is the sale price minus exactly what? You could be getting a sweet deal or a completely raw deal, depending... Do you get any compensation during the project?

Have you completed one of these yet, all the way to the end, and participated in the profit distribution? Or is the current one the first one? 

If you want to get paid during the project, then you should expect your total compensation for the project to decrease, as you take on less of the risk.


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## Shellbuilder (May 14, 2006)

Hard money lenders 6 points up front ,4 points additional at 6 months, 7% interest rate payments, stage funded with appraiser as inspector for 500.00 for 5 draws.....100% financing


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## concrete2013 (Nov 6, 2014)

Are you completing it at cost?


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## RMB48 (Mar 31, 2014)

I am not on the title for the lot. 
When I say 100% of work I mean I am responsible for contracting out all work and overseeing the project. He pays out through draws just like a bank loan except that I pay no interest. We have it in a contract that he is to pay 100% of the costs and property taxes, and upon sale of the house he gets 60% of the profit while I get 40%. Currently I am not paid anything during construction. Only on the sale. 

This is the first one. We just got our CO yesterday. The house is not sold yet.


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## CarpenterSFO (Dec 12, 2012)

If you mean that you split what's left of [sale - investor's cashinvestment], then you're not splitting the profit 60/40. The investor's investment is secured by the value of the property and improvements (including the value of your work). His investment return (let's call it his profit) is 60% of a pool that includes profit plus the value of your investment (your deferred compensation for work actually done by you). Your investment (your deferred compensation) and your investment return (the value attached to having deferred your compensation until the end of the project) are 100% at risk (as they only come after the return to the investor of his investment principal), and both come from that 40% of the hybrid pool. While it's possible that you both make good money, it's also possible that he gets his money back and you lose money - that is, that you lose the significant value of your investment.

You may have a great deal going, and may make some good money, but you should understand all this - the investor certainly does. Hopefully you've kept an accounting of all of your time, travel, expenses, etc., so that at the end you can evaluate whether you made any money on it, or could have done better putting all that labor into some other money-making idea.

Fair or unfair? He's the one with the money, and if those are the rules, then it's just your decision whether to play or not. At least the only thing you're putting at risk is the value of your own time.

I'd wait to see how the final accounting comes out on this first one before entering a commitment for a bunch more.

Good luck with the sale!


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## CarpenterSFO (Dec 12, 2012)

Chasing this down a little more:

If your name isn't on the title, how exactly does the purchaser buy from you?

Let's say that the market goes a little south, and your investor needs to sell, and has the authority to do so because he owns the property. The property sells for the costs, or less, or a little more. You could get zilch, or peanuts, and be the proud owner of the warranty. Is that correct?


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## Golden view (Feb 16, 2012)

Last time I took a construction loan I came out about 90/10 in my favor.


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## griz (Nov 26, 2009)

What are you getting 40% of?

How are profits calculated?

Wouldn't your labor be a job cost?

I'd also lose the responsibility for the warranty.


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## TNTRenovate (Aug 19, 2010)

griz said:


> What are you getting 40% of?
> 
> How are profits calculated?
> 
> ...


You said it before I could. I charge a 12.5% GC fee on ever job I GC. Not to mention my costs. I guarantee its my carpenters and laborers on the job.


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## CarpenterSFO (Dec 12, 2012)

RMB48: Hopefully you understand that no one is against you making some money, as much money as you can, on your projects. What strikes me, and maybe some others, is that you are carrying a lot of the risk. A turn in the market, and you could own all the liability on some houses for which you were never paid a penny.


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## RMB48 (Mar 31, 2014)

Carpenter, don't worry I certainly appreciate all of the advice. I have not thought about the profit before like you laid out.

As far as the market going south and me owning a warranty on a house I made no money on, how is that any different than me taking out a loan from a bank and the same thing happening? In Louisiana, I'm bound by the new home warranty act regardless of how my project is funded. I cannot pass the warranty responsibility on. 

But having said all of that, my question was focused on how should I structure the next deal moving forward to where I can recognize profit. It seems that attaching a GC cost % on the house is the best way - that way it doesn't matter what the house sells for, I get my money.


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## RMB48 (Mar 31, 2014)

Also, as should be evident, I'm new to the business side of this (ie: financing, structuring deals, etc). I've always been able to build a quality house on time and on budget, but going out on my own there is a lot to learn. Any advice I could get or recommendations on reading material is greatly appreciated.


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## EthanB (Sep 28, 2011)

I would think that your labor should be a job cost if you are subtracting his investment from the sale price BEFORE you calculate the split. If his investment is subtracted, then yours should be as well.

I can see arguments for getting draws throughout the project and arguments for getting your money after the sale. It will depend on the two of you. He's putting in a bunch of money with no return until the sale so it's not unfair to think that you should do the same. The big issue I see is that he's the only on on the deed, with that caveat I think I'd want some money in pocket as he IS gaining tangibles throughout the project.


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