so a friend of mine is looking to buy a short sale house that needs a ton of work.

instead of my friend buying it (say $150k for example), and having the ~$45k in work done prior to move in, the relater is proposing that her general contractor guy buy it, and have a contract with the buyer to sell it to the buyer when renovations are complete for $150k+$45k = $195k. There would be an agreed upon budget between the buyer and contractor with line items for each material purchase (as well as his labor), and if the buyer want's to exceed the budget, they can simply pay more on those items.

the loan would be easier for the buyer, since they wouldn't have to get two loans (main + construction), and the repair process would be easier for the general contractor since he wouldn't have to deal with the bank on each repair.

what do you all think about this? what all should the buyer look out for?

is this sort of arrangement even remotely conventional (anyone heard of similar situations)?

10/31/2011 11:49:55 AM

Expect a GC premium if anyone IS willing to do this in this current market. Basically, you would have to pay new home builder premiums for work done on an old house...

I highly doubt anyone reputable GC would agree to it though in todays slow housing market.

10/31/2011 12:01:58 PM

Sounds sketchy.

10/31/2011 12:10:38 PM

Quote :

"Basically, you would have to pay new home builder premiums for work done on an old house..."

Evidently he's already inspected the house with the buyer, and came up with the $45k number himself...so the next step would be looking at the details of his proposal.

10/31/2011 12:49:18 PM

I'm surprised that a GC would be willing to go $45k out of pocket right now. Dude should definitely hire an attorney to go over any contracts between him and the GC.

He could also talk to a lender and see if they'd be willing to make the sale price $195k and give him an allowance for improvements after closing.

10/31/2011 1:16:02 PM

that sounds sketchy as hell

10/31/2011 2:01:12 PM

Like I said in Old School, I also think this sounds sketchy. I don't really understand why they wouldn't just buy the home using a 203k loan and hiring their own contractor that they can trust than hiring some dude their realtor is hooking them up with with some weird ass contract thrown in the mix.

10/31/2011 2:28:37 PM

If possible I would skip the contractor and just bid and sub out the work myself.

10/31/2011 2:37:05 PM

Get a new realtor. This is a stupid idea. The realtor obviously wants the commission and also a "cut" from whatever contractor they have in mind.

10/31/2011 2:37:20 PM

wut da fuk

10/31/2011 2:38:48 PM

wrong thread

[Edited on October 31, 2011 at 2:56 PM. Reason : a]

10/31/2011 2:56:05 PM

yeah this sounds sketchy as fuck.

10/31/2011 3:09:38 PM

that's what i've been thinking.

i'm wondering why would this contractor be willing to plop down up to $195k of his own money in this thing over the few months it would take to fix this thing (he has a full time GC job, and would subcontract some of this work and do the other stuff evenings/weekends). what advantage is there for him to do that versus just fix the place up after the buyer buys it, without him having to invest any of his own money?

why would be be willing to put all this money into a house if all he's really clearing is his labor + profit made on subcontracting? sure taking the bank out of the mix might make things easier for him during the renovation process, but i don't see how THAT would make it worth plopping down that much money into the house.

10/31/2011 3:29:01 PM

Quote :

"why would be be willing to put all this money into a house if all he's really clearing is his labor + profit made on subcontracting?"

the bold part

10/31/2011 3:44:47 PM

Quote :

"the bold part"

theoretically he'd be earning the same amount of labor either way right? (assuming the budget was written with line items etc as described in the OP). how's he going to squeeze more labor $ out of the buyer just because he owns the house while the renovations are going on versus the buyer?

10/31/2011 3:46:44 PM

Yeah, it does seem to be unnecessary additional risk for no additional return. The only incentive I can think of lies with the realtor (so maybe the GC is a relative or owes the realtor a huge favor?).

- two commissions, and a larger one for the second sale

- The second sale would show a ~30% increase in sale price.. which could be perfectly on the up and up, or if they're doing a lot of such transactions, they could be aiming to manipulate the sale prices in an area like this guy did in the height of the bubble.

10/31/2011 3:58:45 PM

Quote :

"two commissions, and a larger one for the second sale"

true, i did consider that aspect as well...but the GC has flipped a few houses already, so I'm wondering if he would need the services of a buyers agent (and thus net 2 commissions for the realtor)

10/31/2011 4:20:07 PM

Sounds like the GC is going to go in there and do subpar renovations then threaten to sue your buddy if he doesn't buy it at $195k like he's contractually obligated to.

10/31/2011 4:23:16 PM

Nah, I meant given that there will be two sales, one to the GC from the bank/prev. owner, and then one from the GC to your friend.

The buyer's agent angle wont matter, since the buyer's agent is paid a commission by the seller's agent (IOW, it comes out of the selling agent's commission).

10/31/2011 4:26:14 PM

Any way to do an equity line?

10/31/2011 8:22:48 PM

Sorry, just skimming a little...but, I assume your friend is able to afford 195k worth of a house. The question in my mind is, he purchases the house and has 1 mortgage at 150k, then what does he have to do to get the 45k for renovations? What does that note look like? Is he going to establish a HELOC after closing the loan on the house using....cash?...as collateral?

[Edited on October 31, 2011 at 8:28 PM. Reason : ^ Thinking along the lines I am]

10/31/2011 8:28:37 PM

Quote :

"I assume your friend is able to afford 195k worth of a house. The question in my mind is, he purchases the house and has 1 mortgage at 150k, then what does he have to do to get the 45k for renovations? What does that note look like? Is he going to establish a HELOC after closing the loan on the house using....cash?...as collateral?"

The buyer qualifies for well over $195k. Sounds like he's called off that sketchy "let the GC buy it, then i buy from him" arrangement and will proceed with a more conventional purchase. I'm not sure what kind of financing he's going to get. I think he prefers a product from SECU where it's all one mortgage (purchase and repairs) but I don't know all the details.

[Edited on November 1, 2011 at 10:01 AM. Reason : -->

11/1/2011 10:00:39 AM

He's probably going for a 203k. Didn't think SECU did those though. Or maybe I'm just thinking of them only doing ARMs.

11/1/2011 10:11:32 AM