What Do You Think About My Offer To A Hard Money Lender (friend)...
...I offered a friend the following offer tonight through email, he said he will look over it and get back to me tommorow. What do you think of my offer, is it something he will go for?
Details:
Currently I own two .24 acre lots on the dead end street Rhudy Ave. They have an appraised value of $26,500 each. In order to put two houses of approximately 1188 sqft on these lots I have First Value Homes under contract for a final price of $91,978 for each house. This price includes everything shown in the accompanying spreadsheet as well as a few other additions I can tell you about if interested. The price of $91,978 is estimate on the high side by First Value Homes as to allow for any additional expenses that may arise. If both houses were to be built at the same time there would be a significant drop in expenses as both lots could be graded at the same time, foundations could both be put up at the same time, all sewer and well lines could be run at the same time and both houses could be set the same day thus saving in crane expenses and crew expenses etc.
Proposed Offer:
I estimate that if both houses were to be built at the same time, with savings on labor etc. each could be built at an estimated cost of $85k thus totaling $170k. Approximately $200k would be required from an interested investor to allow for any cost overruns. If the job only costs $180k then the difference of $20k will be returned to the interested investor. I will oversee all aspects of the building process to ensure everything gets done in a timely manner. My proposal is a fixed rate of $20k returned to the investor as well as their full investment for the utilization of their money after both houses have been sold. For example if the total project costs $185k then a total of $205k will be returned to the investor after both houses have been sold. There are a few pro’s and con’s that come with this deal as any real estate investment will lend to itself.
The Pros:
- Interested Investor is not required to do anything except provide funding
- Interested Investor is not required to buy the land thus saving them $50k up front for a similar investment
- Interested Investor will be paid a fixed rate of $20k no matter the sale price of the house, this can be good because if the house is not moving I can drop the price in order to get it to sell quicker thus I will be responsible for the difference in profits required to pay the Interested Investor their $20k
o This money will come from one of two places:
§ I own the land outright and it has a market value of $26,500 being added to the cost of the house that will be paid to myself at the time of sale. This amount can be decreased in order to ensure the Interested Investor gets their $20k.
§ If the land were factored into the price of the house the potential profits range anywhere between $10k-$30k each after paying a real estate agent their 6% for sales commission. Thus if each house only shows a profit of $15k, then the Interested Investor keeps $20k of that profit and I keep the other $10k.
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The Cons:
- Interested Investor does not receive their money until both houses have been sold. This could range anywhere between 1 month to 1 year. However keep in mind that the Asheville area market is very hot right now. My real estate broker expects that we can pre sell both houses before they are even finished. If this happens then the sale of each house will be finalized and completed shortly after the construction process is complete.
I could do that however my wife and I just bought a house and we close on the 10th of August. In the mean time the bank is not going to give us a construction loan at this point because most of our funding is tied up getting this new house. The bank would probably quality us for the loan(s) to build however there is no way I would be able to afford 3 mortgage payments at one time thus in this case there would be no payments just a lump sum of cash at the end.
-Sly
What are the houses going to be worth after construction?
In the deal you have described it looks like you are giving away a lot to a hard money lender in exchange for savings on construction.
Their market value will be between 137-145k Is my offer to good to a hard money lender?
-Sly