I'm selling land to a contractor, how can I help us both? Is there a creative way that we both win?

Question

I don't want the lot payment and the contractor is just starting in business. He has a friend with years of experience, What way is there that I get my price(no more payments) and he can make the deal.. The lot cost 385K near the ocean, and there is a loan for 303K on the land. He wants to build a spec home on it. The land is currently 8.25%. What deal structure would maximize both of our situations?

Answer 1

Become a partner. Let him build the house and he pays you when the house is sold. He also splits the payment with you until then.

Answer 2

Do this as a Joint Venture. Form an LLC. You are contributing $82,000, he will be contributing much, much more. If he is making the payments on the loan plus purchasing all construction materials and supplying all the labor, then you will make a modest proft. If the house ends up selling for $1.7 million, then your $82,000 against his $$$ will give the percentage of your profits.

If you simply want out, then look in your loan papers to see if he can assume your loan. Sometimes he can, with a fee. Otherwise, his best bet is to get a construction loan that pays off the $303,000 as its first draw. These are interest only loans. Everytime he use money from the construction loan, there is an interest payment due. When the house is done, it flips over to a 30 year mortgage. He will probably have to apply for this as owner-occupied. Banks can get a little leary of spec-home loans.

Make sure that what ever deal you make, you get yourself off the deed unless doing a joint venture. If he ends up running out of money, you will be stuck with a half-finished house and and bills left over from sub-contractors or suppliers.

Answer 3

Form an LLC or LLP (limited liability corporation or partnership): you transfer the land to the new entity, he builds the house for a client or on spec. The entity ends on the sale of the property and the distribution of the net profit, which can be split 50/50 or by the total value of the contribution of each partner divided by the net profit.

Make sure to spell out how the real estate taxes and any assessments, and the mortgage payments are to be handled.

If the new entity cannot get a mortgage with both of you as co-signers, you can still form a new entity, but not transwer the real estate to it.

Answer 4

Get a real estate lawyer to draw up the partnership agreement and make sure both parties are protected and things are fair and legal. This is the best way to insure that you won't lose a friendship.

Family and friends are OK until a business deal comes along and money enters into the picture: Then it should be kept as strictly business.