Investors and Owners FAQ
These are generic answers to our boiler plate joint venture system. These answers may not apply to the agreement you strike with an investor as each deal is unique, and both parties can negotiate virtually all terms freely.
Q How do you help owners net more money when they sell their properties?
A Our investors fund the renovation of your property, so you can sell it for top dollar vs accepting a low-ball offer. Our investors receive the capital they invest back, plus a negotiated percentage of the sale price of your property. Let’s say the investor agrees to spend $60,000 on your property in exchange for the return of his capital plus 4% of sale price of your property. If the property sells for $500,000 then the investor would receive the return of his $60,000 plus $20,000 (4% of the $500k sale price).
Q Is the investor extending a loan to the owner?
A No. The investor signs a joint venture agreement with you, thus there is no loan application or credit check.
Q How is the investor secured?
A The joint venture agreement is secured by the owner giving the investor a two year option to purchase their property. The duration of the option may seem long. That’s good. It can’t really be too long since both parties are obligated to sell to a 3rd party as soon as possible after the renovation, however it can be too short to protect the investor long enough to get to a sale. That’s why we recommend a two year option.
The function of the option is to ensure that the owner cannot sell the property to an end buyer until after the investor releases the option in exchange for his agreed compensation upon the close of escrow.
The option price is for the estimated after renovated value of the property less the amount of capital the investor is projected to contribute to the joint venture, less the investor’s agreed percentage of the estimated sale price. For example, if the property is estimated to be worth $500k after renovation, and the investor is estimated to contribute $60k of capital, and receive 4% of the sale price, then the option price will be $420,000 ($500k arv – $60k capital – (4%*500k sale price)).
In practice the option is very unlikely to ever be exercised as the investor likely has no interest in owning the property. If the option is exercised the owner will likely be ecstatic as they are getting 100% of what they estimated the joint venture would yield to them and they don’t have to wait for a third party buyer.
The joint venture agreement is also secured by a performance deed of trust. Essentially this instrument give the investor the ability to foreclose if the owner violates the terms of the agreement.
Q How is the investor ensured that the property will sell before his option expires?
A Banks typically list their properties at fair market value and reduce the price by 3-5% every three weeks until it sells. Our boiler plate joint venture agreement calls for the property to be listed on the local MLS by a Realtor chosen and contracted with by the owner, using the same pricing strategy that the banks frequently use to be sure the property sells promptly.
Q Can the owner buy out the investor at any time?
A Yes. The owner can buy out the investor for the amount of capital the investor has invested at the time of the buyout plus the investor’s percent of the estimated sale price that he is entitled to. If the investor had invested $40k by the time the owner exercised their buyout right, then the owner could buy out the investor for the return of the $40k plus 4% of $500k, which is $20k. Total buyout would then be $60k.
Q Who manages the renovation?
A The owner does. The owner contracts with whom they choose, subject to the investor’s approval. Once the contractor has been agreed to the renovation contract is attached and incorporated into the joint venture agreement.
Q How is the contractor paid?
A The investor pays the contractor in draws, upon proof of construction progress and compliance with code. Typically upon closing on the joint venture the investor will advance enough funds to get the contractor to begin the job. Then, the contractor will periodically submit draw requests to the investor. Investor will typically send an inspector to the property to confirm the work billed for in the draw request has been done to code. If yes, the investor funds that draw. This process repeats until the construction is 100% complete.
Q How is the joint venture closed?
A Typically an investor will ask an escrow company or attorney to provide title insurance or a title commitment for their option to purchase the property, and record a memorandum of option upon closing. The investor funds 100% of the cost of closing and adds the expenditure to the total amount of capital he is obligated to pay under the terms of the joint venture.
Q What happens if there are cost over-runs?
A The investor is typically obligated to provide up to an additional 15% of the estimated renovation costs to cover unexpected costs necessary to finish the initial scope of renovation work. If contingency costs exceed 15% then the owner and investor must separately agree as to who will cover those costs and under what terms. If they cannot come to terms the property must be sold as is.
Q How do Renovation Funders partners make money?
A They way we work is a partner signs your joint venture agreement as if they were the investor. The partner then markets the opportunity to joint venture with the owner to their database of investors. Once the partner locates a ready, willing and able investor he assigns the joint venture agreement to that investor for compensation he negotiates with the investor.
Q Can the owner get out of the joint venture agreement if he changes his mind?
A Yes. The joint venture agreement can be canceled by the owner for any reason, at any time prior to the joint venture closing escrow. This way all options are on the table for the owner all they way until the agreement actually closes.
Q What happens if the owner and investor have a disagreement they can’t settle?
A In that case the agreement calls for a mediator to render a non-binding decision that both parties can accept. If that does not work the disagreement is escalated to binding arbitration. The neutral arbitrator must be a retired judge or attorney with at least 5 years of experience in residential real estate law.
Q How long does a typical joint venture take to complete?
A Most joint ventures take 2-4 months to renovate, 1-3 months to find a buyer, and 1 more month to close.
Q What kinds of properties typically work?
- Locations: Anywhere in the US (we prefer medium to larger metro areas)
- Property Types: Single Family, Condo. No Commercial, No Development, No Bulk Deals, No Short Sale
- Project Types: Value Added Renovations, Additions, Hard Money Acquisitions OK
- Max (Liens to As Is Value) Ratio: 75%
- Balloons: No loans with a balloon payment requiring payoff in less than 12 months
- Min After Renovated Value: $75,000
- Max Renovation Budget: Case by Case
- Ownership Type: Privately Owned Properties Only, No Banks
- Default Status: Not in Default
- Occupancy: No Tenants, No Owner Occupancy for Major Renovations
Q Does the property have to be vacant, or can it be occupied?
A The property cannot have a tenant. If the renovation is very light the owner may be able to occupy if the investor agrees.
Q How does it work when the buyer is located?
A Escrow will automatically contact the investor to release his option, because the option is a recorded cloud on title. The investor is required by the terms of the joint venture agreement to release his option in exchange for the return of his capital and percentage of the sale price. The owner will be asked by escrow to review and approve all amounts paid to the investor prior to the close of escrow. Upon the close of escrow the escrow agent wires the investor his funds and wires the owner the balance.
Q How are the sale proceeds distributed?
A Typically the sale costs are paid, then loans and liens of record prior to the joint venture closing are paid off, then the investor’s capital is returned, then the investor’s sale price participation is paid to the investor, and the balance is wired to the owner.