Have you ever wondered if you could flip a house without using your own capital? Well, you can. There are several strategies for investors in real estate that work with no money down.
One technique to flip a house without your own money for a down payment is to do a Joint Venture with the seller.
When browsing any real estate forum, it is easy to see that there is tons of interest in how to flip a house without using your own money. Why wouldn’t there be? After all, real estate investing is a capital intensive business, and there are many benefits to structuring a deal that does not include your own capital.
I have used this strategy before where I entered into a financing agreement with the seller. They funded the renovation, I managed the renovation, and we split the profits at a pre-negotiated proportion. It was awesome
Multiple Ways to do a Joint Venture
There are two fundamental different ways you can setup a joint venture to flip a property with no money down. The first way is to have a 3rd party partner on a deal to supply the cash for the project. This is probably the most common way but it requires a partner with deep pockets.
The other way is to partner with the seller of the house. This is a format of owner financing. This is the type of joint venture deal we are talking about in this article. Lets dig into this stragegy a bit further.
When does this Make sense?
Trust is critical. Because you do not have a recorded property interest, and the seller is ultimately on the hook for you completing the repairs, this deal works best when there is a lot of trust between the parties involved.
Why is trust so important? Since you do not have a recorded interest in the property, the seller could technically sell the property and not pay you. Then you would have to take the seller to court outside of the closing to try to collect the money owed to you.
Specific scenarios where this strategy will work are when family members or friends are thinking of selling houses that they would like to renovate before sale. Another scenario is if you know a landlord that has properties they have held for a long time.
You are partnering with the seller for this style of deal. It does not make a much sense to present a complex joint venture as an option to a seller you just met. There are too many moving parts, especially if there is not enough trust between partners.
This Joint Venture Strategy is Best When:
- You have skills to complete rehab
- You have the time to complete rehab
- Seller trusts you
- You trust the seller
- Seller wants to help you get started
- You do not have cash to buy a house to flip
Setting Current Purchase Price
In order to set a fair purchase price with the seller, it is a good idea to consult with a real estate agent that you plan on listing with after the renovation. They will be able to provide you with a CMA (Competitive Market Analysis) on both the current state of the property, and what it could be post renovation.
It is possible to do your own CMA to determine what a fair purchase price would be currently.
When nogotiating this price with the seller, you have to consider how it ties in with the other aspects of the deal. The seller may be willing to set a more conservative before renovation purchase price if you are cutting them in a larger share of the profits after the flip.
Funding Tip: Utilizing a Home Equity Line of Credit
The question of where the money for the renovation comes from is important in this strategy. The great thing about real estate investing is, all of this is up for negotiation. You get to be creative and work out a win-win for all parties.
A potential Win-Win scenario is for the owner to tap into a home equity line of credit for the renovations.
Home equity lines of credit are usually at a very good interest rate. Since the money is going directly back into the house for items that you determined as high value add, it is relatively safe for the owner.
If you are able to negotiate a win-win scenario where the owner of the house pays for the renovation, you are then flipping a house that requires no money out of your pocket. If you do have the ability to fund this part of the deal, you can use this to negotiate better terms on price or income split.
Benefits to Seller
The time when I have done this model was actually not on my first deal. The primary benefit to the seller was that he was in a neighborhood where fully renovated properties were selling extremely fast. Properties that needed some work or were dated were sitting on the market.
By allowing us to renovate the property, he was able to sell the property quick once it was put on the market. He was also able to make some money with the equity split of the gain we created.
Another giant benefit to the seller can be that they are able to participate in part of the profit of the flip or benefit from a higher sales price than they would otherwise recieve on the market.
Handling the Closing
When you put the property on the market and it is under contract, you can send the title company a copy of the JV agreement. That way, they are aware that there will be multiple checks being disbursed at closing.
Most closing companies will not actually want to be responsible for interpreting the whole agreement and determining the amount that is to be split between both parties. The title company will tell you how much is being disbursed in total. You will be responsible for doing the math and coming to an agreement with the seller.
Once you have come up with the amount split between the seller and you, then you can send the numbers to the title company. They will then disburse funds directly to you and the seller at closing.
The Joint Venture Agreement
Getting your paperwork done right is important. It is still important if you are dealing with someone you trust, though for different reasons.
When you are working with someone you trust on a joint venture, the process of going through the scenarios of what could go wrong, or how the deal will work with various outcomes will help set expectations on both sides. There is a lower chance of destroying your relationship with the seller if you discuss problems that could come up and potential consequences of them before you start.
Some items that could be considered:
- What happens when purchase price plus rehab is less than sale price
- What happens when rehab budget goes over
- What happens if rehab timeline goes too long
- Who is responsible for the pricing decisions when selling
This is not a time to cheap out and either skip doing the agreement or preparing an agreement yourself. It is definitely something that you should consult with an attorney and have them draft up.
If you are looking to save money, preparing a solid outline of how you want the deal to be structured should help save time when drafting the agreement.
The Structure of the Deal
Since you can structure the deal pretty much any way that all parties are happy with the agreement, there are a lot of ways a joint venture agreement could end up being structured.
That being said, here are a few building blocks.
The Terms
Here are a few things thatare typically included in the deal:
- Purchase Price: What you “purchase” it for from the seller.
- Renovations: Who provides the money for rehab, and how much is to be provided.
- Your Labor: Are you providing labor as part of the split, or are you getting compensated at an hourly rate for your time?
- Profit Split: This can typically range from 70/30 split your way, to 30/70 their way depending on where things fall for the other terms.
- Holding Costs: Utilities, mortgage payment, interest for funds for renovations, and property taxes can be in this category.
- Transaction Costs: Could be covered by your side. Could be covered by the seller. Could be setup to be split in proportion to how much the seller would have had to of paid on the original sale, and how much the increased price impacted the transaction costs are paid by you.
The Calculation
The equation of the deal would look something like this:
Your Income = (Sale Price - Purchase Price - Renovations - Your Labor - Holding Costs - Transaction costs) * Your Profit SplitThe Waterfall
What do you do when there isn’t enough money to cover the whole payout at sale?
A waterfall payout provision in the joint venture agreement explains what happens in these situations.
It will usually say that the first thing that gets paid out is the purchase price from before the rehab, and that goes 100% to the seller. If there is money leftover it will then go towards the renovation expenses. Then next might go towards paying carrying costs or interest for the renovation expenses. Finally, after all that is paid out, then the profit split is paid out.
Sometimes there is a guaranteed minimum return on the capital invested in a joint venture. In this example, where you are likely helping a friend or family member get their house ready for sale by flipping it while they own it, this is not typical.
Wrapping it Up
Entering a joint venture agreement with the seller of a house can be a great option to flip a house with no money down. It is not the best solution in every, or even most situations. This joint venture strategy has some great benefits in the situations that it fits nicely into.
A joint venture can be a great stepping stone if you are just getting into house flipping.
You can also use this joint venture strategy as a way of adding another project without the capital requirements of financing a more traditional route.
