Author Topic: Salvage Family Real Estate Investment??  (Read 1895 times)

yachi

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Salvage Family Real Estate Investment??
« on: April 03, 2024, 09:51:10 AM »
Summary: family flip house with my $50K investment might need to be sold mid-flip to cover other investor cashout, should I add $150K to cash out another investor and salvage it to help family?

I'm looking for advice on an investment involving family.  My brother-in-law does home construction and is on a third house that he's bought, fixed down to new plumbing, electrical and sold.  My involvement started late on the first house.  I got a tour of the house mostly completed, except for some expensive parts that remained uncompleted - kitchen cabinets, bathroom fixtures including tub, toilet and sink.  The snag was financial - all the money was tied up in the house, and couldn't be unlocked without a few grand.  I called a few days later and offered, unsolicited, $10K or so to finish the house, and a 10% interest rate.  We settled on a 20% interest rate so it could be good for both of us.  (A note on what we've been doing - it's technically 20% per house, not per year, so it kinda matters how quickly he can flip the house, but it simplified our math at the time)  That all worked out great, and a second house worked out fine as well.

The situation today is this house was first bought in 2020.  I had $10K in it in 2020, and added an additional $40K in 2022.  I imagined the situation in 2022 was similar to the first house - a bit of expensive pieces left to finish that this money could resolve, but it hasn't worked out that way.  As it sits, the house has a new roof, new electrical and plumbing, siding, insulation, and exterior landscaping.  It needs drywall, flooring, kitchen cabinets and sink, bathroom toilets, sinks showers tubs and cabinets.  I estimate it needs about $40K to $50K to finish.

But another investor wants out, and that's going to cost maybe $115K - the funds aren't there to cash them out, and there's a court judgement.  I feel I'm looking at losing my $50K investment due to having to sell the house as-is, or finding $150K to salvage the deal and finish the house.  It would 100% be up to me to offer the money, I don't think they assume I have this much available.  I'm FIRED, and while I have that much in retirement accounts accessing it all at once would cost me a lot in higher insurance premiums, insurance for my kids, and 10% early withdrawal penalties.

We have them looking at hard money lenders, and advised them that bankruptcy would protect the house they live in and some other assets, but haven't offered any additional funds.  We can lose the $50K, and the potential $10K profit without risking FIRED life, and while keeping good feelings for the family.  Not sure how it'd be on their end, they're far from FIRE-bound.

FIRED facts: $2.5M in investments without this deal, FIRE budget of $65K

GilesMM

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Re: Salvage Family Real Estate Investment??
« Reply #1 on: April 03, 2024, 09:57:59 AM »
A house unfinished after four years doesn't sound like a very good deal to me. I would be looking to get out, just like the other investor.

roomtempmayo

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Re: Salvage Family Real Estate Investment??
« Reply #2 on: April 03, 2024, 10:20:47 AM »
I wouldn't throw good money after bad.

Paper Chaser

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Re: Salvage Family Real Estate Investment??
« Reply #3 on: April 03, 2024, 10:39:43 AM »
$50k invested thus far + $115k investor buyout + $50k to finish reno = $215k minimum investment?

How long would it take to finish, and what might the property be worth at that time based on current trends in the local market?
How much would you stand to make from your investment (minus taxes, selling fees, etc)?

Potential profit from RE deal - increased insurance premiums for yourself and family - penalties to access the funds = XXX???

Is XXX worth it? If the family doesn't know about your assets, how might revealing that you have these funds change things within that dynamic?

yachi

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Re: Salvage Family Real Estate Investment??
« Reply #4 on: April 03, 2024, 11:09:44 AM »
$50k invested thus far + $115k investor buyout + $50k to finish reno = $215k minimum investment?

How long would it take to finish, and what might the property be worth at that time based on current trends in the local market?
How much would you stand to make from your investment (minus taxes, selling fees, etc)?

Potential profit from RE deal - increased insurance premiums for yourself and family - penalties to access the funds = XXX???

Is XXX worth it? If the family doesn't know about your assets, how might revealing that you have these funds change things within that dynamic?

Houses in the neighborhood have sold for $450K, but had more square footage.  I'd want appraisals and a minimum $350K estimated sale price.

If we add $165K on top of our $65K planned, we'd have at least $16,500 in tax penalties.  Health insurance for 4 kids is currently no cost, but would be $11,280 at this higher income level.  Insurance for adults is low cost with $13K in subsidies last year.  Not sure when those completely go away, but it seems reasonable to assume someone making 1/4 million doesn't get them.

So potentially $40K to get my hands on $165K?

The problem with this from an investment standpoint is the top payout is capped.  I've probably lost $50K in investments before, but it's been with the potential of much higher returns.  I'm showing 27.2% returns in Vanguard accounts that go back 17 years.  I consider the entire period a recovery from 2008, so I've had a massive tailwind, and now I'm in more cash and bonds than ever before.  So I'm not expecting these returns in the future, but taking a 24% haircut to access the funds for this real estate puts me at a massive disadvantage.


Dee18

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Re: Salvage Family Real Estate Investment??
« Reply #5 on: April 03, 2024, 11:15:07 AM »
This sounds like it might be a case of sunk cost fallacy: "the phenomenon whereby a person is reluctant to abandon a strategy or course of action because they have invested heavily in it, even when it is clear that abandonment would be more beneficial."

The best way to deal with a situation like this is to ask yourself:  if you had not initially invested in this, would you now choose to do invest with the combined amount of your initial investment and the additional contemplated cost? If the answer is yes, go for it.  If the answer is no, stop now.

dandarc

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Re: Salvage Family Real Estate Investment??
« Reply #6 on: April 03, 2024, 11:19:38 AM »
Is the only place you have to get funds traditional IRA accounts? No Roth Basis? No capacity to borrow? I can get a five figure sum from a credit card I have for 3-4% fee with 0% interest for 12 months - maybe think outside of the box.

Also - why do you need to be the one to come up with all the money? What is BIL doing that this flip is taking so long to actually happen and there's no money around to finish it?

Oh - and if you do put more money in, then the deal is you get a huge portion of the profit. Your 20% of the $50K plus 50% of whatever additional you put in. Before BIL gets anything. And your end goes up by a significant percentage point per year until he gets the thing finished and sold.
« Last Edit: April 03, 2024, 11:23:07 AM by dandarc »

roomtempmayo

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Re: Salvage Family Real Estate Investment??
« Reply #7 on: April 03, 2024, 11:37:44 AM »

So potentially $40K to get my hands on $165K?


Yikes.  I cannot imagine doing this.  Just firesale the house and get out.

If you feel like you need to do it to save the familial relationship, I would absolutely be up front with your brother than you're paying almost 25% for the money, plus 27% opportunity cost based on your Vanguard accounts.  The one year cost of that 165k to you is something on the order of $245k.  At a bare minimum, I'd want that amount to be paid as a first priority on sale.

yachi

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Re: Salvage Family Real Estate Investment??
« Reply #8 on: April 03, 2024, 01:26:16 PM »
Is the only place you have to get funds traditional IRA accounts? No Roth Basis? No capacity to borrow? I can get a five figure sum from a credit card I have for 3-4% fee with 0% interest for 12 months - maybe think outside of the box.

Also - why do you need to be the one to come up with all the money? What is BIL doing that this flip is taking so long to actually happen and there's no money around to finish it?

Oh - and if you do put more money in, then the deal is you get a huge portion of the profit. Your 20% of the $50K plus 50% of whatever additional you put in. Before BIL gets anything. And your end goes up by a significant percentage point per year until he gets the thing finished and sold.

These are good questions

Quote
Is the only place you have to get funds traditional IRA accounts?
It's where 92% of my funds are.  I have maybe $74K in a bank account and brokerage account, but that's this year's living money.  Then the rest is in an HSA, an ESOP, an old 401(k), and tied up in this flip.
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No Roth Basis?
I just used up my Roth Basis last year, I FIRED in 2022.  This year most of my spending money was going to be from the taxable account.
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No capacity to borrow? I can get a five figure sum from a credit card I have for 3-4% fee with 0% interest for 12 months - maybe think outside of the box.
Borrowing from a credit card I could at least put some of the IRA withdrawals into next year, if not completely pay them off if the house could be finished and sold.  But I'm not sure how comfortable I am relying on the timing like that.
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Also - why do you need to be the one to come up with all the money?
So BIL and spouse are looking to see where they can go to borrow enough to finish the house, and try and pay off the other investor from the house sale.  But I don't know if that timing would work.  In my mind, it would be little use for me to throw another 30K at the deal, as that's not enough to pay off the other investor (who might be able to legally force a sale of the property in as-is condition).
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What is BIL doing that this flip is taking so long to actually happen and there's no money around to finish it?
Apparently starting the build before all the funding is in place.  There were accusations from the other investor that the money wasn't used on the flip but I feel there's enough subcontractor work there to justify what's been spent so far.  The idea to cashflow it from the construction business seems not to have worked out, but I don't have a good handle for how much has gone undone due to finances vs other projects.
Quote
Oh - and if you do put more money in, then the deal is you get a huge portion of the profit. Your 20% of the $50K plus 50% of whatever additional you put in. Before BIL gets anything. And your end goes up by a significant percentage point per year until he gets the thing finished and sold.
Yeah, if it's costing me 20%-25% in taxes and lost benefits to get my hands on the funds, even 50% isnt outrageous from my standpoint.  You're right that there should be an ongoing yearly cost.  I assumed his other funding would be enough push to finish the project on time, but I never imagined it'd just get to an "I want out, give me the money" position from the other funding.

yachi

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Re: Salvage Family Real Estate Investment??
« Reply #9 on: April 03, 2024, 01:44:18 PM »
This sounds like it might be a case of sunk cost fallacy: "the phenomenon whereby a person is reluctant to abandon a strategy or course of action because they have invested heavily in it, even when it is clear that abandonment would be more beneficial."

The best way to deal with a situation like this is to ask yourself:  if you had not initially invested in this, would you now choose to do invest with the combined amount of your initial investment and the additional contemplated cost? If the answer is yes, go for it.  If the answer is no, stop now.

That's tough.  Prior to knowing the situation, I was looking forward to getting the original money back, plus the gain to live on while doing Roth conversions.  So it wasn't going to go back into another flip.  As an investment I can see it kinda sucks - I have little control over the timing, it's not liquid enough to move into other opportunities if the market changes, it's risky, and the disclosure isn't the greatest (I could have insisted in more I suppose).

FINate

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Re: Salvage Family Real Estate Investment??
« Reply #10 on: April 03, 2024, 01:52:48 PM »
This is a deal that's gone sideways. It happens. Back in 2020, with historically low interest rates and increasing housing prices, flipping homes seemed way less risky. All that changed in 2022.

If you buy out the investor they will be the ONLY one made whole in this deal. Do you really want to subsidize this person at your expense?

Just cut your losses and move on. Sell the house as-is and return the money to investors as legally required. This may be a bit complicated, all depends on how things were structured. If there's a mortgage the lender is almost certainly first in line. If there's anything left over it should be divided by percentage of ownership. Hopefully you're not on the mortgage (doesn't sound like it). You may or may not get back a fraction of your $50k. Just be thankful that it didn't cost you more.

Catbert

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Re: Salvage Family Real Estate Investment??
« Reply #11 on: April 03, 2024, 02:35:42 PM »
I would walk away, not invest again with BIL and hope it can all happen without hard feelings.

If I understand correctly, the investor who wants out already has a court judgement?  If not, can you just say "no"? 

The house next to me was intermittently going through a flip also for almost 4 years.  The original 3 guys (contractor, money guy who had worked with the contractor on a previous flip and first-time money guy) had a falling out and it went into foreclosure.  Property taxes alone were  almost 1K a month!  The guy who bought it out of foreclosure apparently relied on online line pictures which didn't show the windows all being removed - an expense he didn't expect.  It was eventually finished and the new owners are nice.  I think in the end no one made any money.  There's a reason hard money lenders charge so much.

yachi

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Re: Salvage Family Real Estate Investment??
« Reply #12 on: April 03, 2024, 09:35:17 PM »
To clarify I'm very much a silent investor in all this, not involved in subcontractor bids, or determining scope of repairs, or level of finishes, or finding sources of funds.  I'm not on any mortgages or the deed.  Another investor already has a court judgement, and that part has no recourse to me.


FLBiker

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Re: Salvage Family Real Estate Investment??
« Reply #13 on: April 04, 2024, 04:57:48 AM »
I also vote for walking away.  For context, though, I would never invest w/ family (or friends, for that matter) and am not interested in real estate, so walking away may make more sense for me than it does for you.

Dee18

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Re: Salvage Family Real Estate Investment??
« Reply #14 on: April 04, 2024, 05:44:12 AM »
Have you read the court judgment or other documents in the case?  They might help you decide.
« Last Edit: April 04, 2024, 07:30:02 AM by Dee18 »

Catbert

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Re: Salvage Family Real Estate Investment??
« Reply #15 on: April 04, 2024, 11:23:02 AM »
Selling this house mid-flip may be difficult.  I say that based on the flip next door to me.  When the original flippers had a falling out the house wasn't habitable (kitchen and bath demo-ed, some walls just studs with electrical but no drywall, all windows removed etc).  They tried to sell but it needed to be an all cash offer since no one could get a regular mortgage on an uninhabitable house.   

former player

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Re: Salvage Family Real Estate Investment??
« Reply #16 on: April 04, 2024, 12:34:15 PM »
Selling this house mid-flip may be difficult.  I say that based on the flip next door to me.  When the original flippers had a falling out the house wasn't habitable (kitchen and bath demo-ed, some walls just studs with electrical but no drywall, all windows removed etc).  They tried to sell but it needed to be an all cash offer since no one could get a regular mortgage on an uninhabitable house.
What you might look at doing is getting the house valued as is, paying out the notional share of that value to this bankrupt investor and then reforming the house ownership amongst the remaining partners. That way you would be returning the bankrupt investor the share of the house that their investment is currently worth while retaining the potential full value when the flip is finished.

The money to pay off the bankrupt investor could come from any one or combination of the existing investors or from a new investor and would be included as part of their ownership share.

You would have to get proper valuations and formal documentation and check that whoever is dealing with the bankruptcy etc is content with the valuation.

FINate

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Re: Salvage Family Real Estate Investment??
« Reply #17 on: April 04, 2024, 01:00:21 PM »
Selling this house mid-flip may be difficult.  I say that based on the flip next door to me.  When the original flippers had a falling out the house wasn't habitable (kitchen and bath demo-ed, some walls just studs with electrical but no drywall, all windows removed etc).  They tried to sell but it needed to be an all cash offer since no one could get a regular mortgage on an uninhabitable house.

Even if it's difficult / impossible to sell, in OP's shoes I would much rather walk away than sink more money into this venture. This is the trap with Sunk Cost Fallacy, it can lead you to keep digging a deeper and deeper hole. What happens if OP puts in another $115k and in 6 months BIL comes asking for another $50k? He doesn't exactly have a stellar track record. At this point OP is looking at salvaging a $165k loss. Then a $215k loss... $265k loss, etc. At each step one becomes more "invested" in salvaging the outcome, it's all loss avoidance behavior.

OP, you're not on the deed or the mortgage. Get out while you can. If that means letting the property go into foreclosure and you don't get any of your $50k back you're still coming out ahead of everyone else in this deal, including the bank. Don't snatch defeat from the jaws of victory by throwing good money after bad.

yachi

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Re: Salvage Family Real Estate Investment??
« Reply #18 on: April 04, 2024, 05:01:41 PM »
I think best case scenario this house that might sell for $350K completed, sells as-is for only $250K.  It needs maybe $50K+ worth of work to make it livable, but maybe that's $80K if you're not doing the work yourself.  I get repaid $60K, the lawsuit investor gets his $115K, and a second family investor gets enough with the $40K left.  By the way, there is no bank involved, just 3 sources of private money and BIL's company.

If it sells for only $120K, then I think legally it needs to pay off the lawsuit happy investor.  I'll lose my investment and so will the other family investor, but at least BIL gets to continue with his construction business.  I found the court cases, but I have to pay to get the documents.  I'd definitely do that before pouring more money into this, but I'm fairly set on not bailing the business situation out.

I'd agree that a partnership-type agreement - where we all buy into a fraction of the property - would handle the risk & reward of these deals better than a fixed percentage deal, but there's still the problem of what to do when the flip is taking longer than expected because there's a time value to money.  Basically there's a mismatch of incentives when one party puts in all the labor and coordination and another party puts in all the money.

I think there's enough built up equity there to pay off the investor lawsuit without completely ruining their personal finances or losing their personal home.  And this would be a far greater concern than losing out on the return, or possibly losing the original loaned money.

Catbert

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Re: Salvage Family Real Estate Investment??
« Reply #19 on: April 05, 2024, 11:39:47 AM »
Selling this house mid-flip may be difficult.  I say that based on the flip next door to me.  When the original flippers had a falling out the house wasn't habitable (kitchen and bath demo-ed, some walls just studs with electrical but no drywall, all windows removed etc).  They tried to sell but it needed to be an all cash offer since no one could get a regular mortgage on an uninhabitable house.

Even if it's difficult / impossible to sell, in OP's shoes I would much rather walk away than sink more money into this venture. This is the trap with Sunk Cost Fallacy, it can lead you to keep digging a deeper and deeper hole. What happens if OP puts in another $115k and in 6 months BIL comes asking for another $50k? He doesn't exactly have a stellar track record. At this point OP is looking at salvaging a $165k loss. Then a $215k loss... $265k loss, etc. At each step one becomes more "invested" in salvaging the outcome, it's all loss avoidance behavior.

OP, you're not on the deed or the mortgage. Get out while you can. If that means letting the property go into foreclosure and you don't get any of your $50k back you're still coming out ahead of everyone else in this deal, including the bank. Don't snatch defeat from the jaws of victory by throwing good money after bad.

I agree completely.  I wasn't saying that he should put more money in to "save" the flip, just that the BIL may have a difficult time finding an all cash buyer. 

mistymoney

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Re: Salvage Family Real Estate Investment??
« Reply #20 on: April 05, 2024, 06:42:37 PM »
this sounds like a mess. honestly no one would take on penalties and high taxes and loss of subsidies to buy into this. So there has to be another angle.

Is there? Is there some desire to help out family?

Otherwise - just say no.

yachi

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Re: Salvage Family Real Estate Investment??
« Reply #21 on: April 06, 2024, 11:21:58 AM »
Is there some desire to help out family?

This.  It's difficult seeing a hard working family about to lose it all.  I'm also worried what a $50k loss between family members will mean for the relationship.  I've lost similar amounts of money on investments (not sure it's relevant, but they would had the potential for much higher returns).  And I'm willing to just forget that existed, but it's difficult from the borrower's standpoint to continue interacting normally.

I've advised them that I think bankruptcy protections will allow them to recover while maintaining their family house, something they've been worrying they could lose.  I've advised them to seek legal help - something that should have already been done, but was not.  Other than that, we haven't discussed availability of any more money.

iris lily

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Re: Salvage Family Real Estate Investment??
« Reply #22 on: April 06, 2024, 11:53:44 AM »
Is there some desire to help out family?

This.  It's difficult seeing a hard working family about to lose it all.  I'm also worried what a $50k loss between family members will mean for the relationship.  I've lost similar amounts of money on investments (not sure it's relevant, but they would had the potential for much higher returns).  And I'm willing to just forget that existed, but it's difficult from the borrower's standpoint to continue interacting normally.

I've advised them that I think bankruptcy protections will allow them to recover while maintaining their family house, something they've been worrying they could lose.  I've advised them to seek legal help - something that should have already been done, but was not.  Other than that, we haven't discussed availability of any more money.

If he is so hard-working, why hasnít he finished it?

Villanelle

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Re: Salvage Family Real Estate Investment??
« Reply #23 on: April 06, 2024, 02:13:52 PM »
It seems like he doesn't know what he's doing, hasn't prioritized this project, is in over his head, is procrastinating, doesn't really care about his investors, doesn't understand carrying costs, or all of the above.  You say he's hardworking.  Where has all that work gone?  Electrical, plumbing, insulation, roof, and landscaping took four years?  You say the problem was "starting the build before all funding was in place".  I don't even know what that means.  They started, ran out of money to continue, and just let it sit, generating carrying costs while they... hoped more money would appear?  If that's even close to what you are saying happened, it's pretty clear this guy doesn't really know what he's doing.  So giving him more money seems like an awful idea.  Does he actually have a solid plan for continuing (and finishing) if he gets more money?  Have you seen it?  Does it make sense and seem realistic? (I actually don't think the answers to those questions matter as I think this should be a "no," regardless, but if you are still entertaining it, those should be the bare minimums.)

He's in over his head.  He's not good at this.  Giving him more money is like investing in your actor-aspiring nephew who can't really act.  He may be a nice guy, but it's a bad bet, for him and for you. 

Just Joe

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Re: Salvage Family Real Estate Investment??
« Reply #24 on: April 08, 2024, 10:39:37 AM »
Can you (and/or family) assist with sweat rather than money?

That way BIL can avoid paying his subcontractors more thus saving cash.

Pull some long nights and weekends and get it done with a minimum of additional cost? The investor might be persuaded to pause for a moment and let BIl finish this house. 

What does it lack? Drywall? Flooring? Cabinets?

Has BIL just run out of steam and time to get this project done?

Family helping family can build very strong ties.

sonofsven

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Re: Salvage Family Real Estate Investment??
« Reply #25 on: April 08, 2024, 06:26:55 PM »
Is there some desire to help out family?

This.  It's difficult seeing a hard working family about to lose it all.  I'm also worried what a $50k loss between family members will mean for the relationship.  I've lost similar amounts of money on investments (not sure it's relevant, but they would had the potential for much higher returns).  And I'm willing to just forget that existed, but it's difficult from the borrower's standpoint to continue interacting normally.

I've advised them that I think bankruptcy protections will allow them to recover while maintaining their family house, something they've been worrying they could lose.  I've advised them to seek legal help - something that should have already been done, but was not.  Other than that, we haven't discussed availability of any more money.

If he is so hard-working, why hasnít he finished it?
Probably because he doesn't have any money.

yachi

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Re: Salvage Family Real Estate Investment??
« Reply #26 on: April 09, 2024, 09:02:35 AM »
Can you (and/or family) assist with sweat rather than money?

That way BIL can avoid paying his subcontractors more thus saving cash.

Pull some long nights and weekends and get it done with a minimum of additional cost? The investor might be persuaded to pause for a moment and let BIl finish this house. 

What does it lack? Drywall? Flooring? Cabinets?

Has BIL just run out of steam and time to get this project done?

Family helping family can build very strong ties.

I'm not local so it makes sweat assistance very difficult.  He uses subcontractors for electrical and plumbing.  Most of what remains is things he does with his crew all the time - drywall, flooring, cabinets, maybe a deck.

I'd be able to do things like install toilets, sinks and dishwashers.  I'm not sure if he uses a plumber for these things or not. 

But the cash for buying the material is not there.

I found more information and looked back on texts about progress.  It's been 2 1/2 years, not 4 since the purchase.  But it seems nearly all the progress happened in the first year.  I added money at the 6-month mark and I don't really see enough done after that.

There's a bunch of red flags from the lawsuit:
It was not defended, resulting in a default judgement for the investor.
The contract with the investor seemed to promise a set percentage return over 6 months, without information for what happens after that (so not x% per year, but x% upon project completion).  It's a bit difficult to make sense of the contract because only the portions that support the investor's lawsuit were included.

There's things that frustrate me about the whole thing, like why he didn't go to normal hard money lenders that work with situations like this.  They typically charge 10%/year (or used to), and that would have worked better with the flip timing.

And there's the lack of disclosure about the lawsuit, or the other investor wanting out.  I'm not even sure if the construction company part is making money.


sonofsven

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Re: Salvage Family Real Estate Investment??
« Reply #27 on: April 09, 2024, 10:11:22 AM »
I'm sorry you're in this mess.
In my experience, many small construction firms have problems because they get over leveraged and use the down payment for their next job to pay off their previous job.
From there it's often a slow, downward spiral.
It sounds like on the house that needs finishing there's still a lot of expensive stuff to get to.
I'd take your estimate of $40-50k and double it. Or even triple it. I do rather high end construction so my numbers could be a little high, but maybe not.
Combined with the need to pay off the other investor, and the amount needed to finish, there's no way this  house is going to pencil.
I can see why you're torn, because a large capital investment from you could absolutely help this family, but I wouldn't count on getting it back for a long time, if ever.
If I did invest more I'd want to be damn sure where the money to pay me back was coming from, because it's likely it all would go to allowing them to break even
Most likely it would come from "the next project".

Catbert

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Re: Salvage Family Real Estate Investment??
« Reply #28 on: April 09, 2024, 10:48:14 AM »
The more I read the more I think your BIL may be a good craftsman, a well meaning contractor, but a very bad businessman.  I think sonofsven is right, money has sloshed around between different jobs and eventually personal expenses.  He may be lucky no one is looking at fraud charges. 

Dicey

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Re: Salvage Family Real Estate Investment??
« Reply #29 on: April 09, 2024, 11:13:18 AM »
I agree that getting out is far superior to cashing out equities, but I have another idea.

You're right that it's impossible to get a mortgage without a kitchen or bath. If you're a person who likes projects (as we are), finding a property with that much work done that you could get a mortgage on is worth extra the Holy Grail.

Would it be feasible to complete the job with secondhand not-that-attractive finishes? Habitat for Humanity, CL, FBM, etc. are flooded with old kitchens that are being remodeled and leftover materials.  Sometimes you can get them free, just for removing them yourself. DH is a master of sourcing great stuff for literally pennies on the dollar, so I know it's out there.

Then when you list it, be very specific in the description (or sell off market). Every realtor I know has a list of flippers who are constantly bugging them for properties like this.

Example: My sister bought a foreclosure, but the bank wouldn't finance without appliances. She scored free ones by offering haul away. They dropped them in place, without even hooking them up, the loan closed, then they ripped out the whole kitchen. They lived in a tent trailer on the property until the kitchen was completed.

Or dump it.

Laura33

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Re: Salvage Family Real Estate Investment??
« Reply #30 on: April 11, 2024, 11:32:18 AM »
I don't understand why the investor with the judgment would get everything and you'd get nothing.  The investor has a judgment against the BIL/his company.  That means BIL owes him $115K.  But the judgment is for the money, not the specific property.  The judgment gives the investor the right to go after BIL's assets in order to satisfy that judgment, so yes, he can force the sale of the house as-is.  But that doesn't mean he gets all the proceeds if other creditors/investors also have interests in that house.  If the house is sold, the proceeds from that sale will go to the various creditors, with the priority based on state law.  And if you and the other investor are both lenders, then it's at least possible that you have comparable rights to the proceeds (unless one of you invested subject to the pre-existing rights of the other -- again, driven by state law).  [Note that you can/should consider hiring a local lawyer to explain your rights and potentially file a lien on the house to protect your investment if the other guy forces a sale -- normally I don't recommend rushing to court, but the other guy is already there, and $50K is a lot of money.]

Assuming you and the other investor have similar deals and thus have similar priority, then the proceeds are going to be split between all of the investors.  The investor could go after the share of the proceeds that would normally go to BIL in order to satisfy the judgment.  But that doesn't mean he could necessarily go after your share, because that's not your BIL's to give away.  A general monetary judgment against your BIL doesn't give that investor any right to seize your property or eradicate your rights.  It just gives the investor the right to go after your brother's assets -- subject to any other valid, pre-existing claims on those same assets.  Hell, he could even go after your brother's residence and try to force a sale of the family home to pay off the debt (which is where bankruptcy can help, because it will generally protect the homestead).  You would just need to make sure to step into any lawsuit trying to force the sale of the house to protect your investment (the court can't/won't protect what it doesn't know about).

Of course, this all assumes that your deal is in writing; if you can't document your deal with BIL like the other investor can, it would be much harder to claim your rights.  And you may choose to let the investor take all the proceeds because that's the only way BIL could satisfy his obligation and/or it's too expensive/difficult to fight and/or you just don't want the hassle.  But the point is that's not what the law would necessarily require here.  So your question here -- the baseline for your analysis -- isn't "invest $150K more or lose $50K."  It's "invest $150K more or lose some amount between $0-50K depending on what the house goes for and how much else is owed on it." 

This is a long way of saying that investing more is an even worse deal than you originally laid out.  I'd cut my losses, let the house go, and see how much I could recover of the initial $50K investment. 

kite

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Re: Salvage Family Real Estate Investment??
« Reply #31 on: April 12, 2024, 01:52:32 PM »
Past performance is not predictive of future returns.

An infusion of substantially more cash from you allows your BIL to save face, getting out from under that judgement. But it doesnít mean you wonít also lose THAT money.  If you had no money already tied up in this deal, would you think it was a good investment? Thatís how you know your answer.

yachi

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Re: Salvage Family Real Estate Investment??
« Reply #32 on: April 12, 2024, 02:08:12 PM »
@Laura33
You make a lot of good points.  I'll put it right out there, I don't have a formal written contract calling out the terms.  It was not a smart move on either of our parts (BIL and I) to enter into the borrowing agreement without a written contract.  All I have to back up the investment is text messages and account transfers.

In BIL's mind, their residence is what's on the line as it seems there isn't much value everywhere else.  And that hits particularly hard because his spouse was not involved in the business dealings.  That's where my advice that they find a lawyer and look into bankruptcy protection comes in.

I wouldn't have thought about going to court to protect my rights because I can see there's not enough assets to satisfy everyone.  I was originally thinking I'm not going to pile in and make things worse for BIL.  But I see the value in putting myself in the same position as the investor with the judgment, thanks for that.  If there's only, say, $100,000 to be split and I get $30,000, with the other investor getting $70,000, with the rest of BIL assets protected by bankruptcy, then that's a somewhat OK deal.  Of course, once in my hands, that $30,000 is mine to do with as I please, including helping the family rebuild from bankruptcy if I so choose.

Laura33

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Re: Salvage Family Real Estate Investment??
« Reply #33 on: April 12, 2024, 02:37:49 PM »
Of course, once in my hands, that $30,000 is mine to do with as I please, including helping the family rebuild from bankruptcy if I so choose.

Precisely.  It's totally reasonable to be worried about family dynamics and what's going to happen to your BIL (who is probably a nice enough guy, just not a great businessman).  If you're willing to forego the $50K, you can look at it as protecting your ability to help BIL's family get back on its feet once it all shakes out.

Probably at least worth checking with a lawyer to see what kind of a case you'd have with just various text messages and such to rely on.

yachi

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Re: Salvage Family Real Estate Investment??
« Reply #34 on: April 12, 2024, 03:13:33 PM »
Past performance is not predictive of future returns.

An infusion of substantially more cash from you allows your BIL to save face, getting out from under that judgement. But it doesnít mean you wonít also lose THAT money.  If you had no money already tied up in this deal, would you think it was a good investment? Thatís how you know your answer.

You're not wrong that there's a chance I'd lose the higher figure.  It's prudent to scale the amount of money involved based on the history, so I'm OK with risking something like $10K in a business venture with little history, but $50K would require a history of having handled $20-30K investments well.

At this point there's more bad news than good I'd say.  I don't have a good handle on whether the business is solvent or not, how much debt it carries and what types of promises have been made.  So there'd be a risk of the money going toward those promises instead of finishing the house so we all can get paid.

Is it a good investment?  Well, the market has changed in the last few years to the point where 5%+ can be had on money in a safe investment like Treasury Bonds.  The original investment was set up as a 20% return upon sale of the rehabbed house.  That's still a good investment given a 1-year turnaround.  That's a terrible investment compared to treasuries if it requires a 4-year turnaround.

But at this point in the investment, I have to consider all the recent history.  And it unfortunately ups the risk to where the return is not so appealing.  Of course, the original investment terms are a loss when considering the epic costs of acquiring the capital today - in lost medical benefits, early withdrawal penalties, and income taxes.

So even just trying to salvage the entire situation to make this whole would look like a *huge* paper gain to even out my personal situation.  And that's probably not good for the bottom line or the personal relationship.