Real Estate

Structuring a real estate deal

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  • Nov 9th, 2020 9:05 pm
[OP]
Deal Addict
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Sep 9, 2007
2035 posts
149 upvotes
Toronto

Structuring a real estate deal

Curious what you guys think the profit structure should be given the following scenario: an owner of the property is approached by a builder with a proposal to rebuild the house. The market value of the property is 1MM and it needs a 500k investment in order to sell it for 2MM. The owner of the property provides his property and the builder provides everything that is associated with rebuilding the property(time, resources, financing etc). What would be a profit share structure in this case that makes sense? Leave tax and other factors aside as I'm curious to see the acceptable % of the share for each individual is in this case.
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Jr. Member
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Jun 3, 2019
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GTA
koleso wrote: Curious what you guys think the profit structure should be given the following scenario: an owner of the property is approached by a builder with a proposal to rebuild the house. The market value of the property is 1MM and it needs a 500k investment in order to sell it for 2MM. The owner of the property provides his property and the builder provides everything that is associated with rebuilding the property(time, resources, financing etc). What would be a profit share structure in this case that makes sense? Leave tax and other factors aside as I'm curious to see the acceptable % of the share for each individual is in this case.
Is the 500k the builder's cost or it includes normal profit margins? If the builder is making their normal profit, then the owner should ask for a larger share of the profit after selling. Ultimately it would be what the two parties can agree on.
Realtor® & Mortgage Agent
Member
Jun 6, 2014
260 posts
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Toronto, ON
There's a lot to negotiate. When does the builder get paid? When construction is completed or when the house is sold? What happens with cost overruns or the house doesn't sell for 2M?
[OP]
Deal Addict
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Sep 9, 2007
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Toronto
trebmember wrote: Is the 500k the builder's cost or it includes normal profit margins? If the builder is making their normal profit, then the owner should ask for a larger share of the profit after selling. Ultimately it would be what the two parties can agree on.
500k is the cost to complete the renovation work.
icedtea365 wrote: There's a lot to negotiate. When does the builder get paid? When construction is completed or when the house is sold? What happens with cost overruns or the house doesn't sell for 2M?
Everyone gets paid after the sale of the renovated property. There are too many "ifs" to cover so I want to leave it out of the discussion.
Member
Jun 6, 2014
260 posts
102 upvotes
Toronto, ON
koleso wrote: Everyone gets paid after the sale of the renovated property. There are too many "ifs" to cover so I want to leave it out of the discussion.
It's those ifs that need to be considered how to structure the deal. Profit structure would be dependent on who is taking on how much risk.
On a side note, not sure how big of rebuild you're doing, but I don't think 500K is enough to turn a 1M property into a 2M property.

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