Renovating a house... thats not mine

Renovating a house then selling it... thats not mine

Ive got a friend whos looking to sell his existing investment property (house) in the inner west of Sydney.

Based on the price he wants to sell it for, i believe it is a bit undervalued (based on recent sales within the area and suburbs next door.

Im trying to convince him to renovate it to give it that "ooohhh ahhh" feeling when people come into look at the property.

Main reason for this is that I have noticed that half the reno jobs in the older houses in the Inner West are pretty much half arsed jobs, yet people are prepared to pay top dollar.

Now im happy to buy it off him and renovate it, but after i take into account the stamp duty + agent fees + tax, it pretty much wont be worthwhile anymore.

I was thinking of setting up some kind of agreement whereby i will maintain his loan for him during this period, organise and cover all renovation costs and once its finished, he takes the amount he initially wanted and I take the rest (after applying agents fees + taxes).

Does this work? Or are there other ways to do this?
 
I'm sure that would be the best option in terms of money, but perhaps not the best in terms of do you really trust him to not screw you over?

The other thing, is what is in it for him? Nothing? He has downsides though;

- he doesn't get the money until 2 months? 6 months? Whenever you finish the renovations, plus the sales time - Does he need (or want) the money now?

- What if you stuff up or pull out half way through? He's left with a bill.

Personally, if I was your friend, the only terms I would be happy with is something like, I want $300,000 for the house as is, you reckon you can get $350,000 with reno's, so you do the reno's and at the end, I'll take 320,000 and you take whatever is above that.

Why? Cause otherwise I'll just take the 300,000 now, why would I want to wait another 6 months to get the same amount?

Just my thoughts.
 
You obviously believe your friend should be renovating to improve his return. At the same time however, you say to buy, renovate and sell doesn't make it worthwhile for a prospective purchaser, even at a 'good price'. Not many properties are around like this however to be honest in capital cities in established suburbs for a 'retail' renovator

Have you dealt with this friend in a money making venture before? Are you both equally as motivated for this to work? If so, you need to document this clearly and preferably with legal representation.

If he is reticent to renovate (I am assuming this as you mention you are trying to convince him), then why would he let you renovate his property? :confused:

When you mention people pay top dollar for poor reno's, you are implying that you may need to break the ceiling price for that property in that area. Are you confident that you can do this?

When you mention it is not worth it, are you willing to share the high level numbers involved in the exercise?

My preference would be to keep any deal relatively simple and even moreso, given a friendship is involved. So my response doesn't really answer your question directly. Either buy, hold, renovate later and sell or alternatively let him sell.
 
He wants around $750k for it.

Recent sales in the area have show properties selling for $800k~$850k for renovated properties.

From what i understand (based on what he tells me), it sounds like he needs

1. A fresh coat of paint in the inside
2. Fix up the lights
3. New bathroom (as the current one is the original one from the 1950's)
4. Light sanding and recoating of existing polished floors
5. Kitchen was replaced in 2003, so maybe new doors + new bench top + cooktop and oven.
6. Landscaping

Ive done some minor renovations on my IP to bring it to a more modern standard, that cost $10k (probably could have been cheaper, but i dont know many tradies).

Based on what he has told me (obviously final cost will be subject to a proper valuation of the site), im guessing renos could be between $20~$30k and would take about 4 weeks at most.

I then think it would sell for $800k~$850k.

Now if you add in Stamp Duty of $30k, I would need to sell it for at least $800k to 810k to break even.

Take away the stamp duty, its a more viable option.

Also with CGT, it he holds onto it, it will allow for a 50% discount on the manufactured gain.

Also the house is in a quiet street and one of the bigger houses / land on the street.
 
This sounds like a friendship could be destroyed if things go wrong.

If he is too disinterested to do the work, I would just stay away from it. There are too many things that could go wrong.

Would you pay someone to install a new bathroom? Would you pay for all the work to be done (new lights installed) but maybe paint and landscape yourself?

You could get him to pay you to do the reno, at a fixed price, but it sounds like you are not after a "job" but after the gain that you can see and want to share it. I understand your thinking, but I just see trouble ahead.

What if you do all this work, pay people for the bathroom and electrical work and then he gets desperate and sells for less than you think is achievable?

Too many things could go wrong, in my opinion.
 
Are you licensed to do work on other peoples house?? (ie: are you a handyman, builder etc) if so...give him a contract to do the work with a fixed price + x% of the profit over $750K. The due date on your invoice could be at settlement of the sale.

If you are not licensed to do such work, be VERY careful.
 
All the work is to be outsourced. I am not a handyman and neither is he. We're both "clumsy office workers" as a sparky mate of mine likes to put it. LOL

I see this as a typical renovation job, whereby draw up some basic plans as to what wants to be done, call around to get some quotes then pick the one that we feel comfortable with.

To avoid any unwanted delays, its pretty much going to be a surface type renovation. Other than bathroom, the aim would be to keep any wall removal to nil (unless it is inevitable).

Initially, he was interested, but i think he got worried about its being too hard. Its the same reason I held back on renovating my IP for so long as well. But after fixing mine up (and realising that it was actually easier than ithought), i started to notice that heaps of the homes for sale did exactly the same thing, basic cheap renos that made the house feel nice and people paid top dollar for it.

As for the selling aspect and if it doesnt reach his desired price, thats something im prepared to wear. Basically if it wasnt for stamp duty i would gladly take this off his hands.

You could get him to pay you to do the reno, at a fixed price, but it sounds like you are not after a "job" but after the gain that you can see and want to share it. I understand your thinking, but I just see trouble ahead.

What if you do all this work, pay people for the bathroom and electrical work and then he gets desperate and sells for less than you think is achievable?

Too many things could go wrong, in my opinion.

Spot on. I see potential and I would prefer he go down that path to make himself more money and I would assist him in any way he could. Profit wise if he went down that path i wouldnt actually want any money from him, its more about friends helping and supporting friends.

But seeing he didnt want to do it, I would and putting out the funds and wearing the risk I would expect a reward.

As for desperation sales, i would guarantee him the price he wants, because i still think its undervalued. Obviously the issue is that he is selling to buy a house elsewhere.

But you're right, its probably not the friendship. Are there any places that offer the renovation service from start to finish? Might be more expensive and we'll need to see if it still works out well for him.
 
You could both, by agreement, caveat your "interest" in the property. The caveat must have a value, and that value must be set out within your agreement. This would provide protection for any money you tip into a property you don't own. In this way, when the property is sold the caveat would need to be satisfied in order to complete the settlement.

And of course, as so many others have pointed out within this thread, the friendship is more difficult to put a value on! In my experience there is only a certain "type" of friend you can do business with; one who understands money, obligations and legal agreements.
 
hi nek,

what i think you could do is draw up an option for you to buy a property in certain time frame for a fixed price from him, then you do the renovation etc and get another contract sigend with another purchaser at the price you want to sell it after you renovated it.

You will have to look into it but I would think this would be the most obvious solution if you wanted to go this path........................

Cheers.
 
Not quite the same but similar - I'm in discussion with brother-in-law re: buying a renovator. I'm time poor and he doesn't have $$ right now. Property bought in my name, he lives there and renovates it and we do an agreement on the side re: a share of equity when sold.

So long as you have an agreement right? We've agreed to have one drawn up if this goes ahead and we're family.
 
Not quite the same but similar - I'm in discussion with brother-in-law re: buying a renovator. I'm time poor and he doesn't have $$ right now. Property bought in my name, he lives there and renovates it and we do an agreement on the side re: a share of equity when sold.

So long as you have an agreement right? We've agreed to have one drawn up if this goes ahead and we're family.

Could be a real problem to you achieving your written goal if BIL takes his time doing reno and you are not receiving rent.

My suggestion would be he pays a small amount of rent for X number of weeks and then he will have to pay full rent after a certain date - get this written down.

The above eliminates the problem of BIL being slow doing reno OR if other problems crop up.

What's your plan if everything - goes wrong?

We tried something many years ago with BIL, he would not work on the project unless my hubby was there even though we wanted to PAY him to work on project during week as he was a qualified tradie.

BIL want to chose the colours of kitchen, carpet & tiles - he was not the one supplying the project money nor was he the one with his house mortgaged and making repayments.

We had talked about project profit for each to share if it was completed in 16 weeks, it took about 26 weeks and BIL could not understand how interest repayments reduced profit that he was to receive.



Regards, Sheryn
 
Some additional advice:

Document the agreed scope of works.
Have plans and permits if they are required.
Document the agreed budget (and monitor that budget).
Document the proposed time line.
Document the agreed profit share arrangement.
Agree on the rental payable, even if it's not paid now, but reconciled later.

Also consider having the property value appraised now by, say 3 local REAs, so there is a yardstick for later.

It's not all dark clouds, the arrangement could work really well for all involved. But in my own eperience this relies on expectations and responsibilties being understood, agreed and documented.
 
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