I have an idea, may or may not be new, regarding a financing option for homeowners who perhaps can’t afford contractor work now, but could later.
Say you’re doing a 30K kitchen remodel in a 500K townhouse. Instead of scheduled payments, the contractor and owner could agree to 5K down for materials and 5% of the sales price of the home, when owner sells.
This way, (with average home owned for 7 years), the owner can postpone payment, and the contractor can earn appreciated income for the payment delay.
What say you?
Expert since 10 am.
Replies
bump
Expert since 10 am.
Major flaw you assume you would not need to eat. Even still lets say you did not need the money untill 7 years down the road you could of be gaining interest on it if you were paid once the job was completed. At 5% that would be 250 a year no compounding 7x 250=1750. Plus 7 years wear and tear is alot on a kitchen, is that kitchen worth 30,000 in seven years? Not to say what will happen to the neighborhood, in 7 years it could be a crack house, what itf the owner is dealing drugs and the feds take it. If some one is in a 500,000 house they can aford a 30,000 remodel. I'd let the bank take the risk.Now if the owner told me he was to rsell in 6 months I'd consider it.
You are proposing a shared equity agreement. It's a sophisticated arrangement and creative too. It might be the only way some contractors can actually price something and make a profit in some localities LOL!
The major problem with an arrangement like this is explaining it in a way that makes sense. People buy things that make sense. They say no to things they don't understand.
Bob's next test date: 12/10/07
All the numbers/percentages are negotiable, if the homeowner is willing to negotiate.
I think in some instances, this arrangement would be quite advantageous. Though it involves risk, it offers substantial reward.Expert since 10 am.
I couldn't see anyone doing it.
I'd rather have more control of my money then this option allows.
I'd venture a guess that you couldn't find to many contractors that could afford to tie up their money like this.
I think for the money that you're proposing a contractor invest he could just as easily go out and buy a house and use it as rental with a better chance/return on his money. JMO, creative yes, feasible... I don't see it.
Doug
I don't see it happening either. The way you would sell it would be to establish yourself as the contractor of choice, then have a price that was too high for them to do the work. You'd then "discount" in order for them to do the job. It's problematic on several levels. Bob's next test date: 12/10/07
LOL, You know if you are trying to negotiate, you start higher and let them whittle you down.5% on that job would be the MINIMUM you would want if it sold the day you finished the job
Invest that same money for seven years and it would have at least doubled from 25grand to fifty grand with less risk than leaving it in your customer's house. And the kitchen is one of the prime selling points for a house. You would also have to come up with a lot of money out of pocket. You mention five grand deposit for materials. No way can I do a 30K kitchen with only 5K of materials.I'd be asking 15% of the house. You don't know if it will EVER sell.Something else to think about - what if it burns down? you would nbe a part owner so you should buy some insurance on it. Can you?
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
I say where would I get the money and that 5% is way too cheap!
Welcome to the
Taunton University of Knowledge FHB Campus at Breaktime.
where ...
Excellence is its own reward!
Piffin,
Interest free credit cards.. Before you laugh that's exactly how I built my place..
Only at the very end did I get stuck paying any interest costs at all! Plus no bank ever "approved" my plans or needed competitive bids..
that's doable, but I am scratching the top of my head trying to figure out what that has to do with the shared equity/investment idea the OP has put forward
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
Piffin
the tittle of the thread was ,
differant finance options.
This is a differant way to finance,.... I think...
No
Go back and read it again.it was singular option, not plural options.
He was offering up one option for discussion.But I see where you went wrong now so I'm less confused.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
Interesting. I have done that on three house renovations, but all were for family members - lowered my rate; no markup on materials. Probably a good bit different - but it will be nice when they sell.
Forrest - not a businessman
What happens when the HO defaults on his mortgage, 2nd mortgage, home equity loan, and/or doesn't pay his property taxes for several years? Or if there is a fire or other tragedy, like death or serious illness?
There would have to be a lot of protection built into the deal from the start. Sounds pretty complicated to me.
But if you want to come do my kitchen, maybe we could work something out.
Pete Duffy, Handyman
LOL!
I agree with everyone that there is a lot of risk, perhaps some could on paper regarding note defaults etc., but it does sound like too much for the potential gain. But if like Forest you know the parties and property well, it might be worth it.Expert since 10 am.
i agree with what jim said and also see it as a shared equity agreement.
i like it in that the money paid for the work of improving the property is in direct relation to what the market will bear, and the incentive is to do high quality work and properly document it.
how many times have you heard on those flip it shows that to maximize your profit you paint and polish, but the guts are cobbled together as quick and cheap as possible. instead you take the time to properly detail and make videos before it is covered up, and you show copies of utility bills to further demonstrate the quality and detail that went in.
there must be a way to draw up a contract that points out to the buyer the advantages, and it could be paid in 7 years regardless of sale by refinancing, with the contract showing the tax advantages etc, it could all be in the form of a note or security if you will that could even in itself be bought and sold. endless possibilities, but i don't see it as popular either. i think like that a lot and it never seems to work out.
jackplane,
If the creditworthiness of the individual involved warrented this sort of deal banks would be happy to do it..
I had a differant approach to doing my house..
I used credit cards!
Yes! I got low or no interest cards and used that money to pay for my materials etc. as I went along.. when the amount became unweildy or a new zero percent card failed to materialize on time I simply paid off the total debt with a refinance of the work already done through a home equity loan..
Paying off all that debt sent a whole flock of new cards my way and I used them to finance the next stage of the project..
I'd never do this with the sort of interest rates common in credit cards but with the introductory cards the amount of credit was usually good for about a years worth of materials and etc. before I had to get another loan.
Doing it this way meant no bank committee decided if I could do something. I didn't need to get bids and turn in bills etc.. I just did it and then let them look at it.
I controlled things rather than the bank..
It was nice too that I would get over a years worth of interest free use of money..
Great plan if the contractor has the financial resources to absorb the total cost of the job today in anticipation of an unknown return at an undetermined time in the future.
Run some numbers for 1 year, 5 year, and 10 year time horizons using low, medium, and high estimated appreciation rates for the condo.