# Business (RE) Proposition (Practical Considerations) **URL:** \ **Category:** In My Humble Opinion\ **Created:** [June 20, 2011, 8:40pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205 "2011-06-20T20:40:02Z")\ **Posts on this page:** 20\ **Page:** 3
**Author:** ![drachillix](https://avatars.discourse-cdn.com/v4/letter/d/48db29/32.png) [@drachillix](https://boards.straightdope.com/u/drachillix)\ **Post date:** [June 22, 2011, 6:10pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/41 "2011-06-22T18:10:49Z")
IANA RE Guy but I am a business owner. My only thoughts are, if you are putting 80% of the money in you should be getting 80% of the profits not 20%. You should also be getting some ROI immediately not after the other guys are bought out. By the arrangement as I understand it, even after they recoup their down payment they still get 80% of any profits…to do what? I get that this is initially zero out of pocket, you are effectively borrowing the down payment from them and paying it back out of rental revenues. Maybe it would help us if we were looking at real world numbers and margins. ---
**Author:** ![Enderw24](https://avatars.discourse-cdn.com/v4/letter/e/ba9def/32.png) [@Enderw24](https://boards.straightdope.com/u/Enderw24)\ **Post date:** [June 22, 2011, 6:22pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/42 "2011-06-22T18:22:20Z")
> [@Fotheringay-Phipps](#): > > I’ve not ignored anything in this thread. And i’ve also never said it’s “no risk”. I’ve repeatedly said it’s “low risk”, and significantly lower risk than an ordinary RE deal, for reasons I’ve given. > > Explain this to me. Why would you feel the need to change what I’ve said so as to be able to pretend that I’ve ignored things? What’s in it for you? You can just skip this thread if it bothers you … Fine. Low risk. Have you run the numbers? Do my guesses seem out of line (scaled up or down to your scenario)? When do you think you’ll get your first check from this investment? ---
**Author:** ![Enderw24](https://avatars.discourse-cdn.com/v4/letter/e/ba9def/32.png) [@Enderw24](https://boards.straightdope.com/u/Enderw24)\ **Post date:** [June 22, 2011, 6:29pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/43 "2011-06-22T18:29:17Z")
Additionally there’s this. These investors are paying 20% down (or 10% each) but signing no paperwork towards ownership of this property. So their risk is from day one through however long it takes to recoup their investment. Every day afterwards, they assume no risk and take home 80% of the net. During that time, at least they’re getting a steady paycheck. Your risk is from day one until whenever you manage to sell the property. Not even when you pay off the mortgage in however many years. As long as the property is in your name, it’s your risk. For that, you get 20% starting from (if you’re lucky) year 6 onward and nothing until then. Does this seem fair and equitable to you? ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [June 22, 2011, 6:30pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/44 "2011-06-22T18:30:56Z")
F-P, you wrote this passage which explains what will happen if there is no tenant, there is a loss on the property, or expenses exceed income: > [@](#): > > Conversely, suppose we have bad tenants/vacancies/repairs and the income averages $1,600 per month instead of our expected $2,000. _Then the property is losing $200 per month. They have to pay this $200. **If they don’t then I can pay it** _, and if we sold after a year the money would go first to the $177K of mortgage debt and the $2.4 of expenses that I laid out, before they get back their initial investment. (If they paid it, then the $200 per month would be added to the $60K invested principle.) Really, the only question you have to ask yourself is “Can I take the hit if this is a total loss and I’m on the hook for the full value of the mortgage plus any and all ancillary expenses such as taxes, repairs, insurances, etc”? If the answer is “yes”, then do as you wish. If the answer is “no”, then I recommend not doing this deal. Perhaps that’s a bit risk-averse for you, but I don’t see any protection on your end in anything that you described. You are the legal owner, other people decide whether they want to pay the mortgage, and if they can’t, you assume their debt. And you do this for $0 for the next 10 or so years (at least until their DP is paid off), and only 20% of the “profit” after that. One doesn’t have to be a “tax lawyer” to understand this is not a Good Thing. And as to this: > [@](#): > > Actually, I suspect Rand would refute you on this. Because I have a couple of BIL’s who are tax lawyers too, and my understanding is that much of what tax lawyers do (at least at the top tier firms these guys work for) is come up with innovative ways to structure deals. Let me finish that last sentence of yours… “come up with innovative ways to structure deals _to take advantage of tax laws_.” I’m not too sure how many reputable attorneys would look at the deal that you described and say “Jump on that, and quick!” But like I said, your mind is set. Have fun. ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [June 22, 2011, 7:59pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/45 "2011-06-22T19:59:47Z")
> [@drachillix](#): > > IANA RE Guy but I am a business owner. My only thoughts are, if you are putting 80% of the money in you should be getting 80% of the profits not 20%. I disagree. The way the RE business works is that it tends to be based on borrowed money, and the return is measured as the return on the invested principle (much like the return on any business). 100% of the invested principle is their’s. > [@](#): > > By the arrangement as I understand it, even after they recoup their down payment they still get 80% of any profits…to do what? I don’t understand the question. > [@](#): > > I get that this is initially zero out of pocket, you are effectively borrowing the down payment from them and paying it back out of rental revenues. Again, I’m not “effectively borrowing” from them, because I have no obligation to repay them if the money is not there. > [@Enderw24](#): > > Fine. Low risk. It’s not fine. The difference between “no risk” and “low risk” is very significant in the context of this exchange and in the context of your accusation that I was ignoring things. Do you have a legitimate reason for your changing it? > [@JohnT](#): > > Perhaps that’s a bit risk-averse for you, but I don’t see any protection on your end in anything that you described. You are the legal owner, other people decide whether they want to pay the mortgage, and if they can’t, you assume their debt. But I also control the asset. :shrug: ---
**Author:** ![Enderw24](https://avatars.discourse-cdn.com/v4/letter/e/ba9def/32.png) [@Enderw24](https://boards.straightdope.com/u/Enderw24)\ **Post date:** [June 22, 2011, 8:21pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/46 "2011-06-22T20:21:06Z")
> [@Fotheringay-Phipps](#): > > It’s not fine. > > The difference between “no risk” and “low risk” is very significant in the context of this exchange and in the context of your accusation that I was ignoring things. Do you have a legitimate reason for your changing it? Honestly? I think you’re insane to think this is a good deal and I think you’re insane to not see that this is an insanely bad deal. It’s very high risk for all the reasons everyone in this thread has pointed out to you time and time again. So yes, I have a legitimate reason for me changing it to low risk. It’s because I didn’t care. Risk is not the point I’m trying to make. I couldn’t care less about the risk. The amount of risk is completely meaningless to my point, which you continue to ignore post after post after post. My point is this: my math, using very conservative estimates, says you won’t get paid for 6 years and thereafter only at 20% while carrying 80-100% of the burden. What does your math say? Have you even done the math? If not, go ahead and do it. When do you get paid Fotheringay-Phipps? Answer yourself that. When do you get paid? ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [June 22, 2011, 8:32pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/47 "2011-06-22T20:32:31Z")
> [@Enderw24](#): > > So yes, I have a legitimate reason for me changing it to low risk. Because even though I don’t believe for a minute it’s either low risk or no risk or slightly maybe probably somewhat a risk, I really didn’t care. The amount of risk is completely meaningless to my point, which you continue to ignore post after post after post. No, I’ve not ignored any post, and I’ve explained why it’s low risk. Enumerating various types of real inherent in the RE business (as various posters have done) does not change that this deal is less subject to those risks then a normal RE deal, not more. You changed my words to “no risk” so that you could pretend that I’ve ignored these posters’ point. That was not honest. I started this thread to hear other perspectives on the deal, not to argue with people. Some people have actually made contributions, and some have not. You are in the latter group. If people are interested in discussing the matter I’m willing to go along, but I don’t need to engage people who are playing games. Think what you want. ---
**Author:** ![Rand\_Rover](https://avatars.discourse-cdn.com/v4/letter/r/db5fbb/32.png) [@Rand\_Rover](https://boards.straightdope.com/u/Rand_Rover)\ **Post date:** [June 22, 2011, 8:37pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/48 "2011-06-22T20:37:10Z")
Very entertaining thread. Thanks F-P. Sone of you here haven’t really embraced the beauty of nonrecourse debt. ---
**Author:** ![GrandWino](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/grandwino/32/67_2.png) [@GrandWino](https://boards.straightdope.com/u/GrandWino)\ **Post date:** [June 22, 2011, 9:00pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/49 "2011-06-22T21:00:43Z")
I haven’t had time to read through the entirety of your posts, so forgive me if I’m asking something you’ve already answered - but have you considered doing this solo? It sounds like these guys need you more than you need them. Certainly it wouldn’t take much work for you to identify similar properties and with your good credit you may be able to get a loan for the entire mortgage. You’ll still be taking on the same level of risk, but you’ll be recieving all of the profits. There are a LOT of foreclosed properties for sale out there that you could scoop up for a fraction of what they’re worth, and it wouldn’t take that much extra effort to find them. And I do think it’s your business where the guys got the money they’re investing. If it’s something they received illegally, and shit goes down, your properties could be siezed and you could be held as a conspiritor to money laundering (at least my background as a viewer of television court room dramas would tell me). ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [June 22, 2011, 9:07pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/50 "2011-06-22T21:07:42Z")
:rolleyes: We’re talking about a house, not a piece of commercial real estate. Some states even prohibit recourse financing on residences (I have no idea if the OP lives in one of those states, and going by what he says, I think the OP doesn’t know either). We’re also talking about an OP who doesn’t understand why the bank should “care” that they are signing on for a recourse financing deal and not a standard loan. But, anyway, Rand, here’s a question: Given what you’ve been told, do you think the OP is ready to make this deal and support it if it collapses? ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [June 22, 2011, 9:08pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/51 "2011-06-22T21:08:31Z")
> [@Bob Ducca](#): > > I haven’t had time to read through the entirety of your posts, so forgive me if I’m asking something you’ve already answered You are and I do forgive you. 🙂 > [@](#): > > but have you considered doing this solo? I already have. I recently purchased a property (and lent money backed by a mortgage on another property) and am not looking to invest any more money in RE at this time. > [@](#): > > It sounds like these guys need you more than you need them. Possible. I don’t know who else is out there that might want this deal. My father suggested that I hold out for a higher cut. > [@](#): > > Certainly it wouldn’t take much work for you to identify similar properties In addition to the above, I don’t know that this is true. I’m a real estate dabbler with a full time job doing something else. These guys are professionals. > [@](#): > > and with your good credit you may be able to get a loan for the entire mortgage. I don’t kow what “a loan for the entire mortgage” means. But if you mean a loan for the entire amount, I don’t think so. Banks insist on a max 75% LTV for investment properties. ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [June 22, 2011, 9:10pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/52 "2011-06-22T21:10:21Z")
> [@JohnT](#): > > We’re also talking about an OP who doesn’t understand why the bank should “care” that they are signing on for a recourse financing deal and not a standard loan. Do you understand it? Feel free to explain … ---
**Author:** ![Enderw24](https://avatars.discourse-cdn.com/v4/letter/e/ba9def/32.png) [@Enderw24](https://boards.straightdope.com/u/Enderw24)\ **Post date:** [June 22, 2011, 9:12pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/53 "2011-06-22T21:12:01Z")
> [@Fotheringay-Phipps](#): > > No, I’ve not ignored any post, and I’ve explained why it’s low risk. > > Enumerating various types of real inherent in the RE business (as various posters have done) does not change that this deal is less subject to those risks then a normal RE deal, not more. > > You changed my words to “no risk” so that you could pretend that I’ve ignored these posters’ point. That was not honest. > > I started this thread to hear other perspectives on the deal, not to argue with people. Some people have actually made contributions, and some have not. You are in the latter group. > > If people are interested in discussing the matter I’m willing to go along, but I don’t need to engage people who are playing games. Think what you want. Translation: I’m arguing semantics with you because I refuse to do the math on my investment and see what a crappy deal this is. One last time Fotheringay-Phipps. Go do the math. When do you get paid? ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [June 22, 2011, 9:15pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/54 "2011-06-22T21:15:14Z")
> [@Enderw24](#): > > Translation: I’m arguing semantics with you because I refuse to do the math on my investment and see what a crappy deal this is. More like: Translation: I’m not arguing anything with you. > [@](#): > > One last time […] Finally. ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [June 22, 2011, 9:17pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/55 "2011-06-22T21:17:19Z")
> [@Fotheringay-Phipps](#): > > But I also control the asset. :shrug: Actually, the bank controls the asset, your brother (and his friend) control the finances, and you’re just the guy in the middle holding the loan, hoping you won’t get wet in case there is a pissing match between the two. Since you’re set to do this, get a lawyer. _Your_ lawyer, to represent _your_ interests. I’m sure you’ve done this already and are just using the message board to bounce some ideas about (as opposed to genuinely asking us for our advice :eek: ), but if you haven’t, do so. ---
**Author:** ![Enderw24](https://avatars.discourse-cdn.com/v4/letter/e/ba9def/32.png) [@Enderw24](https://boards.straightdope.com/u/Enderw24)\ **Post date:** [June 22, 2011, 9:25pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/56 "2011-06-22T21:25:16Z")
All I know is that if it were my money and my credit on the line, I’d have done the math. I’d have asked when I could expect even dollar $1 to come to me considering I was on the hook for the entirety of it. I sincerely wish you don’t go broke when you do this but I really don’t think you need to worry about it. The bank, looking out for its best interest, probably won’t even approve this loan, so you won’t even need to deal with an investment going tits up and having to declare bankruptcy. Win-win! ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [June 22, 2011, 9:25pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/57 "2011-06-22T21:25:35Z")
> [@JohnT](#): > > Actually, the bank controls the asset, your brother (and his friend) control the finances, and you’re just the guy in the middle holding the loan, hoping you won’t get wet in case there is a pissing match between the two. No idea what you’re talking about. I control the asset, as the title is in my name. I control the income and the payments. The investors have no control over anything. > [@](#): > > I’m sure you’ve done this already and are just using the message board to bounce some ideas about (as opposed to genuinely asking us for our advice :eek: ) I see you’ve graduated from being convinced that my mind was made up to being convinced that I’ve already done it. 🆒 It’s incredible that some people would be so emotionally vested in whether some guy on a MB agrees with their position about a RE deal. Weird. ---
**Author:** ![GrandWino](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/grandwino/32/67_2.png) [@GrandWino](https://boards.straightdope.com/u/GrandWino)\ **Post date:** [June 22, 2011, 9:35pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/58 "2011-06-22T21:35:00Z")
Why do I feel this business proposition is somehow connected to this other thread the OP started just a few months ago? (which I believe he referenced in an above post) [Passive Participation in a Real Estate Scam](http://boards.straightdope.com/sdmb/showthread.php?t=603332) Looks like that thread took a similar path as this one with the OP asking for input, and then disputing every single legitimate point that was raised. ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [June 22, 2011, 9:48pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/59 "2011-06-22T21:48:44Z")
> [@Fotheringay-Phipps](#): > > No idea what you’re talking about. I control the asset, as the title is in my name. I control the income and the payments. The investors have no control over anything. There’s a story about Michael Milken, the junk bond king, who was having a dinner with the CEO of a large regional company back in 1976-77 (this was before Mike Milken became _Mike Milken_) for whom Milken had arranged $60 million in financing. The CEO was getting kind of pissed, listening to a young Milken saying “you need to do this… and you need to do that”, and he finally couldn’t help himself: “I’m the CEO of this company, I’m the largest shareholder, and I tell people what to do, not you.” To which Milken coolly replied: “But I own $60,000,000 of your debt and if you miss one interest payment, I’m taking your company.” Again, I merely ask for you to look at the downside, which you are seemingly resistant to doing. ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [June 22, 2011, 9:53pm UTC](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205/60 "2011-06-22T21:53:00Z")
> [@JohnT](#): > > Again, I merely ask for you to look at the downside, which you are seemingly resistant to doing. I’ve addressed the downside that you refer to again and again throughout this thread. I have a 25% cushion before I take a loss. It’s possible that this will happen, but extremely unlikely IMO. I don’t know what more I can do. I’m sorry for disagreeing with you. [Previous page](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205.md?page=2) [Next page](https://boards.straightdope.com/t/business-re-proposition-practical-considerations/586205.md?page=4)