Should I Lend Money to a Builder

Leveraging, renting vs owning, making an investment or buying a home?
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Lucy2001
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Should I Lend Money to a Builder

Post by Lucy2001 »

I have a friend who is a builder, the company is about 20 years old, I've known them for 15. What with one thing and another (sick parents, illness, a crazy client) money is really tight and there's not a lot of work in the pipeline. They need a good break and deserve one. We're on the west coast where the market is crazy hot and a spec house seems like a relatively safe project right now.
I am contemplating some sort of partnership or financial arrangement that would see me buy a lot and the company build a spec house. What are reasonable expectations? What are potential bombshells?
My first thought was that we would form a new company and be equal partners for one house, retaining earnings for a second/third project or folding that company after the build, depending on our outcome.
Second thought was a simple loan, say my $200G secured by lot ownership at x% for x days (any advice on x and x?)
Anybody have a third thought?
The $200G is not a huge problem for me, it's a sum I'd hate to lose but represents less than 10% of assets.
I know I shouldn't mix money and friendship, but they're good people and maybe we could both earn a little return, but I don't want to ruin my financial moat. Looking for advice on best ways to organize the project or advice to run away from it.
Lucy
izzy
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Re: Should I Lend Money to a Builder

Post by izzy »

Be careful
If it's a success both of you will be happy but if it's not you stand to lose both friendship and money!
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planB
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Re: Should I Lend Money to a Builder

Post by planB »

A few thoughts...
- I think you need to decide if you are helping someone or investing
- The success of the project will depend mainly on the skills of your business partner, rather than the real estate market
- Plan for the build and sale to take twice as long as originally planned. Consider downside scenarios.
- Real life continues to happen, including things like family illnesses and crazy contractors
- Do you have any RE contractor/development/sales experience?
- It will be a great learning experience, regardless of the outcome :)
longinvest
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Re: Should I Lend Money to a Builder

Post by longinvest »

Lucy2001 wrote:The $200G is not a huge problem for me, it's a sum I'd hate to lose but represents less than 10% of assets.
Lucy,

If I'd hate to lose a chunk of money, I would not loan it to a private builder, because there would be no guarantee that I would ever see this money again. This would be like investing it into a single high-yield bond (sometimes called junk bond). This is way too risky for me.

Just for the sake of comparison, my entire investment into the Apple company, one of the biggest and most robust worldwide companies, is barely 0.4% of my portfolio. That's four tenths of one percent. I diversify my portfolio, to reduce losses when things go bad, by using ETFs which invest in hundreds (VCN, VAB) or even thousands of different securities (VXC). My bond investments (VAB) are all in either government bonds, or investment-grade bonds which are unlikely to ever default.

I would never put as much as even 1% of my portfolio into a speculative investment; I've just worked too hard to earn and save this money. There's no way that I want to see it evaporate.

Maybe you could invest an amount that you wouldn't care at all to lose. Let say $5,000, if that's small enough in your world?

If the builder cannot find other people than you, to finance him, shouldn't that be a clue that the risk of losing the money is high?
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Re: Should I Lend Money to a Builder

Post by Flaccidsteele »

Lucy2001 wrote:I know I shouldn't mix money and friendship
This should be the beginning and end of this line of thinking.

If you mix money and friendship you will lose both the money and the friendship. For sure. If that is your goal.

If you're not using a lawyer to lock up your interest on paper, then this decision is a terrible one.
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Insomniac
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Re: Should I Lend Money to a Builder

Post by Insomniac »

Lucy2001 wrote: money is really tight and there's not a lot of work in the pipeline.
Lucy
I have worked with a few builders/developers in the past. Many were really flaky and I wouldn't trust them with a dime. The few good ones I know don't seem to have any problem raising money - I suppose the banks know their reputation. The good ones are also very busy with work lined up for years ahead. One good guy told me that he wanted to retire but people kept asking him to work for them - so he was just doing the projects that he finds really interesting.

As others point out, don't mix friendship and investing. If he doesn't want to be your friend after you say no, you now know what you mean to him.
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AltaRed
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Re: Should I Lend Money to a Builder

Post by AltaRed »

Insomniac wrote:As others point out, don't mix friendship and investing. If he doesn't want to be your friend after you say no, you now know what you mean to him.
:thumbsup: +3
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Lucy2001
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Re: Should I Lend Money to a Builder

Post by Lucy2001 »

Thanks for the replies. My late father gave money to a developer in St. Albert in the 1980's and made enough money to be very comfortable in retirement, wish I would have asked him more about the contract they had together but I do remember thinking he was crazy to take such a chance when he was in his early 60's.
I will hear out the proposal and let you know if it's interesting. But the risk/reward scales wrt finance and friendship will, on reflection, probably be way too high for my conservative nature.
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Re: Should I Lend Money to a Builder

Post by freedom_2008 »

If the main purpose doing this is for investment (like your father?), AND if you trust your friends' skill as a builder (but why a good builder has not much work in the pipeline in crazy west coast?), you can just buy a lot and hire them to build you a spec house to sell. They get paid by their work, your get the profit, if any, of selling the spec house. If you want to pay them only after the selling and are willing to give them more (than builder fee) if they are okay with delayed payment, put the details in the contract. This way, lose or gain, you always have control of your own money.

When doing building business, treat them just like you would to hire any builder to build your own home, if they are not the best you can find, skill and price wise, don't hire them.

If you just want to help them, there would be lots other ways to help, without getting yourself into real estate business.
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Re: Should I Lend Money to a Builder

Post by SQRT »

I would never do this for all the reasons others have mentioned. Way too risky for me.
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Spidey
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Re: Should I Lend Money to a Builder

Post by Spidey »

If this "friend" is a recent romance, run for you life. I've lent money to friends and as others say you usually lose both the friend and the money. I agree that it is a terrible idea.
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Re: Should I Lend Money to a Builder

Post by active »

$200K is nothing. There will still be a construction mortgage on the land, so buying the land will not protect you. The Builder/Developer will need to pay himself during the project. From buying the dirt to BP will be 6 month, even if no DP is needed.

If you have experience in this sort of venture and are a knowledgeable equal partner, that is one thing. Everything else... No Way Jose.

This is a crazy market. Everything goes up. If your friend has a problem NOW, under what conditions will he prosper?
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Re: Should I Lend Money to a Builder

Post by nisser »

I think nearly everyone's including myself have given you a resounding no.
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Re: Should I Lend Money to a Builder

Post by BusFinOrigin »

Based on the timelines, this one is likely resolved...here's my thoughts anyway

Why won't the bank do it? Definitely because there's something about the project that is out of their risk category. a Flag but not a dead deal by any means.
Building lender do it? if not..i'd stay away altogether. Real issue here is size and risk. Your friend has building problems that you cannot see - trades, unpaid invoices...something(s) that require an alias - you! Secondly, any margin builder cannot afford to touch this one hence why it's at the personal level and not necessarily a bad deal - size/scope just don't meet builder loans unless it's private. Private is you...has your friend tried raising the capital with real private builder lenders? That would be the last flag...you must know this answer and decided accordingly.

if you cannot help yourself...then at least structure deal to your benefit. ie. you have exclusive title to a clean property - it is clean property correct? After that you can decide what split your are interested in. Remember, you are the risk taker, hence the recipient of all the rewards. Not the otherway around. Do not share title...unless there's more to the story ie. pre-sold and property is already partially built and it's value is more than the mortgage - at least 20% more to cover the costs to unload it but that's even very generous.

Finally...no personal decisions should motivate the transaction...friends come and go, the real ones don't ask for money!

There's no such thing as hot property and no lenders...that just doesn't exist! I've worked with many lenders, their famous for uncovering 'trouble' so please ask ask and ask some more.

Best
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