How Sweat Equity Might Help Purchase Your Next Investment Property
There are four creative investment tools real estate investors might consider using the next time a property of interest turns up when there’s a lack of large sums of buyer capital and it seems that the income-producing property might not otherwise be worth pursuing.
- Option to purchase
- Sweat Equity
- Lease/purchase
- Secondary seller-held financing
Sweat Equity
A sweat equity transaction is a form of option in which the buyer gives the value of his or her time and effort (or sweat) as equity against the purchase of a real estate investment property.
EXAMPLE ONE. The buyer likes a ten-unit apartment but feels that some remodeling and upgrades must be done in order to raise rents enough for the buyer to obtain the necessary financing required to close the deal. The buyer agrees to give time and effort to make the necessary repairs in exchange for a six-month option to buy the property. The seller concedes that the repairs need to be done, and given that the property has yet to generate any other offers, the seller agrees to the option. In exchange, the seller will pay for materials and the buyer will do all the work. The price is set, and the buyer starts the work.
In this case, it’s a win-win. The seller has nothing to lose except time, yet benefits from getting a lot of necessary work done. The incentive for the buyer is improving what he or she hopes will become his or her own property, increased rents and higher value, and better financing.
EXAMPLE TWO. The buyer lacks the necessary down payment to purchase a duplex of interest. Having discovered that the seller also owns a commercial property in need of renovation, the buyer agrees to make those necessary repairs in exchange for the down payment. The seller agrees to the deal on the condition that the repairs to the commercial propery will be completed before closng the duplex.
Sweat equity can work under the right set of circumstances, but care should be taken by the buyer to address issues that might otherwise prevent the buyer from closing the deal. The buyer should reserve the right to extend past the closing date in the event repairs take longer than expected. The buyer should reserve the right to approve all future rental agreements to assure satisfaction with the rent and tenant. The buyer should be sure to include firm and written protection against the possibility that the seller falls back in love with the property and trys to renege on the sale.
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