Friend to enter into a joint venture, do up my house, split profits

snickpan

I have a mortgage-free second home, it has been a rental for 20 years, is distinctly 'tired'. JT (friend of mine) said "I like it, I'd like a project, sell it to me for half price, I'll renovate it, sell it, give you back your half, plus half of any further profit." I was happy with that, I have a very high-risk attitude, plus it meant a 'sale' in this stagnant climate (Brighton). JT to arrange a mortgage for £280k on an agreed £560k house.

We had a meeting yesterday, he said a JV (joint Venture) might be better - it would side-step legal fees, I'd remain the sole owner, JT to renovate (out of his own pocket) then sell and split any profit, he's thinking it could reach £700k.

This means I don't get any lump sum, ie £280K, so I won't get £1k a month interest on the half payment for the house. JT says he can pay me £1k a month (but he'll be saving £2k a month on the mortgage that he now won't need).

I'm retired with £140K in the bank, 7 years till pension, so I'll living off my £140k savings (plus JT's £1k a month). Outgoings of approx £3k a month, but with a month long family trip to Australia in December. If JT's project takes 2 years till sold, I should be able to afford to wait.

Biggest implication may be CGT. I've lived there for 17 years out of 22. Can't quite fathom how much worse I'd be, selling the whole house in my name, if improved to £700k, compqred to if I'd sold half to him in the first instance….

What are my priorities?

Edit: I trust JT, but also aware that he'll want a good deal for himself

EDIT: JV will be a legal document, dictating time limits, what happens if one of us dies, or JT runs out of money, or wants to stay there.

horsewithnoname

how well do you know this JT and do you trust them implicitly?
capital gains tax info starts here: https://www.gov.uk/capital-gains-tax

mlz1413

Gosh that sounds complicated.

I would be happy with the theory of letting a friend renovate a house I owned. I'd probably agree to a low rent whilst they lived there doing it up, but I think a time limit on reduced rent would be wise (or in 2 years you may regret the lack of agreement).

I'd be happy with splitting the profit after his costs, although I would want some agreement on seeing the costs or at least having a good general idea of costs and timings upfront.

As for selling half or getting a payment for the theoretical half you might have got, no that's messy IMO.

Whilst you may be happy with the high risk idea now. Would you be if it went wrong? IE friend is living there in 5 years time, house is a building site and worth less than when it was just tired. Friend has run out of money or gone bankrupt because a customer of his didn't pay .… Etc etc

mta999

will he be living there for the 1k a month? if so he will become a tenant with all that implies

sheramber

Has he experience of doing projects?

Have you seen any completed projects to assess the standard of the finished work?

snickpan

https://forums.moneysavingexpert.com/discussion/comment/82088753#Comment_82088753

yes, he's done it on 2 flats, now champing at the bit to do it on a house

eddddy

What kind of renovation work are you envisioning will add £140k to the value of the house?

Are you going to attempt to identify profit resulting from the renovation vs profit (or loss) resulting from property market movement?

e.g. You say the property is worth £560k today - even if you did no renovation work on it, would it be worth £590k (or £520k) in 2 years time when you sell?

And have you considered 'worst case scenarios', for example:

• Property is worth £560k today, JT spends £50k on renovations, then the property sells for £550k. (Maybe due to market downturn, or botched work by JT)

• JT starts work - rips out kitchen, rips out bathroom, starts knocking down some walls - then loses interest in the project, and walks away. (You are left with an unmortageable house, which you have to sell off cheap to a builder for, say, £450k.)

Jemma01

No, with only 2 flats in his pocket I would sell the house, and if he wants to buy it do it up and resell for higher price, good for him. Remove yourself from the equation altogether. You are not of an age to be taking risks that could cost 100ks loss.

I hate the idea of buying a recently renovated house, where I'm paying a premium price, based on someone else's taste. I might as well renovate to my taste after I pay a fair price for it.

Section62

You are blurring the boundaries between 'personal' and 'commercial' and then throwing friendship into a complicated situation.

It has all the elements required to end up being a complete disaster, unless you obtain professional/legal advice on how to structure the arrangement, and have professional oversight of the work being done.

…and where you said "it would side-step legal fees" the huge red flags started waving for me. A JV is not a way of avoiding legal fees.

Ultimately I think the issue will be your "£140k savings" and "I should be able to afford to wait."

The problem is you don't know you will be able to afford to wait, and £140k is not a lot of capital to have in reserve for a development project, let alone your life savings. You don't mention the capital position of JT, but if he needed a £280k mortgage to buy a half-share in a £560k house it suggests he has none, and his only capital investment would be materials for the renovation (can he afford them?)

In your circumstances (retired, 7 years to pension) some people would consider "a very high-risk attitude" to be 100% equities in a global tracker - individual property development investment is several levels of risk above that.

FWIW, my impression isn't that your friend is trying to scam you. He is perhaps just over-ambitious and lacking capital to match his ambition. I blame the daytime TV property programmes… they make it look dead easy to make a fortune by being a property developer, when in reality it is much harder and riskier than the programme makers suggest.

mlz1413

Another thought on this, if friend really wants to do this and you really want to let him, how about a structured agreement.

Something like

Lives in house for a peppercorn rent, via a legal agreement, say £100pm + all bills.

During X time period he renovates upstairs, set out agreement of what this entails IE wiring, plumbing, boiler, plastering, bathroom, windows, decorating, carpets etc etc so you both know what will be achieved in that space of time. OR it could be one room at a time IE bathroom or a small bedroom.

If you are both still friends and everything looks good then agree stage 2 IE downstairs kitchen, living areas.

The thought pattern is he is living for very little rent doing the work, so each section of work will probably be the time period of the value of that work.

Benefit to friend is he can do this around his normal work and so should be able to save money.

Friend won't get a lump sum but he is getting experience and a cheap place to live. If he does each section quickly he will be able to live in luxury quicker.

Benefit to you is you get the house done up and the rent won't blow a hole in your taxes and you don't have to pay the bills on the place during the agreement.

It does mean you take the risk on the house price as this could well be a year or two before renovating is finished.

I sold a house 2 years ago that had been fully renovated by partner and we got top price for it and the family that bought it loved having a turnkey property.

But my partner was really bad at doing the work, it took 10 years and a lot of arguments he actually only finished the place because I insisted it was sold regardless of it being finished as I simply couldn't live in a building site any longer.

So I am clearly advising from a jaded perspective but a large house renovation is overwhelming. Time, money, energy wear thin after the first year especially when you have to work to buy the materials to do the renovation.

Yorkie1

Irrespective of the amount of rent, the OP will still become a landlord, with all the responsibilities under the Renters' Rights Act that that implies.