April 2016

The best way to split up a pile of houses

After a lot of consideration and years, a former partner and I split the pile.

As is common among investors, I partnered up with another investor back in 2009. We worked together for a few years, bought and sold a few dozen houses and ended up with a pile of about 18 rentals. For lots of reasons that we don't need to explore in this post, I decided to go it on my own in 2012 and just never went back to the "office" after returning from an extended vacation that went longer than I had intended when I departed.

After closing my first deal on my own and getting 100% of the check, I knew I had made the right decision. My former partner and I kept the majority of those rental houses for several more years and slowly sold one here and there as they went vacant or tenants gave us problems. A few months ago, we had 11 left and decided to wholesale one to another investor. You can read about that in February 2016 DOTM if you haven't already. That left us with 10 houses, one of which was vacant and on the market to sell, but wasn't moving. The only things moving were the garage door, A/C, electric wiring and a few broken windows along with some weekly vandalism. I guess you could say my equity in this deal was moving off my balance sheet at a steady pace. We had one final break-in that pretty much sealed the deal for me. The next day, I decided I'd had enough of being in business with another person and wanted 100% control over all my business decision. At 1 o'clock in the morning, I sent the following email;

Subject: Splitting the Candy Bar

I'll take D, Acacia, 2 Cedars & 24th
You take San Antonia, Noble, Lugo & Alameda
I haven't comped them out recently, but based on the last time I did, they were about $5K apart in equity favoring your pile (which I'd expect to be reimbursed for). That is only 4 houses you'd have to sell. We'd each get 2 vacants now to deal with if you already sent the letters out. You get the easier sales I think; Riverside & Ontario, and I'll take on (private investor) as a partner in 24th.

Seems pretty fair and then you can hold/sell whenever you like. Any TNG Loans Craig should rewrite with the new owner. He's done it for other investors splitting up piles. This way we can close shop as soon as Courtland closes. If it interests you, we can rerun comps on all of them again and square up any difference.

We went back and forth over the next few days with different ideas on how to make this split work and be fair. I've heard of investors doing the, "Here is my offer. You take it or I get to take it at that price" method. In other words, you have a house you own with a partner. Let's say it is worth $200K. You offer to sell it to him for $160K and if he accepts you happily go to escrow. If he declines, you happily go to escrow and you get to buy it at that price. Seems pretty fair, but you'd have to be willing to pay that price today for the house and I wasn't readily interested in paying today's inflated prices for 1950's Inland Empire rental houses.

Another method that was suggested was the Snickers Method. (And just for clarity, we just made these names up.) This essentially involved one of us getting an option to buy each house from the other at a slight discount, take full responsibility in kicking out the tenant, rehabbing and selling the property, and getting a 10% cut of the net profit for doing all the work. Then came the 3 Musketeer's Method which was just a derivative of the Snickers. And finally we came to the Reese's Peanut Butter Cup Method which was originally pitched as, "we split up the ones you do want to keep then retail the balance together for a management fee." The problem with this is again, one of us is doing all the work that neither of us wants to do.

So, there we were. Still holding 10 houses and letting one of them get vandalized by transients week after week. During this time, I attended a super secret, ultra private, do not even waste your time asking me about it cuz I'm not going to give you even a remote hint when, where, who is in attendance, or how often we meet master mind. It's kind of a fight club thing where I may get kicked out just for even talking about it, but it's important to my story here.

One of the investors in attendance is, to put it bluntly, brilliant in my opinion, and probably in the opinion of the other attendees as well. I brought up my little dilemma and he said he also was once in a similar situation. He said forget about debt, cash flows, condition, just forget all that. Make it super simple and just divide the pile up by equity. Pick out what you want, make the offer and walk away. Sometimes the simplest solutions are the most brilliant. Just ask me about the balsa wood bridge competition during my senior year of high school physics class.

It was early April and again, slightly after midnight (kind of like it is right now) when I started looking at nothing more than the equities in the properties. I didn't care about location, type of loan, interest rate, rent, condition or value. I just made a list of all the houses and how much equity was on the table. Then I started putting them into two columns: Mine and His. It took me no more than 10 minutes to come up with a solution that I thought would solve what could be quite a complex mathematical problem. There were a few houses I knew I'd like to keep. There were a few houses I knew my partner would like to retail later this year. Seeing as a Reese's Peanut Butter Cup is actually already two separate treats, I stuck with the name, and divided the pile as equally as I could. It was just after 1am when I sent the following email;

Subject: Reese's Peanut Butter Cup Method

Time to divide this pile up and get it over with. I'm offering you my half of Noble, Lugo, San Antonio & Alameda for your half of D St, Acacia, and the two Cedars. If my spreadsheet is correct, it pencils out to within a few thousand. We can send a letter to the tenant in 24th to see if he wants to buy it. If not, we sell it retail and use the cash from that sale to pencil out any money owed to either party based on the split.
I'd like to get this going this week.

That was all it took. Just like pulling off a band-aid, we were done. Of course, there was quite a bit of paperwork that had to be handled and is still in the works, but within a few days we agreed to just call it even on the equities and forget about trying to account for every last penny. Besides, what's $10K or so among friends? When you're splitting up just over $1.2M in houses, it's easy to let something so petty as $10K go.

Are you (still) working with partners? How is it working out for you? Ever thought about going solo mission? Please leave any comments below, share this post with others and head over to my blog for more insights on investing in real estate.

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