Profit Sharing as an acquisition strategy?

Buying Strategies
1

Has anyone ever leveraged profit-sharing as a tool to get buyers to part with their land? I’m wondering if this strategy could work in land acquisition like it does in home acquisitions? I think Orchard.com uses this strategy… they offer a base price for the home then profit-share with the seller whatever they can get above that but lower the price on an agreed-upon schedule.

Does this idea have legs?

2

My husband is a land surveyor so we plan to subdivide the land acquired and resell.

3

No, not in this market. And what investor is going to back land?

4

Profit-sharing with the seller, not an investor… wouldn’t that appeal to someone trying to sell their land for maximum profit?

5

This is one of the 4 main strategies in purchasing,.

  1. Lowball offer. If not acceptable, go to double close
  2. Double close offers more (wholesale value) in return for waiting for the money until we sell. This is your strategy
  3. Seller finance. offers more than wholesale in return for seller carrying financing
  4. Sell through Realtor with seller getting paid a little more than wholesale and land buyer getting the rest after Realtor expenses.
6

Jana - I think your idea could work. I would recommend using the term “profit-split” over “profit-sharing”. The latter has implications in the employee benefits realm.

1 Like
7

Thank you! Do you have any thoughts about how such a deal should be structured with the seller?

8

You may want to structure the deal as a Loan With Equity Profit Participation.

The investor funds the deal in the form of a loan along with a reasonable interest rate and maybe collateral as well. Be sure to use a promissory note and document the deal as a loan; not a joint venture or partnership

Terms would include a due-on-sale clause at which time the accumulated interest gets paid along with the profit allocation. The investor reports interest income for tax purposes and possibly capital gain on the profit split.

Be sure to check with your real estate attorney and CPA.

Hope this helps.

9

Yeah! This is very helpful. Thanks

10

Hey @Jana! Really interesting idea - I haven’t tried this exact approach but I can see how it might work in certain situations.

The challenge I see with land vs houses is that our holding periods are usually way shorter. With houses, you might renovate and flip in 6+ months so there’s time for that price schedule to work. But most of us are trying to flip land in 30-90 days, so the profit-share window is pretty tight.

That said, I could see this working in a few scenarios:

  • Raw land that you’re planning to subdivide or get entitled (longer timeline)
  • Properties where you’re genuinely unsure of market value and want to test different price points
  • Sellers who are really on the fence and this gives them a reason to move forward

The tricky part would be explaining it to land sellers. Most of them just want a clean, simple transaction. Adding complexity might turn off more sellers than it attracts.

I have done something similar informally though. Had a seller who thought their 40 acres was worth way more than I could pay. Told them “look, I’ll give you $X now, but if I can sell it for more than $Y, I’ll send you half the difference.” Ended up paying them an extra $3k when it sold higher than expected. They were thrilled and referred two more deals to me.

Have you tried reaching out to any sellers with this approach yet? Would be curious to hear how they respond to it.

11

I believe this profit splitting approach would be considered a licensed activity in my state (NC). You would need to have a broker’s license to make this pitch to sellers.

1 Like