Structuring A Flipping Partnership
I'm forming a partnership with two other individuals to flip houses in Austin, Texas and need advice structuring our agreement.
I will be providing the financing, insurance, all the back end. One party is a real estate agent and will find the property and then sell the it upon completion of the rehab. The third party is a contractor who will do all the rehab work.
My two partners are siblings and I'm very close friends with one of them. We understand doing business with friends is risky, which is why I want to have a very clear and detailed agreement drawn up by an attorney that protects us all. However, we are having difficulty in determining the terms of the agreement because it seems like hitting a moving target. We're all okay with a 30% split of the profit, yet there are so many other factors that complicate that number (going over rehab budget, delays in rehab, home not selling, contractor needing $ while working, does agent take commission or not, etc). I'm inclined to want everyone to work for free then split the profit evenly.
I'd greatly appreciated any specific advice (aside from speaking with an attorney, which we will do) on how to fairly structure this agreement.
Thanks so much!
Hi Marerk,
I'm in a partnership with a good friend myself. We though are 50/50 and basically agreed that if we couldn't agree then we would go to an arbitrator. Obviously that is an extreme circumstance.
Because you are the one financing 100% of the deal I'm not sure what you have is a partnership per se. It seems to me that you should be compensating a realtor for finding the deal (buying and selling the property) and a contractor for doing the work. There are many flippers who do these things without signing a partnership agreement. Are you completely hands off?
@kevin wood
I'm out of state and will be very hands off. I could indeed just compensate the realtor and contractor, which would certainly be more simple, but because I won't have boots on the ground I'd like a way to incentivize both parties to first find the best deal possible and then complete the renovation as quickly as possible. I don't want to be on the other side of the country worrying about these projects, and I believe I won't if they have skin in the game.
Originally posted by @Marek Berry:
@kevin wood
I'm out of state and will be very hands off. I could indeed just compensate the realtor and contractor, which would certainly be more simple, but because I won't have boots on the ground I'd like a way to incentivize both parties to first find the best deal possible and then complete the renovation as quickly as possible. I don't want to be on the other side of the country worrying about these projects, and I believe I won't if they have skin in the game.
Well the agent would at least be incentivized to maximize his sale price as his commission is usually a percentage. Before buying you should do some due diligence and even use bigger pockets. The only thing I think you could use with the agent is pay him a bonus for greater margins.
For the contractor you should have a scope of work that outlines what needs to be done for the project, when it will be completed, and the cost. The contractor should also be licensed. I am not as familiar with how the contractor should be incentivized.
PS If you press quote and tag me then I will get a notification. I did not know you had responded.
@Kevin Wood Good points, thanks for the feedback.
We're slowly hashing it out and I think for the realtor it will be a combination of commission and share of profit. I think the contractor will be a percentage of labor cost and share of profit. Both their shares of profit will be smaller than I originally anticipated, but that works in my favor in the end.
Originally posted by @Marek Berry:
@Kevin Wood Good points, thanks for the feedback.
We're slowly hashing it out and I think for the realtor it will be a combination of commission and share of profit. I think the contractor will be a percentage of labor cost and share of profit. Both their shares of profit will be smaller than I originally anticipated, but that works in my favor in the end.
Awesome look forward to hearing about it. We're getting into our first 5 in Houston. The deal is outlined here. There is a chance I end up in Austin in the next 2 years and I'm currently exploring the area remotely.
@Kevin Wood I hope I have good information to report in the next 3-6 months. Good luck with your Houston deals, they seem like great cash-flowing properties.
Seems like you are the pig and they are the chickens. I would try to make sure that they are not getting any money personally until you do. The contractor needs to pay subs but not himself. I would also make sure that you get a guaranteed IRR (even if it is only 5%) before anyone else gets anything. Point is that you are taking all the risk and that they have all the power to screw it up. It is hard for your dollar bills to be the thing that kills a deal. If it is a bad deal it is because either the agent picked a lemon or the contractor picked bad subs. So, they should be penalized before you are.
I think you're right. I'm slowly reworking the numbers and percentages. The problem with them getting a smaller cut of the profit is that they are less incentivized, a bigger cut and I get a smaller ROI. It's all about that happy medium...
You can keep the same cuts. You just need to make sure they are not paid until after you are paid. They would only get a smaller cut if there were less than a 15% IRR. This way everyone has the same incentives and you are getting a minimal guarantee of 5%.
I guess I should add a disclaimer here: I am not a lawyer and I am not your agent. These are just my thoughts on how I would structure a deal for myself.
Supplying money= at least 1/2 of partnership because you are assuming 100 percent of the financial risk.
Realtor gets zero percent or something out of the other side. Realtors are a dime a dozen and get compensated as realtors. Their services get nothing from a partnership because they give nothing to it.
If someone outside of your contributions is doing the labor for free, (or at cost), and not making anything accept the profit...and in that way contributing....than its worthwhile. Keep in mind that you must know the actual cost in order to know the diference
And most realtors cant work "for free" for two reasons. 1. Most work for a broker that will want to get paid on both the buy and the sell. 2 on the sell (which is the only one you pay for as the seller), the other realtor is going to het paid by you regardless of whether he does...and as i already said, your partner/realtors broker will want to get paid.
@Account Closed
Good points, thanks for the insight. Because I'm leaning heavily on my realtor to be my eyes and ears and find a good investment deal while I'm out of state I think she will get a small percentage of the profits.
I am in a similar scenario.
Currently I have a single ember LLC (me) that I am planning to use to flip houses. One of my friends would contribute capital (same amount as me) and I would do most of the work. (Acquisition, managing the rehab, managing the sale, etc.). We will use contractors and an RE agent who will get compensated for services performed.
Basically we both would be 50% in the deal financially , both of us would agree to do (or not do) a deal and split profits 60/40.
Option 1. I become the manager of the LLC and he will be a member. Both individuals provide a loan to the LLC and receive interest for a fixed term while the LLC is using the money for flipping. Profits get divided 60/40. I get 60 for doing all the work and he gets 40.
Option 2. I leave the LLC as is (single member-only me) and we would have an agreement that he loans the money to the LLC in exchange for 40% of profits on the deals. Of course everything would be transparent, and both parties would have access to all financial details (expenses, profits, etc).
Anyone has any suggestions on what the best way doing this?