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Forums » Rehabbing and House Flipping » Partnering with a General Contractor

Partnering with a General Contractor

21 posts by 11 users

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· Chelmsford, Massachusetts


I just read a nice blog by @Mike LaCava about flipping houses:

http://www.biggerpockets.com/renewsblog/2013/02/03/flipping-houses-with-no-money/

I found the idea of partnering with a General Contractor very appealing. Perhaps I could find a deal, put up some of the money and get a general contractor as an equity partner. I think this would be great because I have no construction experience and would love a highly motivated GC on my side.

Has anyone done this or have any ideas on how a deal like this could be structured?


Sean Brennan,
E-Mail: [email protected]
Telephone: 617-620-4224
Commercial RE Appraiser and Wannabe Investor


· Chelmsford, Massachusetts


Here are some simple hypothetical parameters:

Acquisition: $200,000
Rehab, Holding, Selling costs: $40,000
ARV: $270,000

Funding:
Hardmoney: $150,000

How would you split up the remaining equity funding ($90,000) if you split the profit with a GC?


Sean Brennan,
E-Mail: [email protected]
Telephone: 617-620-4224
Commercial RE Appraiser and Wannabe Investor


Real Estate Investor · Buzzards Bay (Bourne), Massachusetts


Lets start off with your ARV of 270k. Using the 70% rule you should be buying this around 189k minus repair cost. Your acquisition cost & rehab total you figured at $240 is way to high for $270 sell price. You should project $54k profit. Ok now on the split - You bring the money in at cost for acquisition & the contractor depending on his financial situation can provide materials & labor at cost. You split the net profit 50/50. There are many variable in this situation depending on both partners financial situation. You can get up to 95% financing with hard money in some cases but the rate will be way high but it is an option if the #'s work.


Small_houseflippinglogoMike LaCava, House Flipping School
E-Mail: [email protected]
Telephone: 508-273-0277
Website: http://www.houseflippingschool.com
Mike LaCava House Flipping School http://www.houseflippingschool.com


· Chelmsford, Massachusetts


Yea, I didn't think too hard when giving those numbers.

So basically GC takes care of all the cost to rehab, I fund/find funding for the rest of the costs, then split profit 50%/50%?


Sean Brennan,
E-Mail: [email protected]
Telephone: 617-620-4224
Commercial RE Appraiser and Wannabe Investor


· Chelmsford, Massachusetts


So something like this?

Acquisition: $180,000
Rehab: $30,000
Selling/Holding:20,000
ARV: $300,000

Funding:
Hardmoney: $150,000
Me: $50,000
GC: $30,000 or as low as he/she can get it


Sean Brennan,
E-Mail: [email protected]
Telephone: 617-620-4224
Commercial RE Appraiser and Wannabe Investor


Rehabber · Riverside, California


I agree with what Mike is saying but your contractor might be able to save you a ton of money on the construction costs because of inside connections and cheaper costs on materials. Just a thought since he's potentially an equity partner. You might be able to get more aggressive for the purchase price. Otherwise, the 70% minus repairs is definitely a good starting point.

For our hard money loans in California we often roll in repair money and do two releases. The contractor, under @Mike LaCava's scenario, would be out-of-pocket 50% and would send in pictures when the repairs are 50% complete to get 50% of the repair money out of escrow. Then he'd complete the next 50% out-of-pocket and then only get the final release of money when an inspection of work has been completed. An arrangement like that might be perfect for you because it's an extra set of experienced eyeballs on the project to make sure the work is getting done. If it's not and the contractor walks away, at least not all the money for repairs would be gone. I see you're in Mass. so have no idea what hard money is like out there.

If your contractor has no money, I'd be a little concerned for you. I'd prefer to see you hire a general contractor for a few days and come up with some project templates, cost breakdowns, likely issues with houses in your area, etc. From there, perhaps there's a bonus with some share of equity but not 50/50. I think it depends on what he's bringing to the party.


Small_tng_webAaron Norris, The Norris Group Hard Money
E-Mail: [email protected]
Telephone: 951-780-5856
Website: http://www.thenorrisgroup.com
The Norris Group l www.TheNorrisGroup.com


Real Estate Investor · Buzzards Bay (Bourne), Massachusetts


Yes something like that Sean & Aaron makes some great points as well. The bottom you need to do your due diligence on a GC & set it up to protect your interests & his. There are some bad ones & you don't want to go down that road. A good one will make life great & I have been on both sides. It is all about being creative in this business and if you have the drive you will make it happen.


Small_houseflippinglogoMike LaCava, House Flipping School
E-Mail: [email protected]
Telephone: 508-273-0277
Website: http://www.houseflippingschool.com
Mike LaCava House Flipping School http://www.houseflippingschool.com


Rehabber · Canton-Akron, Ohio


My thoughts, I have done quite a few partner deals where I was the GC. If the I always expected the money partner to put up all the money "interest free " if he expected me to provide my labor for "free".

If we had to pay interest, especially hard money rates, i expected to be paid for my work and we split the profits after that. In my case I was always the finder of the deal, the stager the gc, laborer and the seller, in essence I ran and controlled the project from start to finish and I tended to see my money partner as the bank.

Everyone brings different skills and abilities to the table, so every deal has to be structured to satisfy that.

My perspective.


Dell Schlabach, BenchMark Properties
Telephone: 3304326927
Dell Schlabach BenchMark Properties


· Chelmsford, Massachusetts


@Aaron Norris So, if the GC funded all rehab costs, do you agree that a 50/50 split of profits is reasonable?

If the GC didn't put up any of the money, what kind of profit sharing incentive would be reasonable?


Sean Brennan,
E-Mail: [email protected]
Telephone: 617-620-4224
Commercial RE Appraiser and Wannabe Investor


· Chelmsford, Massachusetts


In the scenario, I am finding the deal, and managing the sales process and arranging the financing minus whatever the GC brings to the table


Sean Brennan,
E-Mail: [email protected]
Telephone: 617-620-4224
Commercial RE Appraiser and Wannabe Investor


Hard Money Lender · Tyngsboro, Massachusetts


@Sean Brennan, you may find some contractor partners at the meetings you will be attending in Chelmsford and Waltham over the next few weeks. If you do find someone you want to consider working with, be sure to ask around if people know him. Attendees at REIA's or at Black Diamond ARE NOT SCREENED. Any one can attend. There are plenty of good people, but also plenty of incompetent or unreliable people out there, and you don't want to work with them. So be sure to ask @Mike LaCava, myself, (or some of the other investors who have been around a while and know lots of people) for input or references when you are deciding who to work with.


Small_small_logoAnn Bellamy, Buy Now, LLC
Telephone: 800-418-0081
Website: http://www.buynowhardmoney.com
Hard money lending in NH and MA, and for free networking in MA, http://www.BlackDiamondREI.com


Rehabber · Riverside, California


@Sean Brennan, that will totally depend on your arrangement and how much money you personally have in the deal and if you're making hard money payments. I'd say as long as it ends up being a 50/50 split in money out of your pocket and labor/materials on the GC side, I think that could work.


Small_tng_webAaron Norris, The Norris Group Hard Money
E-Mail: [email protected]
Telephone: 951-780-5856
Website: http://www.thenorrisgroup.com
The Norris Group l www.TheNorrisGroup.com


Real Estate Broker · Pensacola, Florida


I've certainly done risky things to get deals financed in the past, including using 24% apr credit cards. I would be very concerned about depending on any one contractor to finish a job. One one major rehab, we went through 3 GC's before it was finished: sloppy work, missed deadlines, one went MIA. Contractors are perhaps the most notorious of businesses to over promise and under deliver (next to politicians). Be careful. IMO:)



· Chelmsford, Massachusetts


Thanks guys, I appreciate all your thoughts.

@Ann Bellamy Don't worry, I am very cautious... I'll be vetting any GC I decide to work with very carefully. I plan to network for a few months to figure out who are the reputable players. I am also going to try to make the Nashua REIA and the BostonREIA meetings... Do you go to those?


Sean Brennan,
E-Mail: [email protected]
Telephone: 617-620-4224
Commercial RE Appraiser and Wannabe Investor


Rehabber · Conroe, Texas


Hey there Sean, my two experiences with trying to partner for the profits with a good GC have been challenging, even here in Houston, with endless deals, and lots of REI clubs with networking for GC's...I was very cautious and took my time checking out GC's before settling with one for two deals....he has done 300 deals so quality of work was great with all the people i talked to and some of his work I inspected.....breaking down the numbers to get him to agree to 50% of the profits, and not get paid anything for the rehab is something he has agreed to only on the third deal which we are close to doing....he partners with several others ....but I had to prove myself to him also....I have now found in the last 2 years of getting to this point that there are shady characters on both sides of this equation you are talking about....I have been trying to work with other private investors that have some $$$$ like 100k up to 500 k and want to do deals....but most I have met haven't been willing to bring anything else to the table....and want 50% of the deals....and they can't provide any kind of referals or are willing to do anything else....so I would say that it just takes a lot of give and take to make it work....at least for me being a newbie in REI, but I have construction experience and can fund the deals....



Rehabber · Santa Clarita, California


Some great thoughts above, I am going to take devils advocate position here. I am not a fan of partnering with the GC and here is why: What incentive does he have to keep the rehab costs down? If he has the cost of one item at $1000 when it could have been $600, he pockets $400, then only splits the balance cost of $600, thus his cost from his profit share reduced by $300, yet he pocketed $400, creating a net gain for himself.

Secondly, if a GC is going to be a partner, he better be bringing more than a construction team at " cost" to the table and should be bringing cash or rehab and acquisition.

I personally would rather JV with another investor who was a money partner so that we both have same goals and incentives to keep costs down, liquidation quick, rehab quick, etc.

Just my .02 cents.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


Hard Money Lender · Tyngsboro, Massachusetts


@Sean Brennan, I agree with @Will Barnard by the way. But you may still find partners and contractros of all kinds as you network. I'll PM you about the question you asked.


Small_small_logoAnn Bellamy, Buy Now, LLC
Telephone: 800-418-0081
Website: http://www.buynowhardmoney.com
Hard money lending in NH and MA, and for free networking in MA, http://www.BlackDiamondREI.com



First, unlike some vendors a contractor must be carefully managed. Contractors, whether they're GCs or subs are a different breed. Having one as a partner could work but put it in writing.You're also dealing with project management here which means you, as the other partner need to be involved at every step.

Second, Will Barnard (see his post above) is giving great advice by questioning the contractor's incentive to "keep rehab cost down".

How true!

But let's not limit his way of thinking to contractors. It's smart to consider the role and function of each partner. What's their incentive? What are they getting out of this? How do they benefit?

Is it a good idea to leave a task or function entirely up to a partner completely unchecked? Make sure its in writing and they're held accountable.



Rehabber · Santa Clarita, California


But let's not limit his way of thinking to contractors. It's smart to consider the role and function of each partner. What's their incentive? What are they getting out of this? How do they benefit?
Great point, a non contractor partner also needs to have incentives to keep costs down, holding periods down, and maximum resale price points. How you do this task depends on each partner but as stated, should always be put in writing.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


Contractor · Anchorage, Alaska


Originally posted by Will Barnard:
Some great thoughts above, I am going to take devils advocate position here. I am not a fan of partnering with the GC and here is why: What incentive does he have to keep the rehab costs down? If he has the cost of one item at $1000 when it could have been $600, he pockets $400, then only splits the balance cost of $600, thus his cost from his profit share reduced by $300, yet he pocketed $400, creating a net gain for himself.

Secondly, if a GC is going to be a partner, he better be bringing more than a construction team at " cost" to the table and should be bringing cash or rehab and acquisition.

I personally would rather JV with another investor who was a money partner so that we both have same goals and incentives to keep costs down, liquidation quick, rehab quick, etc.

Just my .02 cents.

Will, I see where you're coming from, but I could only agree with your scenario if trustworthy contractors didnt exist. They DO exist. And I would think that by the time a decision is made to partner, a level of trust has already been established. If the GC signs the agreement stating he will bring materials in at his cost, whether that be at wholesale or retail, he should be trusted to do so.

These are details to work out, but if an investor has an established pipeline to plug properties into, I guess he wouldnt look to partner with a GC in the first place. Consider a scenario from the GC's perspective...

...The GC can save a crapload of money on materials and says that because of the high cost of the money the investor brings to the deal, he thinks it fair to charge the rehab retail for his materials. If he floats both labor and materials at cost, and then the investor cant move the property untill 180 days past projection, what then.

Ideally, we would all approach our business dealings from a position of strength. A GC worth his weight looks to do the same. The challeng, once a relationship based on mutual respect and trust is formed, is in crafting an agreement that covers any and every eventuality and reflects the true picture of their strengths and what each brings to the table.

I guess the bottom line for me is that if you cant trust those you need to run and grow your business, you resign yourself to flying solo, putting a whole lot of energy into babysitting, and only grow your business at a rate you can manage thru your own resources.





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