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Hard Money + Equity Partner

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Zach Whitt

from Dallas, Texas

Feb 20 '13, 09:15 AM


The plan is to flip a property using an equity partner to provide the cash reserves and a hard money lender for the bulk of the purchase and rehab.

We originally planned on all cash, in which case we would split gains/losses 50/50. Money partner would provide all the capital, and I would do all of the work (not the actual flipping work, we will use contractors).

Now, he's decided against using all cash and would instead like to contribute $50k to the deal and finance the rest with debt. How should this be split? My thought is that the $50 should be used as cash reserves. But will the equity still be split 50/50? I would think more like 30% to the equity partner and 70% to me. Is that off base?

Thanks!



Mike Grayford

Rehabber from Simi Valley, California

Feb 20 '13, 10:52 AM
1 vote


My thought would be he would get 50% of the profit from the percentage of the investment that his $50k buys. So let's say the total costs are $150k. He would then get 50% of 1/3 of the profit, because he is covering 1/3 of the total cost. If you gave him, as you suggest, 50% of the total profit, and the other lender 50% of the total profit, you would end up with 0. Even if you give the other lender a fixed percentage (such as a hard money lender), you would still be getting a raw deal. In my opinion, if he wants a profit split, it has to be proportional to his investment.



Zach Whitt

from Dallas, Texas

Feb 20 '13, 10:57 AM


Mike,

That makes sense. We would be using hard money to finance. My partner's contribution would essentially be the ability to borrow, so perhaps we could get away with a smaller contribution from him into our business. As long as he can prove to the HML that he has the liquid assets to cover reserves, the HML should be happy, right?



John Thedford

Real Estate Investor from Naples, Florida

Feb 20 '13, 10:59 AM


No matter his actual cash out of pocket, if he can bring 100% of the money to the deal that, in itself, might be worth something.

Just my .02

John Thedford
Naples, Florida



Zach Whitt

from Dallas, Texas

Feb 20 '13, 11:06 AM


Originally posted by John Thedford:
No matter his actual cash out of pocket, if he can bring 100% of the money to the deal that, in itself, might be worth something.

Yes, true. I guess that whether it's all or just some from him, my contribution is still $0.



Bill G.

Real Estate Investor from Springfield, Missouri

Feb 20 '13, 11:44 AM


Zach, your deal was 50/50 with him providing funds, period.

Where he gets his funding is irrelevant. That assumes you will not be on the loan. However, if he encumbers the or your property, now you are assuming additional risk, what if he drops over and is incapacitated, blabbering in a nursing home from a stroke and his loan is foreclosed, you could lose the property.

So, it's not the same deal, it's one thing to not pay a partner, it's another not to pay a secured lender.

In reality, while he is having you at risk, you are contributing nothing to funding the deal, so even at that point, 50/50 could be fair, just realize that his leveraging the deal puts you at greater risk and perhaps gives you more motivation as well to perform.

Additionally, he can circumvent the partnership and take any obligation in default and follow through with remedies under that loan, outside your partnership. So it places him in a somewhat better position and he avoids any default/foreclsoure.

Another issue, a HML making a loan as an outside lender and taking an equity position is not only unethical but can be self dealing. The practice is illegal here. A lender outside of the business entity is a straight lender. A partner inside a company who lends money to the company is an entirely different situation and is common practice, but as a partner, accepts the risks inside that entity as well which an outside lender does not. Don't deal with HMLs who want that arrangement, IMO. In commercial arrangements, profits can be assigned as premiums, but I really doubt any small HML follows such premium structures based on the balances. Anyway, not sure this even applies as it wasn't clear, but sounded like the HML also wanted a slice. Another issue with those having money or access to money to lend and being unaware of the liabilities of lending or good practice being over shadowed by greed.

If you end up with a loan, you might consider signing the note too and justify any modification to the split if you can based on your risks assumed. But again, he who carries the water takes the first drink. Just my thoughts... :)



Zach Whitt

from Dallas, Texas

Feb 20 '13, 12:36 PM


Originally posted by Bill Gulley:
Zach, your deal was 50/50 with him providing funds, period

In reality, while he is having you at risk, you are contributing nothing to funding the deal, so even at that point, 50/50 could be fair, just realize that his leveraging the deal puts you at greater risk and perhaps gives you more motivation as well to perform.



Originally posted by Bill Gulley:
If you end up with a loan, you might consider signing the note too and justify any modification to the split if you can based on your risks assumed. But again, he who carries the water takes the first drink. Just my thoughts... :)

The deal isn't 50/50, period. It's still in the works and we're making changes before nailing it all down.

I see in my original post where it may have looked like HE is the hard money lender. That's not the case. He's an equity partner contributing funds to the deal. The hard money lender is a third party providing debt to finance the deal. They won't have equity.

Our thought is that we will either be co-borrowers, or, if possible, the loan will be to an LLC of which we are the sole partners.

I see your point, that he is contributing 100% of the money and I'm doing 100% of the work, so whether or not the deal is financed could be irrelevant.

Knowing both of us or OUR LLC is on the loan, still 50/50?



Bill G.

Real Estate Investor from Springfield, Missouri

Feb 20 '13, 12:57 PM


Hmmm, I read 50/50, I do scan alot. Good to hear the HML is not doing that...

Here is kind of a tip....if you have a partner, often it is awkward for both to go to a lender at the same time and spill your personal financial information. The lender will see you seperately. Doing so also allows the lender to treat both fairly as borrowers, individually and discuss issues privately instead of in front of another party.

So, when you get the financing approved, neither party really knows who carried most of the water so to speak, who it was that really swings the deal. From that, each partner can deal on equal footing as they are both on the loan or at least both will guarantee the loan.

Then, by eliminating one feeling like "If it weren't for me, you wouldn't have a deal" you can then address other issues like who does most of the work or what ever you may have to deal with.

I'd say, unless you are related and sometimes even then, if one partner feels as if they are the deep pockets they will tend in cases to assume control if both have similar knowledge, you'll find many times of getting into the golden rule, he who has the gold makes the rules, almost human nature. Keeping your personal finances out of it helps avoid such issues.

Now, you might frame it as "WE" are getting the financing and "I" am doing 100% of the work. And negotiate your split. ;)



Dell Schlabach

Rehabber from Canton-Akron, Ohio

Feb 20 '13, 01:53 PM


My quick take on this, If I had a 50/50 split agreement with a money partner, as I have done numerous times, and he wanted to borrow some of the money. I would keep it simple. He pays the costs of the borrowed money.



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


Will Barnard Verified Moderator Donor

Real Estate Investor from Santa Clarita, California

Feb 20 '13, 02:08 PM


If your proposed deal was 50% split each with funding partner bringing the cash, but know wants to use leverage, then in my mind, you have a choice.
1. Split stays 50% and cost of funds comes out of his share.
2. Split stays 50% and cost of funds comes out of JV equally as with all other expenses.

Your 50% is derived and earned from finding the deal, contracting the deal, structuring of the deal, managing rehab, and managing exit.



Medium_be_logoWill Barnard, Barnard Enterprises, Inc.
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com - For all Southern California House Flippers, Agents, and Wholesalers


Will Barnard Verified Moderator Donor

Real Estate Investor from Santa Clarita, California

Feb 20 '13, 02:10 PM


Caveat, if I was the funding partner and you lack a track record, I am not going to agree to pay for the cost of leveraged funds and I may ask that I get a larger share or that you have some amount of skin in the game.



Medium_be_logoWill Barnard, Barnard Enterprises, Inc.
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com - For all Southern California House Flippers, Agents, and Wholesalers


Mike Grayford

Rehabber from Simi Valley, California

Feb 20 '13, 07:28 PM


I see. I thought the partner wanted to only bring $50k and you were going to be financing the rest of the deal with a loan. If he's still bringing all the money to the table (in other words, he's getting the loan), then I think it is fair if he still gets 50% of the profit. However, if you are expected to cover (or share) the costs of the loan, I don't think it's fair if he still gets 50% of the profit. That said, if this is your first deal and that's the only way he'll do it, you can always just suck it up and go for it. Just know that if you end up breaking even with no profit, YOU still LOST money because you had to pay the loan costs.



Taylor Green

from Gilbert, Arizona

Sep 09 '13, 09:31 AM


Hi Zack,

I was wondering what split you ended up going with on this project?



Will Barnard Verified Moderator Donor

Real Estate Investor from Santa Clarita, California

Sep 10 '13, 07:01 PM


10 months later, yes, an update would be great, no matter what happened. Please do share at your next convenience.



Medium_be_logoWill Barnard, Barnard Enterprises, Inc.
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com - For all Southern California House Flippers, Agents, and Wholesalers


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