Possibly entering a partnership, what is the usual arrangment?
I am a general contractor in the NW, been struggling to find my first rehab because of the usual problems: funding, availability, the usual stuff for first timers as myself. When I first moved in the area I met a number of individuals in the realtor field, some of which have gotten a number of flips under their belt. These are the guys I want to learn from, and I told them so if there was anything I could do to make it worth their while to work with me on a flip. Time passes by, always being in contact will all my new acquaintances, one of the guys tells me of a house he would like to work with me on. We look at it, we both see that possibly some money can be made on it (still need to to a feasibility report on it, to see if it really is). From there a rough draft of a partnership is drawn up. Even though this house may fall through, getting a working relationship going with a realtor/investor is a far cry from where I was a week ago.
It is written in plain english, reading it over I am concerned over just one part. It was written while we met at a local coffee house, I was watching/reading as he was writing. Most of it is easily agreeable. Before I get to the part that concerns me, here is the bulk of the partnership.
There is still debate on whether to create a new LLC or use my LLC for the purchase of the property. I think a new LLC is in order.
I will have all control and final say of the rehab, scheduling, all of it. I want his input as well. A portion of the work is the addition of a master en suite. It is a small house and really needs the extra room. It is in a VERY desirable part of town, will most likely needs a complete gut, the house is a 1926 build. My financial involvement is paying the points.
The partner is going to fund all of the purchase and rehab, list it and collect the 2.5% selling commission. He will not charge me an interest rate on the purchase and rehab monies.
We will both split the profits 50/50, should there be any. We are counting on it. We will both contact the subs and do other managerial stuff for no financial consideration. The profit will be the reimbursement. I will receive a paycheck from any hands on work I do. I am a master carpenter, well rounded in many aspects of home building, 43 years in the trade has taught me a lot. The paycheck for a 40 hr week should it go that way will take care of my family's weekly needs. The chance of actually being there 40 hrs week is slim, but possible.
My concern is the paying of points. The cash out of pocket for me will be approx $6500. The profit would need to be over that much just to break even I think... The rate I will be getting paid is 66% of what I charge for contract work. His take on the idea of me paying the points is the 50/50 split. The points entitle me to the profit share. If I was hired as a GC and I charged all my time and markups, he would not need to share anything. Perhaps a good point?
This still seems to be a little one sided, I am sticking my neck out for $6500 and my time, which I am confident I will get compensated for, but the partner will not only get a potential profit, but the commission from the sale. I don't want to sound ungrateful, but I will have a lot of sweat involved, which I will get paid for at a reduced rate, but to realize a profit for me seems a bit of a stretch. Some money can be made although the margins are tight. The partner thinks there will be 20K to split. Hopefully he is not being over ambitious in his comps.
Could some of you guys fill me in on what the normal setup on this type of partnership is, or is this unique?
Thanks in advance, I will end my novel.