Negotiating partnership...one party has cash, one party has labor

15 Replies

Apologies if this is in the wrong category. This seems like a fairly common issue, so I'm hoping someone will be able to offer some wisdom. My partner and I are trying to figure out how to equitably and fairly negotiate our respective stakes in the business. So far we wholesaled a house without touching it and are in the process of rehabbing a duplex that we might hold or flip. 

I have access to capital therefore I purchase the properties and finance the rehab (offering some, but relatively little in the way of physical work). My partner provides the labor (and is willing to pitch in some cash, but he doesn't make much and it feels unnecessary and complicated for him to pitch in cash when I have that under control). However, he works a full time job and is only able to rehab my/our property in his spare time. 

Our inability to come to an agreement on how our partnership should be divided has led to a standstill on construction.

Does anyone have experience or advice on how to quantify the contributions of each partner and make sure each gets a fair share?

The best Cash +Labor partnership usually is set up where you split everything 50/50, this includes unexpected expenses. 

Since you're saying he only works on the houses part time, this makes things tricky. 

You need to sit down with this guy and state exactly what each others role is in the partnership (preferably with a lawyer present), every detail, every job your in charge of and every worst case scenario should be put in writing. 

There should be no confusion on who does what or if a person is contributing enough because both of you positions would be spelled out clearly this is why you should get a lawyer to write it up as a third party.

it really depends on the value that each of you place on what is provided.  If he is just doing the labor, have you considered just paying him what he would get based on the timeframe he is completing the work.  That is usually the easiest solution if that is all he is bringing to the table.  At the end of the day, it only worth doing a partnership if both parties feel they are properly compensated.  It is one of the reasons I am not a fan of most partnerships proposed to me.

I agree with @Pete T. about how to pay for the Labor partner.  Just pay him for the labor and not as a partner.  If you insist on doing it as a partner, in the future (as in before you get a property), you should have this in writing.  Every property is different, if you are splitting the return % based on two defined roles...cash in, and rehab.  You could adjust the %'s based on how much rehab there is to do.

Keep this in mind though.  If you are putting in your cash, and leaving it in the property, you are taking all the risk (another reason why I don't do that).  If you put all the cash needed in, and refinance all or some of it back out, then your risk is diminished.

When I set up my partnerships, it's based on three defined partners:  Cash, credit, management...the rehab is part of the cost...even if one of the partners is doing it.

He isn't a partner really, because you don't really need him. You can hire another contractor to rehab your projects.  Why split up the proceeds of your investment when you don't have to? If he is your friend, then your attempted partnership is going to ruin your friendship. I would use him as a contractor, but not if he isn't performing at the same speed and workmanship as any other contractor.

I have done this with contractor who I have partnered on with fix and flips. We've done several, and it has worked out well. We split everything 50/50, but I only agreed to that because he pays for all of the renovations (and does much of the work). I fund the purchase of the properties and hold them in the name of my LLC. If my contractor wasn't funding the renovations, I would absolutely, positively, not agree to "partner" with him. As several have already pointed out, would simply pay him as my contractor, but would keep all of the profits.

I really appreciate all the replies, everyone. 

This is a personal as well as a business relationship, which complicates things and I'm sure has many eyes in this thread rolling! But I trust my partner 100%, which is something I can't say about any contractor I've ever come across and that's worth an awful lot to me.

You've given me some things to think about. 

If this is a "relationship thing" it isn't a partnership.  You are giving him profits that  you wouldn't give a contractor who is not putting any money in....you know like a gift.  This   sounds like trouble and more appropriate to a Dear Abby column.

You are paying a lot of money for "trust" and if you are doing a fix and flip speed is important .  If he can only work on it part time sounds like a very costly situation...for you not him ,as he has no skin in the game.

Sorry but that is speaking truth .

I take no offense at your honest feedback. I'm here asking questions because I want to look after myself. Mama didn't raise no fool. 

However, to view things from his perspective, he is currently spending the majority of his free time working on a property that he has no elucidated stake in. I'd say that's "skin in the game". My issue is how to quantify that contribution vis a vis my own financial contribution and make sure we're both coming out ahead. It's easy to say "get a contractor", but those guys are hard to find, hard to trust, and expensive. I've got someone I trust who is working purely on faith because he believes in what we're doing and trusts that everything will work out in the end. 

One scenario I've considered on this current property, assuming we flip: I recoup my initial investment of the purchase price, inspection, taxes, insurance, rehab costs, etc. then we split the profit 50/50. Is that fair to him, or is he is essentially only "recouping" for his labor and not actually profiting? 

I'm a hippie dippy liberal arts major, folks, so I obviously need someone to tell me how it is. I'm just learning all this. 

Originally posted by @Account Closed :

One scenario I've considered on this current property, assuming we flip: I recoup my initial investment of the purchase price, inspection, taxes, insurance, rehab costs, etc. then we split the profit 50/50. Is that fair to him, or is he is essentially only "recouping" for his labor and not actually profiting? 

Since we've ruled out you don't want to treat him as labor/contractor only, the above is exactly what I would suggest. Another thought, what about taxes? If you make $10k on this deal and give him $5k, at the end of the year, if the house is in your name, you're paying taxes on $10k profit, not just your $5k. Not insurmountable but definitely something that needs to be accounted for. 

I have done this type of arrangement with people and I am a licensed contractor not a handy man. You should consider if there is going to be any permits required, if so most of the time you can pull them if you are the homeowner (not an entity) IF YOU ARE GOING TO BE LIVING THERE FOR A MIN OF 2 YEARS AFTER CONSTRUCTION IS COMPLETE. I would find out what your local requirements are. You may be required to have a licensed contractor to get your permits.

It sounds to me like your "(Business?)Partnership" is very one sided and with him having a full-time job. Have you thought about what the cost of your money is going to be? Because your projects are going to take much longer unless you hire other people and possibly have him as a project manager rather than the one who is doing all of the work he can still work on the project but will be doing more of the scheduling, purchasing, hiring/firing etc. all of the tasks that come along with doing a flip outside of the day to day production tasks. 

I agree that you can handle this project much better paying him for his time or possibly his time and small profit sharing but not 50/50. I can see where there could be some real issues arise even with everything drawn out on paper because time and cost of money will pay a major part in your arrangement.

Get three itemized bids. Use those to get a benchmark on how much his work should cost. That's how much you pay him. If he works on contingency, you have to pay more. If he gets paid up front, he gets less.

no equity. 

One of the biggest costs in a flip is holding costs, and your partner's inability to devote full time to getting the flip done expeditiously costs you extra money.    Unless you're doing this out of charity, I'd consider him as no more than a trusted vendor who gets favorable terms.

I have thought a lot about partnering in a Fix N Flip mostly because my time is very precious and I'm always running out of it.  I also am usually the one that finances the purchase and rehab, but have thought about a partnership only because I still work full time and managing my job and a project is very difficult.  I thought the easiest way would be to fund the rehab as I normally do, but the trusted partner would be the one running the rehab and reporting progress to me.  I would make inspections and discuss issues that come up.  So the partner would get paid for his work from the estimate he gave me like any contractor, but then would make an extra percentage off the net profit for being "project manager".  It's his bonus and I've heard other people say they give an extra bonus for coming in under budget and/or earlier than expected time frame, because yes, holding costs are expensive.  It can work...

@Account Closed you need to b extremely careful right now. You cannot mix a personal relationship and a professional relationship and be successful.  You can have them in parallel, but not intertwined. You must decide which one is more important to you. 

If this is a professional endeavor, then you need to do as many have stated, pay him as a contractor or get a real one who can do the flip quickly.

If this is a personal relationship based decision, which it sounds like, acknowledge that you will NOT make as much or any money on the deal and give the guy a 50/50 deal. Anything outside of that and you start arguing about little things and jeopardize the relationship. But you really have to be OK with getting the financial "short end of the stick", because you will. He will control the speed and the quality of the flip and I suspect you will start to feel a TON of frustration. But that is the path you will have willingly chosen if you pick relationship base business vs. a true business.

Either way, if this a person that you plan to keep in your life for a long time, focus on protecting that relationship by choosing either one of these paths. Don't fool yourself onto believing you can mix the two and come out ahead.

As John D Rockerfeller had wisely said,  "a friendship founded in business is better than a business founded in friendship".

-Arlen

let me tell you about the arrangement i have here with a partner. we purchased a flip house. he ( his company) has put up the purchase price of the house, all closing costs, etc. our agreement is that i pay for all of the labor, whether i do it myself, or hire it done, all labor costs are mine. he pays for materials. i pay for permit fees, an any other " surprises" that come up. i keep track of my hours that i put in myself at a reasonable rate and anything i pay for labor whether i hire college kids or professionals. in the end, when we sell the house, everyones input, cash and labor, gets paid back to them out of the proceeds of the house. the profit that is left, we split 50/50. hope this helps you

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