Partnership particulars for Flip

12 Replies

Need help figuring out this partnership agreement!

My partner and I are preparing to conduct our second REO rehab together. We completed one a few months ago and were happy with the results.

We do most of the rehab work ourselves. For this project, one of us is going to have more time to work onsite than the other, but we're putting up equal money for the cash purchase and will split the materials, holding, realtor and all other costs.

We're having trouble finding the right way to pay ourselves for our own labor. We think one of us could spend as much as 10 times the amount of time working onsite as the other. .

Some problems we've considered include:

1. Guy who works onsite fewer hours will earn more per hour if profit is split 50/50

2. We "paid" each other out of our profit last time but the hours were more equal then-- now we're having a hard time deciding upon an appropriate wage to pay ourselves if we choose this route...

3. Guy with less hours could want more worked subbed out depending on agreement-- whereas the guy who can work more will want to get paid to increase profit

4. We're having trouble determining how much our money is worth..and how much our time is worth.

5. Providing worst-case scenario assurances in the partnership agreement is key for us...we have a friendship to protect as well as our own financial interest..

We need to flesh it out more, but we're leaning toward paying ourselves between $30 -$50 for our own labor, then splitting the remaining profit. That figure-range seems to be a compromise between a straight profit split and strict "per hour" profit split.

Anyone have any thoughts? Thanks in advance!

Option 1: Pay a contractor/handyman $50-$100 to provide you a quote for labor for the job. The "working" partner gets that amount in addition to the profit split.

Option 2: Clockin/Clockout like an hourly employee. Determine your hourly.

Option 3: You and your partner seem to have a good thing going. Your time is probably better spent looking for the next deal. Outsource all rehab work and get your next deal lined up.

Option 4: Make your partner a silent partner and determine a different equity split.

How skilled are each of you? $30-$50 per hour is a high wage to pay someone. I'm also a GC. If I'm paying someone that much money things better get done real fast and with good quality craftsmanship. Labor needs to be treated as an expense and not necessarily viewed as lost profit to the other partner. What would you pay someone else to do the same work? Lastly, I would set some type of limit. I don't like paying people hourly to do anything. They don't have motivation to finish quickly under those circumstances.

Thanks for the replies, fellas... I understand that there's more money in making deals than swinging a hammer, and I think I'm working that way. Still, both my partner and I are good at rehab, and we enjoy it. Inventory of good deals is low where I live, too.

I like some of these ideas so far---it seems like we need to place a value on the deal itself and a separate value on labor... and treat it as an expense as Brian suggested.

Wheelhouse-- can you elaborate on your "silent partner" idea--would that mean a money partner only, then changing the split from 50/50?

Again, thanks guys.

Originally posted by Joel K:

Wheelhouse-- can you elaborate on your "silent partner" idea--would that mean a money partner only, then changing the split from 50/50?

My thought was that you take the grunt work on this house and take a 60/40 or 70/30 type split, then your partner takes the grunt work on the next house and he takes the larger split. You switch back and forth. This will allow you to stay involved while the other looks for the next deal.

Thanks, Wheelhouse!

It sounds like were getting somewhere--- this is a particular case and we draw up a different Partnership Agreement each time, so we could do something like that.

Do you guys think it's flawed logic to evaluate a deal based on $ made per hour? That seems to be the big hurdle for us in this instance because of different amount of hours we can work.

Do you guys think it's flawed logic to evaluate a deal based on $ made per hour? That seems to be the big hurdle for us in this instance because of different amount of hours we can work.

To be honest, I think its flawed that you are doing the work instead of looking for the next deal. I know several investors that put a time value of $200-300/hour for their time. If it can get done cheaper than that, then they hire someone else to do it.

But I know you like the work and to be honest, I like doing some of the work myself as well. I think a fair market hourly wage is an okay way to work things out. I would put a cap it on though so your partner does thing you are a "slow worker". Make it a fixed priced contract.

Honesty's what makes BP great...thanks!

I hope to only do deals eventually--- but we do enjoy the labor, for one.

Interesting idea about a fixed price contract...

I'm working on spreadsheets that explore different hour disrepencies and different wages--- fixed price contract may solve some of those unknowns...

In my opinion, fixed pricing is the only way to go. The money I pay to a contractor is based on the job performed. I chase down the materials. I want them at the job site as much as possible to mitigate delays.

But, I am with you Joel, I often become enamored over doing a flip too! I've done at least a few days of manual labor on each project house. I just can't stand to not be involved in some way with the grunt work.

For the reasons you've stated above, that is why I don't partner with anyone on my deals. A HML is one thing; a partner is another.

Thanks Mark!

First off--what's HML stand for--- I should probably know from lurking on this site!

Don't you think that there's some value to work those hours on your flips? Aren't you more aware of estimation factors, pitfalls and quality issues?

And it is fun---but it'd be cool if there was a time in the future when I had to choose between making a ton of money or having fun at an hourly wage!

I'm definitely going to run the fixed pricing idea by my partner.

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