Investor and Contractor - 50/50 Split?

Question

Hi all!  I am interested in partnering with a contractor but not sure exactly what makes sense.  Here's the scenario:

My agent (or the contractor) finds the deals.  I fund the purchase price of the home and the contractor covers all the rehab costs, including materials.

Is that a fair deal...and given this scenario, is a 50/50 split fair?

Aaron K. · Answer

@Tomiko Graves that makes sense, but if you are paying the contractor for their labor as well as materials there is no real benefit to you in the partnership, you'd be better off hiring the contractor.  And if the contractor wants a bigger slice of the pie all he has to do is decide his time is worth more money.

Tomiko Graves · Answer

@Frank Wong that’s exactly it. We would both get back what we put in and split net gains.

@Brian Pulaski and @Aaron K. perhaps I was using the wrong language with “profit.” The same way I would recoup my funds put in at closing , the contractor would too. That would be factored in. We would split what’s left

For example, pp is $50,000 with a $30,000 rehab cost. ARV is $130,00. I get my 50 back. He gets his 30 back. After closing costs, etc, we split the “profit.” Am I missing something? I’m new so I appreciate the feedback.

Frank Wong · Answer

If its exactly how you describe it sounds like a great deal for you.   Just so you are clear this is probably how it is going to work.  You both will go 50/50 and you fund the deal.

The contractor will do the work pay for material and also charge you for the labor.  Then take that off the final sales price before you split the net gains.  No contractor will ever do the work for free labor.

Aaron K. · Answer

It depends on how big the rehab is, if the rehab costs $100k and you plan to split a $50k profit the contractor would lose money.  Any deal where someone funds the entire rehab will not end in a 50/50 split of the profit.

Brian Pulaski · Answer

If I'm the contractor I would never agree to this. Who gets paid back first if the deal is a dud, you or the contractor? He has to work for free for months and then you split the "profit"? Does his labor/materials cost get paid to him and then you guys split what's left, or is his profit to cover the labor/materials.