Partnering on a flip/BRRR property

9 Replies

Hi all. I'm sorry if this question was asked a dozen times before, but I was wondering what kind of documentation/contracts go into making sure one partner on a flip/BRRR property doesn't screw the other over. I've done deals with family members before on buy and hold properties where it is verbally agreed upon that the profit will be split 50/50, but now I have peers recommending partnering with a stranger that knows a specific market and how to flip in that market better than I do. The idea would be to use my own money to finance the entire project and split the profits 50/50 with someone that can do a better job of finding the deal and managing the project better than I do.

If I'm using all my finances for the project, wouldn't the property be in my name? How does my partner know I am not going to sell the completed project and keep the money for myself? What procedures would we follow in order to assure neither of us get taken advantage of?

I'd appreciate any replies as I'm really trying to learn the process. Thanks in advance and I look forward to hearing what you guys have to say.

@Ryan Bosetti

There's multiple principal agent problems and trust issues that arise in not being the one actively managing the asset.  For instance, if your partner is making maintenance decisions he/she is either paying them-self to take care of something (often much more cost effective to do that, or at least to put eyes on something).  There's plenty of opportunity for one to inflate their time, or be dishonest about a situation, if they are so inclined.

When paying someone else, a person with the relationship and 'on the ground' also has opportunities to work with a vendor to artificially inflate prices.

For me, the moral of the story, to be totally honest is not to be the passive investor type.

There are folks on here that will have a different perspective/take on this, however my belief is to not expose yourself like this - and if you have the ability/constraints, be the more active investor of the two.

The document spelling out the contract details and who has what role and  each partner's share in the contract is called "Operating Agreement". It has to be prepared by a local real estate attorney . However ultimately it is up to you and your partner as to what kind of content to cover/add to this agreement. I'd say you have to spell out everything or as much as possible to avoid any issues.

 
Originally posted by @Ryan Bosetti :

Hi all. I'm sorry if this question was asked a dozen times before, but I was wondering what kind of documentation/contracts go into making sure one partner on a flip/BRRR property doesn't screw the other over. I've done deals with family members before on buy and hold properties where it is verbally agreed upon that the profit will be split 50/50, but now I have peers recommending partnering with a stranger that knows a specific market and how to flip in that market better than I do. The idea would be to use my own money to finance the entire project and split the profits 50/50 with someone that can do a better job of finding the deal and managing the project better than I do.

If I'm using all my finances for the project, wouldn't the property be in my name? How does my partner know I am not going to sell the completed project and keep the money for myself? What procedures would we follow in order to assure neither of us get taken advantage of?

I'd appreciate any replies as I'm really trying to learn the process. Thanks in advance and I look forward to hearing what you guys have to say.

@Ryan Bosetti  

To add to what @Jim Goebel said, since it is only two people involved and someone you've never worked with before, I agree with Jim, you should not be completely passive. You should be offered some decision power.

Thanks @Jim Goebel , Thanks @Alina Trigub ,

It's comforting to know that it's not just my deep seated trust issues. When I hear some of these guys talk about partnering with someone they met online it comes off as insane to me. I suppose you're both right, that if you can be heavily involved in the process than it really mitigates the risk. I guess this leaves partnering with people out of state off the table if you can't really monitor everything your partner and the contractor do. Even with an operating agreement in place it seems like it would be extremely difficult to prove theft of service/inflation of prices. Thank you both for your comments, they were very informative. 

You seem to only hear about success stories in this business and rarely failures. Do either of you know of any specific examples where a situation like this has happened? Either anecdotal or perhaps there is a thread on this site? I am going to do a quick search, as I'm curious to see the fallout and legal repercussions of such an incident. 

@Ryan Bosetti I'm in this exact situation right now. A local GC contacted me and asked if I'd be interested in partnering up to rehab homes. After meeting him, seeing his work and getting to know him a little I decided to try one project and see how it goes. We compiled a partnership agreement setting forth, among other things, that I would acquire the properties in my name and he would manage the rehab. Profits would be split 50/50. We actually did 3 properties that way, then we decided to form an LLC together. My RE attorney helped us compile an operating agreement with many of the same clauses as our original partnership agreement. Two things I've made certain the entire time is that: 1) I retain management control over the assets since it's all my money, and 2) I have the right to be as passive or active as I want... again because it's all my money and I have a better business background than my partner. It's been a good partnership thus far but certainly not without its challenges. Much like any relationship. Hope that helps. Feel free to reach out with other questions. Best of luck to you!

Chris

Hey @Chris Jensen ,

Would you be able to speak to the specifics of your operating agreement? What kind of practices do you and partner put forth to assure there's no meddling? You spoke about retaining control and activeness, can you delve more into that? Also, would you recommend partnering with a contractor to a beginner or do you think the process is easy enough to where an individual can just hire a contractor and go at the project solo? Looking to see what you think the upsides of your partnership is as opposed to you doing things by yourself. Appreciate the reply. 

@Ryan Bosetti our operating agreement outlines each partner's core responsibilities. My partner's core focus is the rehab, since that's where is background and skill set lies. My core responsibility is aligned with my background and expertise as well... finance, taxes, insurance, and legal.

We work together on deal prospecting and acquisition and coming up with the overall design and rehab plan for the property. Then I try to stay out of his way while he manages the rehab. We have regular updates/discussions as the project progresses. I'll stop by periodically to see how things are going, but otherwise my involvement is fairly passive unless I have a major concern.

Among the things listed, I handle all the finances. I run the modeling and deal analysis. I keep the books. I manage the relationships and activity with the financing companies. I provide regular financial status reports as the project progresses, along with final results after the project is completed.

Once the rehab is complete, we work together on staging and marketing, along with any repair items coming out of the inspections, and anything else required to take us through to closing.

My wife and I have owned and self-managed rentals for several years, and we want to eventually expand into multi-family units. We view rehabbing as a way to accumulate the additional capital and expertise needed. We were originally planning to go it alone, hire the contractors, and manage the rehab ourselves. But honestly I was overwhelmed at the expected time commitment. I have a demanding full-time job, a large family, and I'm very active in serving in my church. My available time for managing rehabbing projects is not conducive. So the partner request from our now GC friend was very timely. We do still leave the go-it-alone option on the table in case conditions change with my partner.

You might be in a different position. If you have the time, basic knowledge, and financial resources, you might consider cutting your teeth on a small project. The knowledge part is huge, because there's a hundred different things that can go wrong during a rehab. Definitely not for the faint of heart. A partner with experience is the easiest way to start down that path until your own experience and confidence grows.

Hopefully that's what you were looking for. Let me know otherwise.

Contracts and operating agreements are a necessary instrument to use, but ultimately it comes down to personal trust between you and your partners and team members.  Anybody can violate the terms of a contract and simply walk away - it's up to the other party to enforce that contract, or walk away also. 

Ultimately if there are trust issues with a potential partner, you should avoid getting into a partnership with that person / people.  If a deal goes south and a partner decides to give you the ole' 1-finger salute, it will be up to you to enforce whatever agreement was made, which usually involves spending money on lawyers and letters.

This is a relationship business.  If you don't have healthy trustful relationships with everybody you are working with you run the risk of dealing with unnecessary challenges that usually have nothing to do with Real Estate.