Owner / Investor Contract Strategy with GC
Memphis, TN · Member since 2022 · 30 posts · 18 votes
Owner / Investor Contract Strategy with GC
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Contractor · Nashville, TN · Member since 2014 · 1k+ posts · 1k+ votes
9moI'm a GC and I've also developed new construction I owned. The GC is getting a screaming deal here if he gets some of your profit for... doing his job. He presumably doesn't get a builder fee, which keeps everyone's costs lower until it sells. When it sells instead of getting a builder fee he gets a cut of profit.
A typical builder fee on that many houses is probably 12% of the total construction cost. So you'd want to run your own numbers. For example, if a 1/3 of the profit ends up being the same as a 14% builder fee, I'd say you are still getting a good deal bc holding costs will be lower (smaller construction draws without having to pay builder markup). But I'm guessing that it's much more than 14% to where you are giving quite a bit away. Also, in my experience when the builder joins in on the equity, it's common for him to be signing the loan. Although in most cases the owner (you) cover the down payment which is probably just buying the land in cash.
In my humble opinion unless you've known this GC for 10+ years, it's mostly better to keep a clean separation and let him build it for a fee, get paid, and you collect profit with your partner.
Speaking of keeping clean lines, it might work out to have his brokerage list the houses but first you want to make sure he's GREAT at selling houses. And second, you want to negotiate his commission up front. It should be very competitive with your market. Around here, 6% was the going rate, but many agents are discounting to 5%. Plus, agents have always offered 5% to investors as they tend to get volume instead.
8 Replies
- Contractor · Nashville, TN · Member since 2014 · 1k+ posts · 1k+ votes9mo
I'm a GC and I've also developed new construction I owned. The GC is getting a screaming deal here if he gets some of your profit for... doing his job. He presumably doesn't get a builder fee, which keeps everyone's costs lower until it sells. When it sells instead of getting a builder fee he gets a cut of profit.
A typical builder fee on that many houses is probably 12% of the total construction cost. So you'd want to run your own numbers. For example, if a 1/3 of the profit ends up being the same as a 14% builder fee, I'd say you are still getting a good deal bc holding costs will be lower (smaller construction draws without having to pay builder markup). But I'm guessing that it's much more than 14% to where you are giving quite a bit away. Also, in my experience when the builder joins in on the equity, it's common for him to be signing the loan. Although in most cases the owner (you) cover the down payment which is probably just buying the land in cash.
In my humble opinion unless you've known this GC for 10+ years, it's mostly better to keep a clean separation and let him build it for a fee, get paid, and you collect profit with your partner.
Speaking of keeping clean lines, it might work out to have his brokerage list the houses but first you want to make sure he's GREAT at selling houses. And second, you want to negotiate his commission up front. It should be very competitive with your market. Around here, 6% was the going rate, but many agents are discounting to 5%. Plus, agents have always offered 5% to investors as they tend to get volume instead.
- 9moHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
OP. Keep clean as the other poster noted.
1. GC dies, gets divorced, in a lawsuit, walks off the job, etc. Your deal gets tied up even more than if it was just a contractual GC agreement. Also, you still have to go through his realtor office?
2. GC is putting no skin in the game. If he delays build, you take 2/3 of the brunt on construction interest.
3. You are putting the downpayment in with the land up front. That is normally the hardest part of the deal. Again, the GC is not putting any skin in the game.
4. 1/3???? Change figures to suit. Land $1.5mm (you); 40 upscale townhomes say $2.5mm (you); Utilities/Roads/parking/fire/storm sewers/surveys/landscaping/etc $1mm (you); Construction Interest during construction and sale period say 4 years (you); assume the GC is not funding the material/labor/subs/etc (you); he is just giving his GC time for free??? (him); he has no risk on his time; you have all of the risk on everything else.
- Memphis, TN · Member since 2022 · 30 posts · 18 votes9mo
Quote from @Henry Clark:
OP. Keep clean as the other poster noted.
1. GC dies, gets divorced, in a lawsuit, walks off the job, etc. Your deal gets tied up even more than if it was just a contractual GC agreement. Also, you still have to go through his realtor office?
2. GC is putting no skin in the game. If he delays build, you take 2/3 of the brunt on construction interest.
3. You are putting the downpayment in with the land up front. That is normally the hardest part of the deal. Again, the GC is not putting any skin in the game.
4. 1/3???? Change figures to suit. Land $1.5mm (you); 40 upscale townhomes say $2.5mm (you); Utilities/Roads/parking/fire/storm sewers/surveys/landscaping/etc $1mm (you); Construction Interest during construction and sale period say 4 years (you); assume the GC is not funding the material/labor/subs/etc (you); he is just giving his GC time for free??? (him); he has no risk on his time; you have all of the risk on everything else.
This is great. Thank you, Henry. I appreciate the full breadth of your risk based analysis. The current proposal is clearly far out of balance. I appreciate you breaking things down for me. Thanks again for your advice and input.
- 9moDenise SuppleeBusiness MemberRealtor · Willow Grove, PA · Member since 2017 · 984 posts · 643 votes
Hi @Everett Stephens, A cleaner structure is to clearly separate roles: fixed or incentive-based GC fees, defined profit waterfalls after capital is repaid, and arm’s-length brokerage commissions (or none at all). Align incentives, cap conflicts, and make sure returns reflect who’s actually putting capital and guarantees at risk.
Spark Rental Co-Investing Club580 Reviews- Memphis, TN · Member since 2022 · 30 posts · 18 votes9mo
Quote from @Denise Supplee:
Hi @Everett Stephens, A cleaner structure is to clearly separate roles: fixed or incentive-based GC fees, defined profit waterfalls after capital is repaid, and arm’s-length brokerage commissions (or none at all). Align incentives, cap conflicts, and make sure returns reflect who’s actually putting capital and guarantees at risk.
Thank you much, Denise. Indeed -- I need to ensure the GC's incentive structure is better aligned. Thank you much!!!
- Memphis, TN · Member since 2022 · 30 posts · 18 votes9mo
@Allan Smith Good morning! I truly appreciate your experience and guidance here with supporting reference numbers. This is GREAT insight. At the end of the day, I try to structure fair symmetrical deals and contracts with all my relations. The GC is highly respected around the region with a solid track record on the build side, but I need to verify the sales side. And, to your point, there's an imbalance of risks vs reward in the current structure as we own the land and finance relations. My gut told me the GC's proposals was lopsided, but I was approaching it blindly as this will be my first large residential development. One final question, please: How do I verify / build controls around a builder's fee to ensure it's a true x%? Thanks again, Allen.
- Contractor · Nashville, TN · Member since 2014 · 1k+ posts · 1k+ votes9mo
Quote from @Everett Stephens:
@Allan Smith Good morning! I truly appreciate your experience and guidance here with supporting reference numbers. This is GREAT insight. At the end of the day, I try to structure fair symmetrical deals and contracts with all my relations. The GC is highly respected around the region with a solid track record on the build side, but I need to verify the sales side. And, to your point, there's an imbalance of risks vs reward in the current structure as we own the land and finance relations. My gut told me the GC's proposals was lopsided, but I was approaching it blindly as this will be my first large residential development. One final question, please: How do I verify / build controls around a builder's fee to ensure it's a true x%? Thanks again, Allen.
The best thing is to start with a trusted, vetting GC. The next best thing is to require that he upload copies of all invoices so you can verify that when he bills you $112k for 100k +12% fee, that he actually spent $100k. If he was an actual fraud then he could fabricate sub's invoices to be higher amounts.
So either way you want to keep good reporting to see that things are on track throughout so you don't get to the end and find out you're going to need another $500k to put in concrete and buy lighting or whatever.
- Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes9mo
What's the benefit of including the GC in the profit?
Generally partnerships are needed to raise more capital...but in this case what is the GC actually doing for his 1/3 of the profit? And he wants to sell them? Is he splitting the sales commission with you and your other partner?
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