What do you think about this Joint Venture structure?

Question

Currently, I engage on flips with my brother in laws who own a construction company.  I have zero construction experience. We formed an LLC and split profits 3 ways.   I want to reposition some multi units and am looking at two in particular that I have potential.   I don't have construction knowledge so I am scared to do a deal without them.  They don't have good credit or the money to fund the deal.  I do.

I was thinking,  I buy the property 100% in my name, all rents and income will be mine while we are holding,  they will provide the GC work and I will pay them for it a normal rate.  Then...on the sale,  We split the profits of the property (50/50),  but out of their 50, they have to reimburse 50% of the GC and improvement costs.

I think this is fair as they have zero risk (no money in), get a job to do and get paid for,  yet they have incentive to keep costs down and improve value as well as help me plan whether or not it is a good deal at all.

What do you think?  Anyone have a better arrangement similar to this? Does this seem fair to you?

Spencer Gray · Answer

I agree with @Patrice Penda .

How many GC's have you gotten quotes from?

There's no reason to give up your profits to a GC just because they know construction or they are your brother in law. I mean, they better know construction (that's what you are hiring them for and it's their job)! If you get to a point where you are confident managing contractors then you can become the GC and sub everything out, but until then what you pay a GC for is to understand the construction process and to hire the appropriate and qualified subs - that is the job you pay them to do, not extra. If they bring more to the deal (guarantee debt, found the deal, fund the deal, provide his time/services at cost etc) then you could give them something (5-30%). 50% is more like you put up the money and he does ALL the work, or visa-versa. There are much better ways to incentivize (bonuses for on time completion, penalties for not hitting deadlines).

If your brother in-law is the GC at full cost and he takes 50% of sale proceeds he is taking advantage of your inexperience. Save your equity for investors and yourself, tell your brother in law to find his own deals!

Also make sure you are using a different LLC for each project.

Paul Etchison · Answer

I guess my major fear is that the past 3 deals we have done have been with their knowledge of what needs to be done, what to look out for, basically their construction experience.    I have just been funding it.   I had nothing to do with finding it, renovating or selling.

I want to do this deal differently.  I want their help for the viewing of the property before purchase.  I guess I just don't know where else to find someone that would walk the property with me and give me some good advice.  So that is why I am trying to include them in on the deal.

Thank you for your input,  I appreciate your response.

I wonder if I am just basically needing an inspector.   As you can tell my experience here is very little and I am doing everything to learn.  I know I am going to make mistakes,  I just don't want to make a huge one.   I guess I just want to know what I am getting into before I get into it.  They would probably walk the property with me for nothing as they are family,  I just would like to include them.  Maybe I need to rethink the whole thing.  Thanks again!

Paul Etchison · Answer

I was thinking a 3-4 year hold.   Time to repair and raise rents.  At that point I guess i would see if I even wanted to sell depending on the cash flow.   Thank you for your input as I am exploring the idea and you bring up valid points.

Patrice Penda · Answer

hey @Paul Etchison

If you are going to pay the construction company upfront at the normal rate, I am not sure why would you want to share the profits? I am not sure that your proposed agreement structure ensures that all parties' interests are aligned. A possibility is that they charge you more upfront than they would get at sale.

What is the time frame? You mentioned about rents coming in but also about sale. Is it a fix & flip or a buy & hold?