Best Way to Partner?

Question

I'm looking at a couple vacant sites in my area that will support the construction of duplexes.

I have a GC who would be interested in partnering and would be in control of the construction aspect.

What is the best way to structure a partnership for this kind of project, especially if we may do up to 4 of these at one time together?

Should I buy the land and then he supplies the down payment on construction? Any thoughts would be appreciated.

Kevin Sobilo · Answer

@Steve B., its about you and your partner are defining what "at cost" means. Using a term like that is all well and good, but it only works if you both have the same clear understanding of what it means.

Steve B. · Answer

@Kevin Sobilo I don't understand your reply.  is "at cost" inclusive of his labor?  How do you determine the "at cost" value of his labor and do you deduct that from his profit at  the end of his project?

@Michele B.  The 50/50 makes sense for a straight forward partnership, however I'm sure the OP meant he wants to trade labor for equity.  I'm also sure the contractor is exchanging his skills for the fact that he doesn't have capital to invest up front.  Again its a much more complicated question.

Lets look at a simplified example where the numbers are ball-park  accurate.  Investor buys heavy fixer property for 300k with a completed ARV of 500k.  Labor and materials market rate is 100k.  Contractor needs 25k of materials supplies (75k of labor he does himself he does at no upfront reimbursement).  Investor is all in for 300k+25k materials.

Investor and contractor split profit (again estimated at 500k -300k-25k).  End result is investor makes 1/2(500k-325k)  =87.5k.  Contractor makes the other 87.5k.  These numbers somewhat look ok but at the end of the day the contractor makes a decent margin assuming the deal is profitable, same for investor.  Also at he end of the day the Investor is just offsetting some up-front costs at the expense of paying the contractor  a premium assuming a profitable end result.

If the house sells for 400k, they both take little to no profit and both take a haircut.  The investor risks his holding expenses while the contractor risks working at a crappy rate, de facto, if the profit margins arn't meet.  Of course you would have to adjust these returns given the selling costs and costs of money.  As I said , even the simplified case, isn't that simple and unless you lay out all possible scenarios with both the contractor and Investor someone is likely left to feel disgruntled and upset.  Bad feelings are likely to occur even if the deal is profitable as the investor may not appreciate all the work the contractor did and the contractor may not appreciate all the cost of money and risk the investor has taken.

I believe J. Scott addressed this kind of deal years ago and came to the conclusion that equity partnerships between contractors and investors are generally a bad idea.  The more I study these things the more l've come to agree with that conclusion.  I'm interested in hearing where I could be wrong about this.

Michele B. · Answer

I think that you should both put in 1/2 of what the expected cost of land and building are including his labor no profit taken.  If the land is 100k and the cost of constructions is 1.5 million then you need to each put in 800k for a 50/50 ownership.  Or you could do the % of if the cost to construct with his time added is as above no profit taken,  and you only buy the land,then you get around 20%  (6.25% plus whatever number you both agree upon for finding and setting the deal); and he would get the rest.  If you want more equity in the project pu some money on the costs of construction.

Write a contingency plan incase it goes over budget.

Kevin Sobilo · Answer

@Jackson Tate, I suspect the words "at cost" did not include the GC's materials and labor just that he would not get paid for his own time or mark up any of the work.

I think how to pay for the construction another aspect.

Jackson Tate · Answer

I'd have to agree with @Steve B. The land is going to be about 100k total, while total construction costs could be as high as 750-800k. Even at cost for the GC, he would end up throwing a lot more of his money into the deal and I don't see him going for that.

Antoine Martel · Answer

Lol.

This is a way that I've done deals in the past.

Antoine Martel · Answer

You buy the land, he does the construction at cost and then you split the profits 50/50

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