How should I structure a joint venture with GC?

Question

Hi everyone, I'm planning on doing my first flip, and I don't know much about renovation. I found a good GC with great references. He agreed to help me out if we split the profit (70% to me, 30% to him). I will put my money in for down payment (hard money lender, this is his connection). He will get paid for the renovation job, and plus 30% of the profit. He will show me the process of doing flip, and teach me as much as possible.

Will this be a fair deal for both sides? I just feel like I'm taking all the risk here, because his renovation job gets paid for sure, no matter what, and the profit is a bonus for him.

Should I ask him to contribute a part of down payment (how many %)? or closing cost? or a part the renovation cost?

Thank you!

Account Closed · Answer

@Vee Vu hi Vee, Yes, I would be worried about this since you are putting in all the money. The risk is all on your side (other than the 30% profit - aka his variable bonus if things work out and it sells quickly at a good price after a smooth reno). If GC has other jobs running concurrently and they see the 30% profit slipping because of the reno challenges, length, other unknowns (while your holding costs are increasing which also are on you), who is to say the reno timeline/costs doesnt stretch so they are still making their money. I wouldn't want to go in on this unless they had some money in and there were some guarantee timelines and/or other documented assurances.

Robert Tinker · Answer

@Vee Vu Maybe he gets 30% as payment for renovations. But not both

Frank Hinck · Answer

@Vee Vu

Sounds like he has 3 sources of income on that job: You as the client, you on the JV split, and Hard Money kickback.   On the contracting work I’d want a Stipulated Sum GMP (Guaranteed Max Price)

Sean Howell · Answer

This seems like a pretty bad deal for you. Like others have said, you're taking all the risk PLUS this dude is double dipping!

He gets paid for the rehab and then gets to share in 30% of the profit...? I must be missing something? If that's the case why not just hire another GC, pay him, and keep 100% of the profit?

Paul Shannon · Answer

Its sounds like the GC has the opportunity to drive up labor costs on the front end prior to the sale.  They could also walk off the job with your materials and you'd have no recourse.  I'd give a bigger % profit to them, but have them put some skin in the game.

Ex: You pay for the purchase of the property.  GC pays for materials.  At the sale, you both get your up front investment back prior to splitting the profits.

Jesse Daconta · Answer

@Vee Vu

There's a conflict of interest with the GC getting paid for the renovation. It would be better if the GC was getting reimbursed for only materials at sale + 30% profit. In this case they would put in sweat equity and you would put in a down payment (not to mention that you take all of the risk with hard money).

Best,

Account Closed · Answer

@Vee Vu not sure on that, I'll let other Flip investors chime in. I would think it all depends on your comfort with GC and his background and experience. Have you run several scenarios through estimation and do you have the expected profit range determined?

Meryl McElwain · Answer

@Vee Vu

What exactly do you want him to show you? Are you going to tag along to subcontractor meetings? Is he going to show you how to estimate and order material? Is he going to give you copies of the contracts? Show you how to do payouts? Explain exactly how construction works?

To know whether this is fair to you I'd have to know what your goal is. If you want someone to show you how to GC so you can one day do it yourself I can understand the deal. Absent that being your goal I'm not sure what the point of the deal is.

.

Vee Vu · Answer

@Justin Schreibeis so you how much should I ask him to put in to make it a fair deal?

How should I structure a joint venture with GC?

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