What contract do you use for partnership on a fix & flip deal?
Real Estate Agent · Houston, TX · Member since 2020 · 107 posts · 32 votes
I am working with a few friends to start purchasing properties to fix & flip. I am wondering how others go about creating the contractual agreement for a partnership on fix & flip deals. Do you create a partnership or an LLC for each property? What do you do if people are bringing different things to the table (i.e. money vs. time vs. deal, etc.)? Any feedback would be helpful. Thank you!
This has been discussed several times before somewhat recently, but I can't find the threads right now..
First, most I believe use LLC's for the limited liability. A multi-member LLC is taxed like a partnership anyway by default.
the business structure is an exhausting discussion. You can take Title into one LLC, or use separate. I believe TX allows for series LLC's so that could be a route, but I hear the main issue is that they are so knew there is very little case history on it. Otherwise, for a fix and flip using separate LLC's for each property is nice because any "lingering" liability is tossed away with the LLC.
If you really wanted to get complicated, you could each form a single member LLC. Then, each of your single member LLC's would be a member on a multi-member LLC that took Title. this more complicated but gives high flexibiilty, in my layman's opinion. Maybe not all of you want in on the deal. Maybe your splits will be different on a specific deal. All of this can be addressed in the Operating Agreement of the multi-member LLC. Meanwhile, each of you has their own LLC for marketing/branding purposes if you should so care. Some people like the 1 LLC per property since its common to name the LLC the street address for the property. Makes it easier to keep track instead of using a bunch of fancy names. Here some posts I found quickly:
https://www.biggerpockets.com/...
https://www.biggerpockets.com/...
As for the splits, there are some discussions on that. In my opinion, it comes down to who is taking the risk. Everybody needs to be clear as whether they are "investors" or "workers." The former loses money when the deal doesn't work out, the latter still gets paid. Those "investors-wannabe's" who say that they will put in their labor for free but their subs and material costs have to be covered. To me, that's not an investor. One partner putting up the capital and the other "doing the work" usually doesn't work well either for real estate. Again, whatever one stands to gain must/should be what one stands to lose. As an investor, I don't get paid until the deal is completed and the property is sold (in the case of a flip). So, how does this "other guy" going to "cover the loss" if they never put anything in (and usually wants their expenses covered up front).
For some, it has worked donig 50/50 (for two people) because both sides are happy. Okay, I have no issue with that...
My point is you need to look at the risk, as well as the contribution. Many times, all those that aren't putting up funds really should just be paid accordingly to the "work being done." if you try to calc a percentage, its usually quite measely. If they are putting any "skin in the game," how can they be responsible for a loss? Again, investors can lose money, workers get paid...
I'd be happy to chat and save my fingers :) Just let me know. Otherwise, good luck.
This has been discussed several times before somewhat recently, but I can't find the threads right now..
First, most I believe use LLC's for the limited liability. A multi-member LLC is taxed like a partnership anyway by default.
the business structure is an exhausting discussion. You can take Title into one LLC, or use separate. I believe TX allows for series LLC's so that could be a route, but I hear the main issue is that they are so knew there is very little case history on it. Otherwise, for a fix and flip using separate LLC's for each property is nice because any "lingering" liability is tossed away with the LLC.
If you really wanted to get complicated, you could each form a single member LLC. Then, each of your single member LLC's would be a member on a multi-member LLC that took Title. this more complicated but gives high flexibiilty, in my layman's opinion. Maybe not all of you want in on the deal. Maybe your splits will be different on a specific deal. All of this can be addressed in the Operating Agreement of the multi-member LLC. Meanwhile, each of you has their own LLC for marketing/branding purposes if you should so care. Some people like the 1 LLC per property since its common to name the LLC the street address for the property. Makes it easier to keep track instead of using a bunch of fancy names. Here some posts I found quickly:
https://www.biggerpockets.com/...
https://www.biggerpockets.com/...
As for the splits, there are some discussions on that. In my opinion, it comes down to who is taking the risk. Everybody needs to be clear as whether they are "investors" or "workers." The former loses money when the deal doesn't work out, the latter still gets paid. Those "investors-wannabe's" who say that they will put in their labor for free but their subs and material costs have to be covered. To me, that's not an investor. One partner putting up the capital and the other "doing the work" usually doesn't work well either for real estate. Again, whatever one stands to gain must/should be what one stands to lose. As an investor, I don't get paid until the deal is completed and the property is sold (in the case of a flip). So, how does this "other guy" going to "cover the loss" if they never put anything in (and usually wants their expenses covered up front).
For some, it has worked donig 50/50 (for two people) because both sides are happy. Okay, I have no issue with that...
My point is you need to look at the risk, as well as the contribution. Many times, all those that aren't putting up funds really should just be paid accordingly to the "work being done." if you try to calc a percentage, its usually quite measely. If they are putting any "skin in the game," how can they be responsible for a loss? Again, investors can lose money, workers get paid...
I'd be happy to chat and save my fingers :) Just let me know. Otherwise, good luck.
Hey David, thank you so much for the response! You have given me so much to consider and think about.
We did discuss and decide that everyone needs to create their own individual LLCs that will then be part owner of the multi-member LLC for the flip property. At this point we plan to create a new LLC for each property and dissolve the LLC after everything is done.
I totally agree with the investor vs worker thought process. My idea was to split everything based on the percentage of funds everyone puts in to the deal. 40k total split up into 20k, 10k and 10k means person A gets 50% of the profit/loss and persons B & C each get 25%. That's the simplest and easiest way to go about it to me.
I sent you a link to connect. Would love to talk more when you have time. Also, I'll be in NJ at the beginning of next month. Don't know exactly where you are in relation to where I'll be but if we could meet up for lunch, maybe that could work as well. Blessings on your day!