JV with experienced investor what would you do?

Question

Hi BP members, I'm planning to JV a fix&flip deal with a experienced investor, below are the 3 options he is proposing..I'm looking for advice if you are in my shoe, which option you will do without hesitation.

Purchase: $310k (included $20k wholesale fee)

Rehab: $80k

ARV: $500k

Potential profit after all expense/holding cost/paying hard money lender and etc: $70k

-My part: invest my own cash $115k-$125k depend on which option I go with below
-JV partner: project management for the rehab, his partner which is a broker do the listing of house once it is ready for sale. Does not put in any cash, his responsibility is managing the project from rehab to sale of the house. He is proposing the following split where he gets the most of profit since I'm passive investor (bring the funds only).
I want to know what others see as potential red flags?

Thanks!

In summary, there are 3 main options:

1. You buy the deal at $310k, ABC’s wholesale fee will be baked into your loan with the hard money lender, and we do 60/40 profit share between XYZ Development (aka XYZ, my renovations company) and you/your company via a JV agreement. You would be sole member of LLC that owns property.

2. XYZ submits for loan with you and closes on property with new LLC. You pay $20k ABC fee outside of loan and we are 65/35 (XYZ/you) partners on LLC.

3. If you don't want to be on the loan at all and willing to pay the ABC wholesale fee at closing, you can be a gap investor to fund 1) ABC fee, 2) down payment on purchase, 3) first payment to contractor and 4) carrying costs for the duration of project. XYZ will form new LLC to purchase property. I can give you 25% of the profit either as a member of the new LLC or via a JV agreement.

In addition to everything mentioned above, on options 1 and 2, I am open to giving more equity if you are willing to buy it at closing. For example, if you want 20% more equity (worth roughly 20k based on projections), I would be willing to sell to you now for an additional 15k with all other terms remaining the same.

Jennifer Stradtman · Answer

Every deal I’ve done has been a 50/50 split with me putting up the cash. Your ‘partners’ seem to be trying to ltake advantage. I wouldn’t do it.

Enrique Huerta · Answer

@Jack Yu, If it was my capital, I'd ask for a minimum of 70% of the equity interest in the property if there was no preferred return. I would not sign loan documents and I would maintain control of the operations should things go sideways through a meticulous operating agreement. I would only agree to lower equity interest IF, AND ONLY IF, there were some skin in the game from the JV partner's end. In this scenario, there is NOT, so I would not go below 70% of the profit returns to me. I would also ensure there is some limit on budget on the rehab and commissions on the sale since the contractor and broker are affiliates of the JV partner. Just some food for thought.

And I agree with @Dennis M., I probably would pass on the opportunity just given the mindset of the JV partner.

I would encourage you to be patient and do more research on the deals you're trying to do as well as the people you are trying to do them with. There's no need to rush into your first deal. If you're comfortable with everything and just need help to negotiate a fair arrangement, then hey, it is your money and your decision. I gave you my personal threshold above.

Dennis M. · Answer

@Jack Yu

I’d pick option #4

- run for the hills

Jack Yu · Answer

Thanks for the feedback @Enrique Huerta. Yes this will be my first deal doing flip.

If you are in my shoe with option 3, what % would you ask so it fits your investment requirement?

Enrique Huerta · Answer

@Jack Yu, One red flag I see is that the person putting zero money into the deal is making more money than you. Just because you are a "passive investor" doesn't mean you get lower returns. You eventually do, but you should be the priority upfront and only get lower returns AFTER a specific return is reached.

I don't think the person putting zero money into the deal should be compensated at a higher percentage than you. That doesn't make any sense, ESPECIALLY if they are collecting a fee, doing the renovation work, and having an affiliated party list the home on the back-end.

I personally would do #3 if I was looking to be a passive investor. No loan or other liability should be associated with my investment. HOWEVER, I would not agree to only receive 25% of the profit. It doesn't pass muster with my personal investment philosophy.

Is this your first JV on a house flip?

JV with experienced investor what would you do?

5 Replies