Residential Real Estate Agent · Mt. Pleasant, SC · Member since 2010 · 257 posts · 130 votes
I'm trying to get a REO under contract, cash purchase. I have a good contractor that will do all the rehab, and in return I will split the profit with him (not sure on the % yet). What's the best way to set this up from a legal/tax perspective? I just want to make sure that I don't end up with the entire tax burden. Could we hold joint title? I'll obviously consult a lawyer, but I figured I'd check the wealth of info here first.
I'm not understanding why you would want to do this Chris. The real work is finding the deal and coming up with the cash, not hiring a contractor. I wouldn't be inclined to give the contractor a piece of the deal. He's a worker bee not a deal procurer. Why should he get more than the fair cost of his work? Now, if he brings you the deal...there may be something to talk about.
Why couldn't you just account for the percentage you pay the contractor as an expense when you file your taxes using a 1099 or other appropriate tax form?
Explain a little more what your intention is of doing this and why?
Is it a partnership in the sense that you find the deal and he fixes it?
If so is how much capital is each putting in?
If there is a loan who is getting and signing for it?
Or...
Are you just trying to set up a situation where you own a property and as an incentive for the contractor doing a great job you want to incentivize him?
In that situation I will many times have a bonus clause for coming in on time and budget and a liquidated damages of approximately what my carrying costs are per day he is late after our agreed upon date.
With this method its important to give an appropriate time extension for any change orders.
You are not going to pay his taxes. Make sure he has a license and before he starts get him to fill out a 1040 so you can send him a 1099 at the end of the year.
I apologize if I'm rambling and hhave grammatical errors. This messge is written from my cell phone
Simple a Joint Venture agreement as Dave T said. Or you can formally create a partnership or my preference is an S-Corp. Helps limit the SE liabilities.
I agree. Use a joint venture agreement with either the two of you as partners, or your two companies as partners. Profits would be split according to the agreement in the JV and the both of you would handle profits through either your company or personal tax returns.
I'm not understanding why you would want to do this Chris. The real work is finding the deal and coming up with the cash, not hiring a contractor. I wouldn't be inclined to give the contractor a piece of the deal. He's a worker bee not a deal procurer. Why should he get more than the fair cost of his work? Now, if he brings you the deal...there may be something to talk about.
I would assume it's a scenario where the contractor is contributing labor and materials worth an agreed upon amount, entitling them to a cut. Nothing else makes sense to me.
I'm not understanding why you would want to do this Chris. The real work is finding the deal and coming up with the cash, not hiring a contractor. I wouldn't be inclined to give the contractor a piece of the deal. He's a worker bee not a deal procurer. Why should he get more than the fair cost of his work? Now, if he brings you the deal...there may be something to talk about.
Cheryl,
You dont think a contractor who will do the work without getting paid upfront is a good deal? Do you know how much contractor costs are for a rehab? What if the REO doesnt sell right away, he wont get paid. If people are doing 1-2 deals a year and you have the means to sit while your money is tied up in this 1 project then yeah dont do it, but if your a person who does multiple houses at a time those expenses/holding costs can add up like crazy.
Its not about the workers, coming up with cash, or "finding" the deal. Its about making a deal while minimizing your risk as much as possible and in my opinion using the least amount of your own cash as possible. A contractor who is willing invest his time and money with your project deserves to be compensated for it. (If the deal is suitable).
You could set up a formal partnership or you could issue him a 1099 in exchange for the amount. I personally prefer the LLC as a partnership in this scenario.
You could set up a formal partnership or you could issue him a 1099 in exchange for the amount. I personally prefer the LLC as a partnership in this scenario.
If cash is a problem, then maybe this is a reasonable avenue to take. I've never had this issue and my contractor is already fairly compensated. If this is what you need to do, then have an attorney draw up a contract that you can use when needed.
Adrian,
If cash is a problem, then maybe this is a reasonable avenue to take. I've never had this issue and my contractor is already fairly compensated. If this is what you need to do, then have an attorney draw up a contract that you can use when needed.
Cash doesnt always have to be an issue for this to work. Im not saying this is what I need to do but (big picture) if there were more contractors willing to share the risk with us the flipping game would be very different today.
On several f my properties, a contractor that I work with and I split profits. I purchase everything down to the materials. This however gives him incentive to get the property done correctly and make everything look nice. The profits are 70/30; however you have to remember that I'm not paying for labor up front.
Adrian, I'm sure there are plenty of contractors willing to work this way; however, you need to have some type of relationship with them. For example, the guy I work with is a friend of my brother in law.
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