Real Estate Investor · Leawood, KS · Member since 2013 · 14 posts · 1 vote
I have read several posts on this subject but none I could find that spell out my potential situation. Here it is:
I'm contemplating a partnership with a contractor.
I would provide 100% of financing and rehab cost of materials.
He would provide finding property
Rehabbing the property
However, I would have to pay him for his labor and his crews labor.
I know that isn't ideal for me as a funding partner but here is what I think he can offer me at least for the short term since I am new to this area and don't have a team or knowledge of areas to invest.
He can find properties that he has been doing as an investor himself. He can, if he is forthcoming about his true costs, provide better prices on materials etc.
I am weary about him not having any true skin in the game but it is a risk I'm willing to take since the property will remain in my name and the price of the properties could be potentially low enough so if I loose it won't be huge money.
Looking for input and suggestions of what a "fair to him and to me" split would be.
All input will be greatly appreciated and "YES" I would love to hear from contractors as well.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Personally, I think this is a horrible idea. Some (too many, in my opinion) contractors aren't very skilled, aren't very reliable and aren't very efficient (not putting down contractors, just stating the obvious). The good part is, they're easily replaceable should they turn out to not be a good fit for your project or not have the qualifications to get the job done.
But, if the contractor is a partner, it makes it very difficult to fire him and hire someone else. Meaning, if your partner/contractor isn't very good, the likelihood is that you'll lose money. It's even worse when the contractor/partner has no skin in the game.
Now, in your particular scenario, the contractor is finding the deal and doing the work. But, he's getting paid to do the work (just like any other contractor). So, really the only thing he's doing to provide additional value over and above any other contractor is finding the deal. Is that really worth giving up 50% (or however much) of the profit? Not in my opinion.
If your contractor wants to help you find deals, let him wholesale the deals to you for a fee, and then hire him (or don't) to do the work. That way, you're not giving up an excessive amount of equity to someone just for finding the deal PLUS you'll still have the flexibility to use other contractors should he not work out very well.
Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
12y
@Kira Volpi We don't know enough of the information to give you a definitive answer. Yes, partnerships are done all the time, and the split should be based on the value each brings to the deal. If the contractor will be paid for his labor then you should set the money you invest up as a loan with interest, and both you and the contractor being liable for its repayment.. That way there is an incentive for him to finish the job on time and within budget. Have him personally guarantee his portion, which gives him skin in the game. Ask your attorney if that would work (I've never done a Joint Venture deal)
It concerns me that you don't know anything about the area, nor its values. Honestly, before getting in on any deal you should do your homework, and get a true understanding of the market.
Also, it doesn't appear that you have any experience dealing with contractors, and you need to understand the entire process before investing. Below are a few of the questions you need to understand and address.
What is the total cost to develop the property, and build the house, including plans and permits? How will the money be handled, draws or a voucher system? Who will do inspections to make sure that the work is done? Who will buy and pay for materials? Is the contractor licensed? Are all of the subs? Do they all have insurance and bonds? Who will draw the plans,get permits, etc.? How big will the house be? Has the contractor given you a complete cost breakdown showing ALL of the costs? How long does it take to get permits from the time they're submitted? Have you checked references?
Aside from that, you are the one with all of the liability. I'm not sure what the lien laws are in your area, but you need to find out. If the subs or suppliers do work, or supply materials, and they aren't paid, it's your property that will be liened, therefore, you are the one that needs to be sure they're being paid, and get signed lien releases from them.
As at J Scott mentioned, the better choice might be to buy the land, and hire the contractor. You can pay him a finders fee for the land or ? Whatever you do, make sure EVERYTHING is in writing, and agreed to by both of you, and drawn up by an attorney that understands construction and real estate law. Good luck.
Thank you all for being so protective and that is what I'm getting here. You are really looking out for me and I really appreciate every bit of this input.
I've gotten a lot out of these posts and have come to the conclusion that I should and would rather have him put skin in or just pay him a bird dogging fee and hire him. You all have brought me to this conclusion and although I really was hoping to hear something else I kind of knew this was the intelligent thing to do.
David, thank you for your objective opinion and referral to J Scotts book.
J Scott thank you for playing devils advocate.
Tony Reale thank you for a terrific analysis and a contractors point of view.
Thank you all. I'm so impressed with this community and grateful to be a part of it.
In closing, if anyone knows a contractor in the Kansas City Missouri or Johnson County area Kansas that is looking for a "true" partnership, please feel free to refer them to me.
Kira -
I own a real estate investment company here in the KC area, and have been in the business 21 years (13 full time). If you wish, contact me and I am sure I can help you network and find the right contacts for you (and a few to avoid!).
I have a brick mason that has no clue how to approach production builders and get signed up to perform work. I'm proposing helping him and entering a partnership split of 20/80 in the company since i will be responsible for business development. What would those propose that have multiple executed ownership agreements.