How to work with a builder to flip homes

Question

I would like to flip homes with a friend who is a contractor in NJ and I am trying to figure out the best way to structure an agreement between us. I have the financing and he has the building skills and about. Originally I was thinking I would buy the house with a asset backet loan and he buys all the materials and labor and we slip the profits 70-30 where I keep the 70 percent. And we write up a contract and get it notarized. I have access to 800K and he has about 250K he can use on materials/labor. I'm sure and LLC would be the safest way to go, but would it be okay if I buy the house under my name only and then we just sign an outside business contract? If not, how should I structure the LLC? Would it be separate LLCs for each of us or one LLC and how would we determine how to slip the profits? Thanks!

Jake Handler · Answer

I'm also in NJ and went through a similar situation just a couple weeks ago.  We tried to do everything possible to keep the partnership 50/50.  We just felt it was cleaner and more scalable for our goals.  So we started with that premise and then worked around how we could most fairly come up with a 50/50 partnership.  Hope that helps a bit.

Scott E. · Answer

There are so many ways to do this. The simplest answer on how to structure this deal is - Structure it in a way where both of you are comfortable with the terms.

If I were in your shoes I'd follow what @Jake Handler suggested. A 50/50 partnership probably makes more sense here. Even though you're putting up most of the money, your contractor is going to be doing most of the work.

Lindsay Op de Coul · Answer

@Daniel Kosciuszko, I sent your question to one of our group of investors (who have a 100+ single family home portfolio).  Here is what they shared:

"They need to talk to a lawyer to make sure the agreement and LLC are structured properly. The operating agreement for an LLC will need to be clearly written out stating how much money each of them will be putting into the deal, how the profits will be split, and who is responsible for managing the project and needed to sign off on financials.

They should also discuss with the bank that's doing the financing in advance of the agreement being made, because the ownership structure of the property/LLC will determine the kind of financing available, the interest rates, and who needs to sign on as guarantors for the loan (typically any more than 20% ownership by one person in an asset can require a personal guarantee on the funds in the case of foreclosure or loss of the asset)."I hope that is helpful!

Blake Novotney · Answer

Make sure you each have some skin in the game (your plan sounds great with him spending $250k on materials and you financing house) so that way it is in everyones best interest to show up and get to the finish line. Let us know how you end up formally doing this whether LLC or partnership I am also curious what others think some of the best strategies are.

How to work with a builder to flip homes

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