Partnering on a flip
I'm thinking of flipping houses with a builder/handyman. I told him if he could find good off market deals, I would finance the rehabs. I told him I'd be interested if we could split the profit 50/50. But all I am is the money guy. My wife won't let me do this unless I promise her I won't work on it or be away helping him. I just finance it. Then we'd take 24% off the profit for taxes, subtract all the expenses and divide the left over profit 50/50. Anyone see any red flags with this? Or have done something similar? All the risk is on me since I'm putting the properties in my name or LLC. This guy already found an off market property for a great deal in an upcoming area that I like.
John,
There are many concerns... Let me preface that I don't know the handyman.
First, is the handyman providing 50/50 in expenses such as materials and payments.
Next, define handyman. If he's going to be the one to do all the work himself (which I doubt), the holding costs will eat into your profits. No offense, but he has nothing to lose.
I'm presumming he will be paid as well along the way...
Even if you could get everything financed and incorporate the purchase and rehab, there will be issues. I guarantee it. Meaning, there will be things you find that you won't expect.
What about permits?
Is he licensed? What recourse if he isn't and something occurs post retail sale?
What work is he expected to do?
What is his skill set?
You mention builder... Is he a General Contractor? Is he Licensed and Bonded?
How are you going to solidify this partnership? Through handshake (or elbow bump), Joint Venture, etc.?
Who are you going to pay if he has to get third party sub-contractors?
Are you paying them directly? Or are you paying him? If him, what's to say there isn't a double dip or increase for profit?
Who is going to buy the materials?
Have you seen his work? As in all aspects of his work?
Look, to be frank, it is very concerning to place yourself in a compromising position especially, if you're not involved.
Eventually, good workers will not show, you will be chasing him, he will most likely try to do other jobs in addition to your project... At first he'll be there five days a week, then it will be three... You'll light a fire under his *** and give him your "Any Given Sunday" speech talking about "inch by inch". Then he'll start working five days a week with weekends off, but then he'll start showing up for a half a day or just a couple of hours... Now your project is taking three to four times longer to finish.
How will you monitor this? Will you visit? Have cameras?
What happens if he gets sick or does?
How much is it in your area to hire a skilled worker? Pay by the day, hour, or project?
Again, is it possible? Maybe.
Is it worth placing your trust into one person?
Nope.
Best case scenario, he is the greatest handyman on earth. Time is of the essence! Not to mention, work has to be permitted... Otherwise, if they (Code Compliance) catch him working without permits, they will shutdown the project. Not to mention, a buyer or Realtor (buyer's) can check with the city to see if permits are pulled.
Even if he does the work perfectly, they (CC) will not see that it was done to code and neither a potential buyer. How about pictures of the progress of rehab? Nope. It still won't justify the process.
I hate to be the Petty Roosevelt of this post, but trust me, I've been there.
Just my two cents and believe me, there's more on the subject.
Please VOTE if this made sense or touched your heart in some special way. 😂
from SAN ANTONIO, TEXAS!
"Big" Henry
@Henry M.
Great points! I appreciate your time, input and questions. You’ve brought up some great things to think about. I don’t have answers to some of those questions so I’ll have to find out.
He used to build expensive custom homes and work for himself back in ‘07 when the housing crash happened. He was doing well and bought up several lots on a golf course in a nice lake community when things went south. He lost everything and he never worked for himself since. Recently he’s been a builder/contractor for a reputable new home builder near me (DFW) that sells new builds in the 400k range. So I assume he’s licensed and bonded.
His wife isn't 100% on board with him investing their $ into something like this. And worries about liability and the unknowns. She's a Dave Ramsey girl and they have two nice paid off homes. She won't do a cash out refi on either home to pony up any money. I understand and don't blame her for taking on a risk like this. So I would be funding 100% of this and taking on all the risk. I would buy it under my LLC and pay all materials and sub contractors. Yes, I could get ripped off by this and there could be a number of things that could go wrong with that. I would have to figure out something to pay him along the way. I told him I'd just deduct it out of the sale when it's all done.
He found a house in ft worth and thinks we could get it from this old lady for 30-40k. ARV in this area is would be around 150k. Maybe higher. I'm guessing we would have to drop 50k total for everything to gut this thing out. It's a small SFH in bad shape and vacant.
So if we made say 50k profit when it’s all said and done, I’d deduct the taxes I’ll have to pay right off the top of 50k. So say taxes are 26k (24% tax bracket I’m in) from our 110k profit, we’d spilt the 24k profit 50/50 after paying everything (holding costs, labor, material, property taxes, utilities, closing costs, realtor fees etc). I’d probably have to pay him a little along the way so I’d deduct that from his portion at the end.
We talked about getting permits for everything and he knows approximately how much that’ll cost so we’ll factor that in ahead of time when we crunch the numbers.
I've got all the risk. He has zero risk since I'll probably have to pay him something along the way. He said he wouldn't need much for pay draws along the way since his house is paid off and his wife works. Yes, I'm sure he would pick up other side hustles along the way to make $ which could hold this project up. But all those holding costs are coming out of his pocket too. The house would be in my name and I'd be stuck with it if he died or bailed on me. I've got another great contractor I've used to rehab other homes for me that I could use to finish it up if something happened. I'm a buy n hold investor with 10 SFRs in the DFW area so this is a little out of my comfort zone. That's why I posted to get input. But seemed like something fun to do. But deep diving further on this makes me a little nervous now. And after lobbing out numbers and taking 24% right off the top for taxes, we'd need to make a whole lot more than only 50k on this! I was conservative in my ARV, but I'd rather err on the conservative side!
I can narrowly see potential for a valuable relationship here. However, partnerships are risky especially if there is not a detailed partnership agreement drawn out beforehand pointing directly to where ALL costs, expenses (both planned and unexpected), and profits are to be split and/or allocated to each partner. Are you purchasing the home AND funding the rehab? If so your partner's (handyman) profit will be wholly dependent on the final net profit of this investment and not his work. Not all flips are successful or sell at the targeted ARV you project. Is he willing to take on this project and do the work even if the flip sells under your targeted value which will eat into his profits or will he expect you to fund the normal value of his work?
Partnerships are normally created to diversify risk and pool resources together. It seems to me that this project would place all the risk on you as well as require 100% of your funding. I honestly do not see the value in this partnership unless you trust this gentleman like a brother and looking to build a relationship for ongoing projects.
I used to work in a law firm that specialized in buyer/contractor litigation and this is giving me deja vu....Again, I do not know the situation here as well as yourself. I personally would recommend thinking this through in depth, consider hard money and utilize BRRR if it is a rental or just leverage your capital with a qualified hard money lender for a fix n flip. I have helped numerous investors into their first hard money investments. Why take on the risk with your capital when you can use someone else's and still pull profits, higher ROI and cash on cash returns?
Wishing nothing but the best for you John!
@Robert Neal
Thanks Robert. I appreciate your response. This does sound risky on my part. This would only be worthwhile to do if I could get a property in an area I like for really cheap with good bones and potential. What I thought would benefit me is he would have a huge incentive to find me good deals with lots of potential since he’d be getting 50% of the profit. And by saving a ton on materials through his contacts and habit for humanity which he does on flips would drastically keep costs down for us. Maybe I should just stick to buy n holds. Lol. Or just hire him as a contractor for me on a rehab I intend to hold.
I would not necessarily write it off just yet. I can see where there is potential, I would just be careful. Are you partnered up with any agents/wholesalers in your area that send you off market properties or discounted on market properties? I may would start there and see what is out there as opposed to just relying on him to bring you deals. I know the DFW market is insanely competitive too!
John,
I hear you (or technically read you;), I always see the glass half full, but that's the easy part in real estate. Guys like us are risk takers in general. Of course, typically calculated.
It would be different if you know or worked with this guy before. But, it doesn't mean it couldn't work.
Look I have a formula I use that can be adjusted. It's a formula I created and use every time.
Your Example with "Big" Henry's Quick & Dirty Formula:
ARV - 47% - Repairs = MAO
This includes all costs up to six months and a 30% potential profit or cushion. You can do it at 20% (if so, then use X 37%).
$150K (ARV)
- 47% (All Costs Acquisition, CC, Hold, Resale, CC, etc.)
=
$79,500 (Sub-Total)
-
$50K (Rehab)
=
$29,500 (MAO)
or
X 37%
=
$94,500
-
$50K (rehab)
=
$44,500 (MAO)
-------------
In a nutshell:
Potential Profit @
47% = $45K
37% = $30K
It comes down to speed. As you know the less in holding costs and saving money in material and labor, the more money you make in profit.
Good luck and please keep us posted.
Btw, I may have a HML who can do 75% LTV on ARV - Just hit me up if you want to go that route.
As always, Please VOTE if you likey my posty. 😂
Your Real Estate Ally,
"Big" Henry
Only ever tried it once with a neighbor of our daughter who knew we had dabbled in REI for many years. He found a place to rehab & begged me to go in 50/50. My wife was adamant 'we do not need a partner'.
I prevailed & 2-3 months into it he was o/whelmed with the work, rarely showed up & wanted to cash out. He wanted his investment plus $8k for the 'work he did'. BUT my wife had an agreement drawn up by our attorney, so he got back his initial investment minus 50% of carrying costs, all the legal/filing costs to xfer title back into our names & the cost of labor he hired to take his place to avoid doing the work. He was NOT pleased. After we paid him off his wife & daughter still came by a couple of times a week to help my wife & to just hang out. It delayed us 3 months BUT we did make a very nice profit...NEVER again!!!
I haven't seen or heard from him since.....
Pat,
Exactly!
If I was John, I would have a clause in the agreement that in the event your handyman doesn't complete the project 100%, and/or doesn't fulfill his end of the agreement, he will forfeit to you his equity and profits 100% without recourse.
Im not an attorney, but I'm sure you can have one draw up an agreement that protects you in the end, in the event something were to occur.
I would set expectations in writing regarding time frame of SOW, work schedule, draws, and anything pertinent that can be measured.
Let's make the assumption it goes perfectly... Then that trust is built and it will be much easier to get into more projects.
My suggestion: If you proceed, then go after properties that are mostly cosmetic. At least until he proves himself and you can see if he can handle the one at hand and build from there.
Good luck.
Your Real Estate Ally,
"Big" Henry
@John Morgan
Lots of red flags here. Generally when people partner with a contractor, the deals go south about 50% of the time. Contractors can Jack up costs and make money that way, then there isn’t as much profit left to split.
Also, since you both have different tax situations, taxes would not be taken into account when factoring the profit split. You’d just have to set aside 24% from your share of profits.
@Henry M.
Well said Henry 👏🏼 perfectly said, You got my vote 🗳
@Dan Beaulieu
I told him 24% would be taken off the top from our profit for the taxes I will have to pay. The incentive for me is he’s able to get off market properties really cheap. And gets materials very cheap and would be able to do everything. I probably won’t do it based off the feedback from this post of all the potential things that could fall apart. I’m a buy n hold investor and a little bored right now. I thought it would be fun to try a flip with someone who is really hungry to get back into real estate. I’ve never partnered with anyone so maybe it’s not a good idea. I’m always willing to take a risk. Risks have worked out well for me in real estate so far. But maybe I should quit while I’m ahead. Lol.
Originally posted by @John Morgan:I probably won’t do it based off the feedback from this post of all the potential things that could fall apart. I’ve never partnered with anyone so maybe it’s not a good idea. I’m always willing to take a risk. But maybe I should quit while I’m ahead. Lol.
John,
I believe you can partner with someone one day and I am so glad to read you are taking a step back at this time especially considering your circumstances. You're doing just fine. No doubt. I hope you keep us posted if eventually you do partner with someone one day.
"Big" Henry
As an aside we contracted with a GC 'friend' for a new build. His work was impressive on the several we toured. We had it contracted with every detail. He did NOT get a draw until that stage of work was complete, subs, suppliers were paid by our attorney & signed off that they had been paid in full.
Sure enough as the project came down to the occupancy permit he went AWOL to grab other quicky $$$ projects. He then sent mutts over to finish the work & we them sent home. One was had a broken arm & was off on WC from his car salesman day-job. We held back over $7,000 & it was more than enough to finish the loose ends. No longer friends, in fact he went broke.
Tie it up with a tight contract. Our attorney & his 90lb bull-dog para-legal was the least expensive cost for that project.
@Pat L.
Wow, that’s exactly what I was worried about. This guy has a ton of experience and I could see him getting pulled to other money making projects on the side. Smart of you to hire an attorney to make sure it was done right! Ok, so now I’m definitely not on board with this idea of flipping with a partner. I appreciate all the feedback from everyone!
Pat, I see you’re in the DFW area. Are you still active in finding new properties? If so, what kind of deals are you doing? I’m in the southern DFW area and nothing really makes too much sense. If you count on appreciation, everything makes sense. Lol. But I look at cash flow for buy n holds and things aren’t that appealing around here due to all the competition and new investors snapping up average deals. What’s your thoughts?
@John Morgan Partnering is always a good idea. We firmly believe in the joint venture model and find that both parties can bring their skills and strengths to the table for a win/win. Best of luck in all your endeavors.
The red flag is mainly the partner, who has no financial skin in the game.
Now, if you think the guy is well experienced then do it, BUT apologize to your wife first, as you need to be at that property almost every day and get super involved with the project.
The main challenge with projects is that they take longer and cost more. Mitigate those risks by taking a pulse on the project on an ongoing basis.
Consequently, if you are able to be a side project manager and ensure the deal doesn't take too long and cost too much more, I think you might be onto something (buy you say that is more work for me, and you will be right).
But, if this guy is the classic CONtractor, you have already lost when you start working with him.
