Advice on agreement with money investors on fix and flip

[Junior Francica]

Hey everyone any advice or experience would be appreciated. After starting out first flip we had people approach us wanting to give us money for our next flip. We have identified our next flip and want to figure out an agreement with the money investors would that be a JV agreement?

They want to give us the money to pay the hard money lender fees, interest, closing costs, and anything else and we find the deal, do the work, and then after selling it (I am an agent) we will give them interest on their money. 

My question is, what type of agreement should we have in place with them? Does anyone want to share any agreement you go off of? also what is a good return to offer them on their money? I was thinking 15-20%? Thank you guys

[Mike Hern]

Quote from @Junior Francica:

Hey everyone any advice or experience would be appreciated. After starting out first flip we had people approach us wanting to give us money for our next flip. We have identified our next flip and want to figure out an agreement with the money investors would that be a JV agreement?

They want to give us the money to pay the hard money lender fees, interest, closing costs, and anything else and we find the deal, do the work, and then after selling it (I am an agent) we will give them interest on their money. 

My question is, what type of agreement should we have in place with them? Does anyone want to share any agreement you go off of? also what is a good return to offer them on their money? I was thinking 15-20%? Thank you guys

If you are going to give them interest on their money, have them as a lender. If you are going to give them a percentage of the proceeds, have them as a Joint Venture Agreement.

[Alan F.]

Quote from @Junior Francica:

Hey everyone any advice or experience would be appreciated. After starting out first flip we had people approach us wanting to give us money for our next flip. We have identified our next flip and want to figure out an agreement with the money investors would that be a JV agreement?

They want to give us the money to pay the hard money lender fees, interest, closing costs, and anything else and we find the deal, do the work, and then after selling it (I am an agent) we will give them interest on their money. 

My question is, what type of agreement should we have in place with them? Does anyone want to share any agreement you go off of? also what is a good return to offer them on their money? I was thinking 15-20%? Thank you guys

Mike nailed the answer, JV agreement is about doing business that's mutually beneficial. Lending is a different animal.

To wit, 15-20% is appealing to a PML, that being said a savvy PML will want to be in 1st position.

IMHO a JV agreement should be a very well defined contract drafted by an attorney. I've seen far more JV agreements go wrong rather than right. Flipping can be risky even when all intentions are good.

[Junior Francica]

Gotcha, thank you for clarifying the lender vs JV. So if they are just the "lender", is there an agreement required there? ( I would assume yes?).

[Junior Francica]

Also to clarify, I will be getting hard money loan for purchase and rehab and the "lender" (second party) will pay for the hard money and fees so not sure they could have 1st position as hard money lender would have that position on loan. 

[Alan F.]

Quote from @Junior Francica:

Also to clarify, I will be getting hard money loan for purchase and rehab and the "lender" (second party) will pay for the hard money and fees so not sure they could have 1st position as hard money lender would have that position on loan. 

 To answer the 1st question re; lender agreement, yes & drafted appropriately.

2nd question; I've never structured a deal where a lender covers a lender. I'm not seeing the value in such a deal. Maybe more experienced investors than myself will add value here.

IMO all business deals are well outlined mutually beneficial contractual agreements.

[Mike Hern]

Quote from @Junior Francica:

Also to clarify, I will be getting hard money loan for purchase and rehab and the "lender" (second party) will pay for the hard money and fees so not sure they could have 1st position as hard money lender would have that position on loan. 

The hard money loan (HML lender) will be in first position. If you have another party paying for the loan payments, they would be in second position.
What you are contemplating isn't a normal arrangement, but done correctly should work.

Normally you would borrow from the HML (who would be in 1st position) in your entities name and make the payments from cash on hand.

Since oftentimes, fix & flips go over budget and take longer than anticipated to sell, make plans for that in your financing and contracts.

[Junior Francica]

Quote from @Alan F.:

Quote from @Junior Francica:

Also to clarify, I will be getting hard money loan for purchase and rehab and the "lender" (second party) will pay for the hard money and fees so not sure they could have 1st position as hard money lender would have that position on loan. 

 To answer the 1st question re; lender agreement, yes & drafted appropriately.

2nd question; I've never structured a deal where a lender covers a lender. I'm not seeing the value in such a deal. Maybe more experienced investors than myself will add value here.

IMO all business deals are well outlined mutually beneficial contractual agreements.

 Thank you. 

The value from my viewpoint is being in the deal with no money down. This first flip that I am in after HML fees, closing costs, interest and so on we will probably be all in around 35k.Which came out of my pocket. This second deal if we get a lender to fund the second position lets say same as first flip with 35k, we would be able to fund the purchase and rehab with with HML and then pay all fees and interest, closing costs and so on with second lender and at closing everyone gets paid back but we used no money out of pocket for the deal. We also had people reach out to us after social media posts asking if they could give us money for our next flip and that's what I came up with, I thought that was normal practice.

[Junior Francica]

Quote from @Mike Hern:

Quote from @Junior Francica:

Also to clarify, I will be getting hard money loan for purchase and rehab and the "lender" (second party) will pay for the hard money and fees so not sure they could have 1st position as hard money lender would have that position on loan. 

The hard money loan (HML lender) will be in first position. If you have another party paying for the loan payments, they would be in second position.
What you are contemplating isn't a normal arrangement, but done correctly should work.

Normally you would borrow from the HML (who would be in 1st position) in your entities name and make the payments from cash on hand.

Since oftentimes, fix & flips go over budget and take longer than anticipated to sell, make plans for that in your financing and contracts.

 yep have already learned that over budget and longer than anticipated is what happens but a lot of lessons learned for flips moving forward. Thanks for your input. 

[Zachary Cain Humphrey]

Quote from @Junior Francica:

Hey everyone any advice or experience would be appreciated. After starting out first flip we had people approach us wanting to give us money for our next flip. We have identified our next flip and want to figure out an agreement with the money investors would that be a JV agreement?

They want to give us the money to pay the hard money lender fees, interest, closing costs, and anything else and we find the deal, do the work, and then after selling it (I am an agent) we will give them interest on their money. 

My question is, what type of agreement should we have in place with them? Does anyone want to share any agreement you go off of? also what is a good return to offer them on their money? I was thinking 15-20%? Thank you guys

What you are describing is a partnership. A JV is between entities. For example you have an LLC you're doing your flip under, and the lender has an LLC. If both LLC's decide to work together that is a JV.

15-20% is a little high. I would push that to 10-12% if you can. If not I wouldn't pay over 15% as that is quite a high price to pay for hard money, which is essentially what they are lending you. 

[Mike Klarman]

So, there's a few ways to go about it. It can be a profit share agreement or a fixed rate of return. The best way for you is to offer them a 10% APR on like 50k. That's 5k you owe them per year until you repay the 50k. But with their 50k you get into a deal where you make 20k let's say. You give them their 5k for the year and you don't owe them a dime until next year but you now have 65k and can get into two more deals at the same time now. You make another 20k each deal and you don't have to give them squat. Now you have 105k. Now you can do another two deals at the same time. Then after those two pay them their 50k back plus one more 5k payment maybe and now you have 90k of your own.

If you do a profit share agreement, they will want half.  People that take on all the financial risk never take less than half.

In the fixed rate scenario, even if you lose their 50k you still ow it to them and you owe them 5k every year unil they get it back, in a profit share scenario the money guy takes on the risk.