Partnership agreement between Investor and "contractor"

14 Replies

Hello,

I was contacted by a friend who wants to invest in flipping houses and me to do the work. He would basically be a silent investor, I would put together a bid to get the work done and pick and choose the work i would do myself and the work i would sub out to other contractors i know and have relationships with. He would fund the entire project from purchase of house to paying subs and materials. We are now at the point we need to write up a contract..... This is tricky and I'm looking for some advice, anyone with thoughts please share!!

How about forming an LLC just for that property. With the LLC, you and your partner can be the members (owners) and you can be the manager (person running the LLC). This may work best for the both of you. The operating agreement (which governs the LLC) would govern your arrangement. You can draft the operating agreement to include almost anything under the sun, subject to your state's laws. For example, you can have a provision that requires any expenditure above $X,XXX be approved by the unanimous consent of the members (you and the partner), but that anything below that threshold can be done by the manager (you) (e.g., purchase of fixtures for the house, payment of subcontractors, etc.)

@Miles Warren I would definitely consider a LLC for both parties protection. The responsibilities and splits with all contingencies so there are no known problems like vendor liens, failure of either party to fulfill responsibilities and they lived happy ever after. And probably did more deals together. Have Fun.

Tom Keith, TAK Enterprises | [email protected] | 903‑452‑8843

@Miles Warren  good advice from @Tom Keith on the LLC's.

Once you have your LLC's setup I would recommend you get your contractors license so you can pull permits. Then you and your partner would sign a contract (I would recommend the AIA A105) with his LLC as the Owner and yours as the Contractor.

Alter the language in the contract to suit your needs - payment every 1 or 2 weeks to cover whatever expenses you have.

This way your subs can sign subcontracts that bind them to the prime contract and you and your partner are covered.

Would you just be making money off your bid or would you have equity in the property?

If the latter is the case, I'm sure someone on here can offer advice on that. Maybe your LLC would be part owner of the property once it's purchased? Again, not my area of expertise.

Good luck!

I am looking into getting a contractors license currently and then screaming an LLC.

Myself as the contractor and the investor have agreed I will receive all $$$$ remaining from the bid I put together after all work is completed and the property is sold. We have also agreed that I would have a percentage of the final profits as well but we are unable to come up with a fair percentage. Anyone in the similar type of agreement or any suggestions??

Many thanks!!

The AIA (American Institute of Architects) has lots of good examples of contracts. Also, I myself have written many contracts. Make sure your contract has provisions in itself to protect you and to clarify any aspects that may be misinterpreted.

Structure the deal first. Entity second.

I put about 10% of profit for finding the deal. Another 10 for putting it together. 25-39% for Someone to manage the project, the contractor(s) up to the point of sale and COE.  Probably up to half for funding it. My ratios may be way off from yours.

Break it down to reward for on-time and on-budget performance.  

Consider the value of preferred payouts for milestones or risk points.

Entity? THT is easy and cheap. Can use third party trustee.

Set up? Could be equity share note secured by TD or mortgage for either or both sides.

Thanks guys, Rick Harmon here is an example of what i have written up currently.....

Investor is silent and gets 6% back on his money with an additional 40% of the final profits

Contractor/Project manager (me) gets remaining budget left over from bid and 40% of the profits

Realestate agent- gets commishion of sale and purchase and 20% of the profits. (also acts as project manager and assists the contractors on all work.

@Miles Warren we are doing a very, very similar thing right now, about to close on the house next week. Our investor is paying for the house we found and all materials/subcontractors, and we're doing the work for a small flat fee. Then we take 25% of profit at the end.

Anyway I'm wondering how this worked out for you, since it was two years ago?

NY Agent # 10401301213

Originally posted by @Stephanie Jacobson :

@Miles Warren we are doing a very, very similar thing right now, about to close on the house next week. Our investor is paying for the house we found and all materials/subcontractors, and we're doing the work for a small flat fee. Then we take 25% of profit at the end.

Anyway I'm wondering how this worked out for you, since it was two years ago?

What was the details of your agreement Stephanie? 

I am in a similar boat but on the other side. I have contacted a family member who has some experience in construction as well as 1 prior successful experience with flipping. I have some saving and I think RE is a smart way to invest. I want to capitalize on his knowledge as well.

NOW, he is doing the work (hiring contractors, finding a house, supervising the work, etc) We have talked about 2 options: forming an LLC or just an agreement. I want things to be fair and transparent. Also, he has said that the profit/loss responsibility would be 50% for work 50% investors (there might be a third person who wants to chip in)

Any thoughts you all seasoned real estate pros?  Do you all think is fair? How do you usually handle investors in the flipping biz?  

THANK YOU!  any feedback is well received!

Im looking to do the same things, Although Im looking for an investor to front the purchase and rehab materials, I find and negotiate the deal, do the rehab with my laborers, Grant it I have an extensive network of other licensed contractors, my fathers a licensed plumber, and I have several friends who are licensed electricians. Depending on where im flipping I have the experience to obtain GC license else where. The issue how to split the profits as we both have alot to loose and gain. Let me know how you make out, im very curious how other structure this

@Stephanie Jacobson How did it work out for you? What did your contract entail? Did you form an LLC with your investors? What fee do you charge?

Thanks!

@Justin Jacobs and @Paulina Borja Hi y'all! Boy, this is a thread that keeps on going, eh?

Well, we closed last November and are STILL working on the flip. It got a bit complicated, as our investor is also a client for our renovation business. He owns student rentals, and had some issues with his buildings that my husband had to deal with, setting the flip aside for a month or two.

Since the house isn't on the market yet (it will be by the end of the month), I can't quite give the whole story, but I can give more details.

We did not form and LLC, or even have a contract, which I would NOT recommend for most situations. This investor/client is also a friend of ours, and a truly upstanding and honest man, so we all were okay with this arrangement. We trust each other and decided we would value flexibility in the arrangement. But an attorney did offer to draft a contract for our agreement for around $300.

Not having a contract helped and hurt us. For example, we ran out of money to actually live on as the project stretched out, since we aren't being paid for the renovation. So, our investor agreed to put us on a weekly salary through the end of the project that we would not count towards expenses, but in exchange I had to give up the right to sell the property (I'm a real estate agent and that was  our original agreement). Instead, he wanted to save money by having his commercial agent list the property for a 1.5% commission, where mine would have been 6%. I don't think this is going to work very well, but that's what he wanted and at least we can continue to pay our bills in the meantime. I can update you when it sells and let you know how it turned out.

Another thing that became a problem was a complete and utter lack of agreement on how the renovation should go. We have control over staging and who we hire, but our investor desperately doesn't want to pay any single sub-contractor more than $15/hour. This has been the single largest reason the project went six months beyond our expected end date. Rather than hiring a roofer, my husband had to do the work. He knows how, but he's not as fast as a professional roofer would be. He also had to do all the electric and plumbing for the same reasons. The electric alone took six weeks! Our electric inspector said the work was absolutely beautiful, but we should have been able to hire a professional to do it in a fraction of the time while my husband worked on something else. Also, $15/hour is not quite enough to hire reliable help. We keep having helpers who stop showing up, or who struggle with the tasks they're assigned. Working around this problem has, again, required that my husband pick up the pieces and spend WAY too much time on tasks that should have been done by someone else. Meanwhile, our investor is racking up $1,000 per month in interest! So it would have been cheaper to just pay to do it right in the first place!

The market has only increased in the past year, and the house is absolutely stunning. But we put too much on credit cards for survival in the meantime and spent all of our savings. This is a common story for a first flip, I know. It has all still been worth it, though: this will open doors with other investors and banks, and we know much better now what works and what doesn't.

Tl;dr: Have a contract, but be open to flexibility. On your first flip, be prepared to make mistakes and spend money and time learning how to do it right. If you stick it out, you'll be a better, more well-prepared, well-educated investor.

NY Agent # 10401301213

@Stephanie Jacobson Thanks for sharing your experience, as well as being so generous educating people from it. It seems, indeed that there is a lot of trust between the parties but different ways to work and approach a project. I am convinced now that the best would be to form an LLC and have all the main points very clear.

Best of lucks with this project and yes, please,  keep us posted!