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!!
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.
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.
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.
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??
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.
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.
@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?
@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?
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?
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
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.
@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!
Thanks everybody who has posted to this thread, and to quote @Stephanie Jacobson, "this is the thread that keeps on going." By the way, how did the flip turn out?
I was wondering if anyone has any experience for the exact wording of capital contributions. My partner and I are equally invested as guarantors and hands on work for coordinating contractors at this point. However, at close at the end of this week, we will be contributing different amounts for the downpayment and closing costs. Then, as the work goes on, my partner will be making the payments on our note. In a month, he will be relocating, and I will takeover the day to day work of coordinating the project.
Oh boy. Okay, so... our amazingly gorgeous house in a hot market is just sitting there. It's been heartbreaking. Our investor did end up listing it with a commercial agent, but for the 1.5% the agent was just putting it on the MLS. No other marketing or open houses. A number of months went by, and finally Harold agreed to let me list it. My comps showed the house should sell for $295k, making everyone a nice $40k profit after all expenses. Harold decided he wouldn't list it for less that $325k because he likes a good haggle, and wouldn't pay a buyer's agent. We had very few showings, and the feedback was all the same: "Beautiful house, price is too high." I marketed the living daylights out of it, but no one was willing to pay $30k above market AND their buyer's agent 3% on top. Harold thinks he'll be able to sell it himself, so we dissolved the listing contract and he's put it on Zillow at $319k. So far he's had no luck.
At this point he's paid so much in interest on the extra time he took trying to save money that we'll be lucky to break even. If it had been priced right, I'm confident we would have sold it last summer.
We still have a beautiful portfolio piece, and our contracting company got a lot of great attention. The project connected us to other more experienced investors. But we also still have the credit card debt. We'll try another one, but this one was a pretty abysmal failure financially-speaking.
As far as your agreement, is this what you and your partner have come to as an arrangement that would ultimately equal a 50/50 split on profits? Or are you expecting to split differently based on labor and financial contribution? If it will be an equal split, get both your and his responsibilities in writing. If it will be a 60/40 split or otherwise and you're in agreement on it, I'd go together to the same attorney to get a contract written up.
@Stephanie Jacobson Can you list the property and reduce your commission to the 1.5%? The goal for everyone should be to get it sold and if you can do that better than the commercial broker then it's a win-win. 1.5% is better than 0%.