Fair partnership between contractor and investor?

Question

Mike H. · Answer

Therein lies the rub.  I've actually tried to put something together with a couple contractors before but I just didn't see anything that makes sense.

After all, why not just hire them?

If you really want to make it a partnership, then what you have to do is find some way where he is participating in the risk as well as the reward.

One way is if he has a crew, his crew would be charged out at cost to the rehab - i.e nor profit markup.  His labor would be at some reasonable rate like $25/hr.

Or better still, come up with an entire list of pricing for work items and then get a 25% discount off those items from him.  So if installing laminate is normally $2 a square foot, you're only going to pay him $1.50 a square foot.

By agreeing to that discount, then maybe it would make sense to cut him in for a portion of the profits. I'm assuming you're talking about flipping deals only and not buy and hold.

The other option is to only cut him in on deals that he brings to you. Thats the other thing that makes sense. If you find the deal, he's just a contractor. If he finds the deal, he's your partner.  But he should still have to submit quotes for the work and compete against other contractors.

Honestly, though, the best way to keep a contractor from gouging on the labor when they know or think that they'll automatically be getting the work is to come up with a price list on all the types of work that can be done. Lock that in and you'll at least be able to prevent gouging on 75 to 80% of the work.

Thinks like installing doors, faucet fixtures, lights, cabinets, countertops, tile, laminate, vanities, sheet of drywall, etc.  There are always going to be a few items not on that list that you just can't put a number to (i.e. demo), but for the most part, you'll get it down pretty good.

Still, cutting in a contractor as a partner really is fraught with peril based on all the possible ways you can lose out.

That being said though. Is it that you can't do any of the work or that you don't know what level of finish to rehab to for a good flip and this guy does?

It might very well be that it simply makes sense to partner with someone that has extensive rehab experience because they know how to make the house pop and where to put the money.

The same could be said for the contractor too in that situation. Why should he want to partner with you. He's bringing all the expertise. You're just bringing the money which is nothing more than being the bank.  He can find a hard money lender (maybe) that will only charge him a high interest rate but that would be far less than having to split the profits.

So before I would completely write off suggesting you just hire the contractor, I think it depends on what else they bring to the table that you possibly do not.

If you look at the reality flipping shows, there almost always seems to be the same dynamic - one partner with construction background and one with design. So maybe partnering up and just doing 50-50 is ok here too.

I guess the bottom line is that there is no right or wrong answer. You just have to assess what the contractor is bringing to the table and whether a partnership makes sense or if it makes more sense to just hire them on as a contractor.

Are they bringing deals to the table? Are they bringing design ideas? Will they cut you a discount on the labor in return for the larger upside of having a stake in the profits.

Christopher J. · Answer

Thanks for the replies folks!  It is really helpful to hear the perspectives.  I haven't made a decision yet and these are great thoughts to guide me.

Rumen Mladenov · Answer

I have not been in such a partnership personally, but a business partner of mine has. His did not work out, and he believes the reason is that he did not have the ability to get quotes from multiple contractors and thus ended up with unnecessarily high labor cost. Conflict of interest for the contractor in the partnership...

A crucial question in order to determine fair terms - who has the deal? The more common form of partnership is usually between the money guy and the guy who has the deal.

Let us know how yours works out.