Question for you successful investors. Sorry if it gets a bit lengthy.
I am an investor/realtor, and I've been looking to ramp up my flip game. I have a meeting set up tonight with a contractor who I have used twice now. He asked me how he can I start doing what I'm doing, so I saw an opportunity and proposed a business partnership. He agreed it would be a good idea.
Now my question is - does anyone else here have this sort of partnership already? I have an idea of how I'd like this meeting to go, but I wanted to see how you structured-or would structure-this business relationship.
We briefly threw out ideas of how the general structure would be, which was I find these deals, bring money partners to the table if need be, and he and his small crew do the work before I re-sell it.
Any tips on the finer parts of this partnership though? Such as pay structure for materials, profit sharing, amount of time spent at job site, cut labor costs and he pays subcontractors with profits, him bringing money up front too, etc??
Any information would be much appreciated!
I wouldn't do it. When you partner with a contractor, you will often pay more (profit split versus contractor fee) and have much less control over the project (you can't fire him if he does a bad job and he has say in decisions).
What advantage does this provide you?
You brought up a good point J. My line of thinking was it would give me an advantage if I outsourced this work to him so I can still keep moving forward with my work. I get what you are saying about less control-so if it were to happen I would have to make clear I would be the oversight. Also I figure bringing him into it would give him the incentive and motivation to do quick, good, cost efficient work since he would hypothetically be splitting the profit 50/50-and bringing his own money on the front end. Which is then bringing me even more, listings consistently which isnt a bad perk.
My other line of thinking was he is in metro detroit where more than 50% of the deals would be, while im 40 minutes away in Ann Arbor so he would already be there saving me a lot of driving. If it were to be a 50/50 split-yes-I wouldnt make as much if I didnt partner, but I also wouldnt have to do the physical work that would take time away from my job while I can still reap the profits of the flips. Commission front end, back end as well.
Im not saying youre wrong-I am just letting you know why I think it has the potential to be a good thing. But thats what I need is someone pointing out what could go wrong so I know ahead of time that if it wont work the way I need it to then there is no partnership, period. Any other things you would have to have to make the partnership work?
What happens if he doesn't do a good/timely job and you need to fire him?
Is he getting paid for the work he does in addition to the profit split?
Does he do the work himself or sub it out? Who chooses and pays for the subs?
Would it be cheaper to hire a project manager to oversee things for a smaller fee ?
I have dealt with the legal side of these types of arrangements a few times. The key is working out a proper incentive structure. J Scott is right, Even when these deals are done right and they work out you will end up paying a larger percentage of the total to your contractor. You should however be paying at-cost, or less for the work done which lowers your risk of loss if the flip is a dud and depending on your finances and the capacity of your contractor can allow you to operate at a higher volume.
All good things to consider. Like you said Ray, I would only do this is there was a good enough incentive structure in place.
J, all good questions-and I couldnt really see myself doing it if he wasnt willing to pay the subs with his profits.
Again, a lot of things would need to be in my favor in order for me to go through with it-which he may not like. But if thats the case than it is what it is. Hiring a project manager could be a better idea. Not worried about his work-I've seen it. But this is the sort of feedback I was looking for.
Tough call. If it's low risk investment, maybe try it. Remember the 80's song: "I've got the brains, you got the looks, let's make lot's of money..."
@Dakota Cooley I have thought about this, but I am on the contractor side, I take the deals and they bring the financial side pre and post construction process (buying and selling only), I could not cover all legal and bad scenarios where it would be "fair", there are too many moving pieces. What my final offer was (and before I decided not to go with it), is they bring the money guy and they are in charge of buying (after I give them data of the deal and it passes), after escrow I take over, after I am done, they take over. Here are my list of problems:
1. I could not expose my bank account to the partner for payroll specific. If I run my own payroll on other jobs, and I run another for this partnership, I would end up reporting 2 quarterly payrolls to the irs. The solution for this is, I have to charge at a fixed price instead of at cost. This would probably raise a red flag since I will not agree to lose money and get fired at the end.
2. I could not mitigate my risk if I don't perform, or if my partner does not perform. Fall-out solutions and all that.
3. If we were to cancel everything half way, how would we go with it?
I already have a draft for a perfect scenario, but I do not have enough knowledge on the investor side of it to draft the rest of the agreement.
If it was to go south, you would lose a potentially good contractor and him a potentially good client.
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing