Structuring the first partnership

7 Replies

Hi, 

I am looking for thoughts on structuring a partnership on a short term rehab with my brother.  Until now I have been doing rehabs by myself but I am looking to grow and realize the benefits of partnerships.   

The responsibilities would be divided as such:  

I am an agent so I will find the property and sell it. 

I will be in charge of all design specs.  

I will be provide the 30% down payment along with any of the remodeling costs.

I will provide some sweat equity.  

My brothers responsibilities will be:

Carrying the loan and managing the project. 

He will be providing the majority of the sweat equity.  

I understand that the more we clarify the mechanics in the beginning the less gray area we will face in the future.  Any help is greatly appreciated and well received. Thank you! Roxy 

So it sounds like you are finding the deal and putting in 50% of the funds and your brother is managing the rehab and putting in the other 50% of the funds? As long as the money from the commissions saved on your part and your bother's GC charges are either a part of the deal OR both kept out of the deal (that sounds like it would be pretty much a wash either way) then this seems like a slam dunk 50/50 partnership to me. 

I appreciate the feedback Jonathan :).  I do believe you are right on with a 50/50 split.  

That being said I have been in a few partnerships in other businesses and eventually a heated question is raised.  How much value/money/ time does each partner contribute.  In my experience someone spending  more time working in the business does not always earn a higher percentage. I may work less hours than my brother but ultimately it's our value and job worth that determines a fair split, correct?  Up until now I have always worked alone and managed all the sub-contractors myself, so I have very little experience with what a GC would typically charge.   It is very clear what a realtor makes on a deal and also easy to determine what an investor would make.  I am curious if there is a good formula to determine what a GC would make?   If you think it is a wash between my commission and his project management I am wondering how you came to this conclusion?  Is there a percentage that a GC is paid?  Thank you again for all your advice!!! Roxy

I think you bring much more value to the deal than a contractor. The adage of "the money is made when you buy a house" is dead on.  Finding a deal is HUGE. If you are able to have enough spread because you bought right, then you can find a good contractor that is expensive but good and just take out a HM loan or convention finance. 

I think that finding the deal and bringing the selling commissions into it are significantly more valuable than GC'ing a deal, but that is just me. I personally would never JV with a contractor because your interests are not aligned. You also cannot fire a JV partner who is a crappy contractor, much less if he is family.

I won't make any suggestions, as partnerships are a very personal thing - specifically so when they involve family. But here are some numbers for you to keep in mind:

GCs typically work on a 12% profit margin, and that is after the overage assumption (usually 10%, but sometimes up to 15%).

People who "find" the deal usually take home 3-5% depending on how far they bring the deal (verbally accepted offer from seller vs. under contract). This is 3-5% of the purchase price.

The hard money lender will take 12-15%, plus 0-4 points.

If there were an operator (project manager), they would usually get 10-20% if they have no capital in the deal, more with capital.

You know what the realtor gets.

It seems like your brother is the GC and possibly the PM? You are the wholesaler/bird dog/finder as well as the realtor. And depending on how much money you are each putting up - it sounds like you're splitting the lender role.

I agree with what was said above that either you both take NOTHING from the deal until its done - then do your split from all profits, OR you both take your fees as appropriate along the way, and then split whats left.

Whatever you decide put it in a legal partnership agreement. I've been in partnerships with family before and keeping it official and documented always helps. I've also tried to keep the deal simple. The more complicated the calculations to determine the split, the more there is to fight about later.

This is wonderful advice and information I am happy to have found this site!  I have recently heard when structuring a partnership both the business side and the emotion side should be structured in order to avoid unnecessary conflict.  I thought this was interesting because most of the conversation and negotiation revolves around the money and responsibility leaving out a system for emotional conflicts.  I am not sure what a legal contract for that would look like... Lol. 

 A few days ago we went undercontract on a mid century modern home with a large amount of untapped potential.  It is 3,000 sqft and much larger than I would typically tackle on my own.  I am looking forward to sharing the responsibility and thrilled to have the opportunity to design such a wonderful home for a future buyer.  

Off subject what are your thoughts on baseboard radiant heating and resale?  As a real estate agent I hear mixed opinions from clients.  To replace the system with HVAC is very costly at $16,000 but within the budget.  This property has no attic or crawl space and very tall ceilings.  They are less costly to heat this space than an HVAC however often buyers see them and think $$$.  I am leaning towards replacing them from a design perspective. Any thoughts? 

Originally posted by @Roxy Blu :

Off subject what are your thoughts on baseboard radiant heating and resale?  As a real estate agent I hear mixed opinions from clients.  To replace the system with HVAC is very costly at $16,000 but within the budget.  This property has no attic or crawl space and very tall ceilings.  They are less costly to heat this space than an HVAC however often buyers see them and think $$$.  I am leaning towards replacing them from a design perspective. Any thoughts? 

what about in floor radiant heating?  I was just having this convo with my HVAC guy yesterday. He asked me if I had thought about doing in floor radiant heating on my next flip. He says its the most efficient since it heats the whole room from the floor up to about thermostat level. No need to heat anything above that since most people are about 6 foot tall anyway. Since I do most of the work myself, he suggested it because its fairly easy to install.