50/50 partners...What?

44 Replies

I just emailed a remodeling company asking if they act as GCs on house rehab projects.  They come highly recommended and are a Five Star Rated (by Home Services Review) company. 

My email said, "I'm a RE investor in the area and I'm actively trying to form my rehab team for the winter season. I'm looking for a company to work with that will provide me with one point of contact for 100% of the cosmetic rehab of the properties I purchase. Since I don't have time to interview GCs, I'd like to know that SOWs will be managed and executed on time without me having to manage assorted sub-contractors at different properties.  Would you be able to work with me in this way?"

Their response was, "Sure we can be single point of contact with hundreds of resources at our disposal to handle a large array projects on time. 50/50 partners is our acceptance." 

What does that last sentence mean?  I'm not sure if that's contracting lingo or not.  Thanks!

Ashley Wolfe

it sounds like they want to partner with you on the deals for the running the crews.  At least that's how I read it.  

Now when you ask them about capital contribution that's when it'll get fun. :)

Originally posted by @David Dey :

it sounds like they want to partner with you on the deals for the running the crews.  At least that's how I read it.  

Now when you ask them about capital contribution that's when it'll get fun. :)

What would a good line of questioning be for capital contribution (and what is that exactly)?

I feel like I need to interview companies like this, even if they are rated highly and have great reviews. 

@Ashley Wolfe   what David means is if you ask them if they are going to put any money into your deals to get a 50% interest in the upside.

JV's are common but under different structures than just over seeing rehab. If they also source the deal.. then they would be brining value add.. and doing their construction at cost with no mark up.

Well they simply are not being very clear. Our acceptance sounds like they are accepting your offer, but it also sounds like what they want to accept isn't what you were offering. I think you need to talk it out and figure what they mean. 

This is common with inexperienced flippers. The issue is: Yes you have the capital and yes you "found" the property but the reality is you can not complete it without a team. Most posters and people will tell you the team is made up of a realtor, money person, etc. but the truth of the matter is that the most important member of your team is your contractor. They will be able to tell you the reality of you home. Finding a qualified contractor is the single most important part of a real estate flip. If the deal is good the money will find you but that does not mean a contractor will. I have been apart of over 45 flips as a contractor and as an investor and with that comes relationships. My relationships just as your capital comes with a price. A quality contractor will get you the best price for cabinets, flooring paint, etc. You don't have to shop at all the stores because the contractor already has the "stores" Most quality contractors don't use Home Depot or Lowes for most of their stuff most use dedicated vendors who's relationships have been built over a number of jobs. A quality contractor will deliver not just on quality of work but also quality of material used. As a contractor my value to your deal is more then just my quality of work. It is the quality of product. 

A 50/50 means the contractor is expecting because of his value he is bringing to the deal 50 percent of the net profit. Contractor will bring no capital to the deal but what he/she will bring is a bounty of knowledge, an array of vendors and a peace of mind you can't find on craigslist. 

I would not do a deal involving a flip without at least a 50/50 deal. I wish more people valued contractors. Although I love this site for answering questions it does an injustice of valuing the people who actually complete the flips. There is the 70 percent rule, the spreadsheets, the numbers, the whatever but when it comes down to it the most success comes from finding a qualified, quality contractor that delivers.  

John

I couldn't agree more regarding what you are saying about a good contractor is worth his/her weight in gold!!

However, for an equity participation into the deal, especially one of a 50/50 split, there is no substitute for "skin in the game."

A good quality contractor can still make a good bid on the rehab and still provide a quality service for that bid. I also do believe in rewarding my team, and work in bonuses for coming under budget and for better timeframes.

The contractor is already building a spread into his bid. The 50/50 split without additional benefit is just license to double dip.

@Ashley Wolfe especially at the beginning, if you don't want to be taken advantage of, you need to be OVERLY involved in the process.  You need to study up on construction costs, you need to be a part of the buying process, you need to become an expert in pricing material, labor, timeframes, etc.

My true recommendation is that you do partner up with an experienced Rehabber on your first deal.  It could be an investor contractor like @John Ellis or an experienced investor like @Jay Hinrichs who knows how to manage contractors.  But either way, become an expert by leaning on their experience before you do it yourself.  You'll save yourself a lot of heart ache!!

Originally posted by @John Ellis :

 I'm understanding more now and I agree that people who do quality work and do every aspect of the work should be paid accordingly then should be given more jobs in the future.  So 50/50 means that they do not invest their capital into the project but their time, expertise, work and project management.  When the deal is closed, they get paid half of the net profits in addition to my repair costs?

I think I know the answer to this next question but don't want to assume.  Do GCs appreciate the rehabs where there is a list of materials with price, timeline and SKU# that has already been used for past rehabs?  In other words, a cookie-cutter rehab?  I know every rehab is different and there could be a rotting sub-floor waiting to be discovered that will change the price and thus the profits.  But does a systemized, repeatable cosmetic rehab system save stress for the contractor?  Would a contractor be willing to help me create these systems you think?

Y'all have been more than helpful.  I know that, without an amazing contractor, I can kiss my house flipping dreams goodbye.  I just want to be an equally amazing investor to work with so the relationship can be mutually beneficial for years to come.

@Ashley Wolfe , I applaud you on wanting "to be an equally amazing investor to work with so the relationship can be mutually beneficial for years to come."

While I am admittedly biased given my background, I couldn't agree more with @John Ellis

An amazing contractor, whether or not they are held at arms length as a hired hand, or as a partner, is going to cost a premium.  It doesn't take long to be on BP before one might get the impression that investors need contractors far more than contractors need investors.  If that holds true for you, then what do you have to offer an amazing contractor that they don't already have/can't get elsewhere?  They've stated what it takes to get them.

@David Dey   is correct that a contractor will have a spread in their bid (I interpret spread as overhead and profit) - after all, they are running a business... therein, in part, is their monetary skin in the game.  Additionally, they may have significant capital tied-up in tools and equipment and of course, their network of subs and suppliers is priceless.

If direct capital is used only for direct expenses, at cost, and they take their payout at the end when the house sells, they share in the risk and so should share in the reward at a measure greater than if they were just a hired hand.

Regardless of which path you take, be sure to have your attorney structure the deal and/or review the contract for the company you hire.

On another note, if I may suggest it, before you even consider going further in any direction, go meet with them (or any potential candidate)... have a face-to-face.  This alone will prove extremely insightful and valuable.  And take someone with you... have them take notes while you ask questions.

Good luck!

Interesting conversation here. I started exactly one year ago, building new homes. My investor and I started a separate entity altogether where we each own 50%. He invests in the properties, I build the homes at cost, we split the profits. It works great for all of us in my view. The only thing he does is write checks, I find the properties, work with the realtors and buyers, and completely manage the projects. My equitable contribution is my knowledge and sweat equity. 

Again, my situation is different as I build new homes.....

@Keith Bloemendaal I started this model 4 years ago after exiting my HML company.. I like it a lot better... I find that contractors alone in the rehab side of it are usually a little weak in sourcing the deal. I find if they can hook up with a good realtor that makes a dynamic team and I am good splitting profits with that team. Glad you found good capital partner sounds like its working well for you.. most contractors that are capital squeezed would do well to follow your lead.

@John Ellis   your describing a sub base that in my funding's all over the country is pretty rare in the smaller rehab business IE jobs  50k and under... When I am building new homes this is the norm... Although we don't split profit I hire a GC for a fee build so they are guaranteed a set fee.. then they manage subs.  But subs are quality... they get paid once a month.. draws in on the 1st paid on the 10th.. they have credit. And of course we buy ZERO products at home depot or Lowes I don't even have credit with them. And you learn the hard way that many of the products sold ( especially plumbing ) are not even approved in many states if you have a defect claim your toast ( I know happened to me) But if you buy from Fergusons your good they only sell products that are approved in each state they work in. 

. Most of the rehab Investors  because it is so competitive have to get their remodel costs as low as possible so they will go with johnny lunch bucket who needs a draw to start and be paid once a week and cannot carry a job.. when you do that you expect to get better pricing. and its much like running a restaurant you can have great help but on a busy Friday 2 of your staff may not show...

@Ashley Wolfe   you can certainly wigitize your rehab process when I was doing 50 to 70 rehabs a year in PDX we bought carpet buy the roll. Same paint schemes in each home. same with counter tops cabinets tile etc.  Many high volume rehabbers do it this way.

Originally posted by @Keith Bloemendaal :

Interesting conversation here. I started exactly one year ago, building new homes. My investor and I started a separate entity altogether where we each own 50%. He invests in the properties, I build the homes at cost, we split the profits. It works great for all of us in my view. The only thing he does is write checks, I find the properties, work with the realtors and buyers, and completely manage the projects. My equitable contribution is my knowledge and sweat equity. 

Again, my situation is different as I build new homes.....

 Keith

Your scenario puts you in with significant "skin in the game."  Your sweat equity in sourcing the deal and building the houses AT COST are more than enough reason to partner with you.  You are waiting to get paid when the deal is finished just like your partner.

You most definitely deserve your equal split in the profit.

The original scenario, does not.  They will be building a profit into their first bid "unless specifically agreed to otherwise," and then additionally collecting 50% of the profit.  This is double dipping in my book.

Originally posted by @David Dey :

The original scenario, does not.  They will be building a profit into their first bid "unless specifically agreed to otherwise," and then additionally collecting 50% of the profit.  This is double dipping in my book.

This is what I'm thinking and I may be misinterpreting so I know I need to come with more questions to the person I'm emailing. Because I'm looking to work with a reputable GC who can take care of subs and complete cosmetic rehabs on time and within budget I'm willing to do a JV like the 50/50 split idea. But if I'm also paying an agent/wholesaler or marketing costs to develop leads or relationships to keep the opportunities coming in, then that is taken out of the gross profit before its split as a payout to myself and the contractor (if a 50/50 split).

I feel a bit vulnerable since I'm so new at this.  I don't want to get screwed over by a contractor that knows I'll be confused with all the details and nuances of the flipping and real estate business.  I guess that is where having an attorney really helps. 

What type of attorney do I need to be looking for?

Originally posted by @John Ellis :

A 50/50 means the contractor is expecting because of his value he is bringing to the deal 50 percent of the net profit. Contractor will bring no capital to the deal but what he/she will bring is a bounty of knowledge, an array of vendors and a peace of mind you can't find on craigslist. 

Can we do an example with simple numbers so I understand? (Please note, I'm so new at this that some of these figures such as wholesaler fee, potential repairs and holding costs are completely made up by me.  If there is a more realistic figure, by all means, correct me if I'm wrong.)

ARV on a home is $100,000

$100,000 * .65 (65% rule) = $65,000

$65,000 - $3,000 potential wholesaler fee = $62,000

$62,000 - $20,000 in potential repairs = $42,000

$42,000 - $4,000 in potential holding costs = $39,000 MAO

Potential gross profits $61,000/2=$30,500 for myself and contractor

I know this is full of holes and may not even be in the right universe as an actual breakdown.  But, hey, this is why I'm here asking all these greener than green questions.  Thank you for your input.

@Ashley Wolfe , you could accept their offer like this: OK, thanks. Proportionally, I will buy property for $50k that has an ARV of $100k after a $20k rehab - at your cost. We will split the $30k profit down the middle. I will be more out of pocket, and you will have more sweat equity. Let's do it!

(Could take some trust-building before getting an agreement)...

Updated almost 6 years ago

[Oh, and don't worry, your $20k Rehab Invoice will also be paid out upon closing]...

Originally posted by @Ashley Wolfe :
Originally posted by @David Dey:

I feel a bit vulnerable since I'm so new at this.  I don't want to get screwed over by a contractor that knows I'll be confused with all the details and nuances of the flipping and real estate business.  I guess that is where having an attorney really helps. 

What type of attorney do I need to be looking for?

 You are very vulnerable as someone new at this. That is why I suggest that you partner with an investor in your area.  PM me if you want and I will give you some pointers on how to do that.

While it has been enlightenting reading everyone else's opinion on this matter, I just couldn't justify finding the deal, buying the house, paying for the rehab and then also giving away half my profit on the back end. I could see it justified if the contractor worked at cost and was paid out everything on sale, but I don't think that was the scenario as it's been outlined so far. I will agree that finding the right contractor for you is crucial. I'm going through a couple rehab and rents right now and I think I have found the right team, but only time will tell. Good luck!

I think you also need to schedule an appointment with this and numerous contractors, and if you don't have enough time to interview them then you don't have enough time to take on this project. Even with a GC you'll still want to be involved and make certain that things are progressing as planned.

Also, everybody has to have something. If I were you I would be begging for this kind of deal. You are contributing very little. You are buying from a wholesaler who did the leg work/marketing, found a contractor willing to do the work and oversee the project(who is apparently highly regarded), and if you use an agent to sell then all you've done is send an email to make 50% of the profit. 

I don't think its a terrible idea to partner with another investor but then your both going to end up paying a contractor for the rehab and then still split the profits. Why not just partner with the contractor.

Also, have a conversation with the contractor. This is business, but its much easier if you get along and respect what each party brings. 

50% to a contractor...I'm going to fall out of my chair!

Ashley, it all depends on the type of flips you will be doing.    Some fall in love with what they do on TV and bring a 30k house up to 200k, typically by putting over 100k into it.   Others do typically what Fannie Mae does and just fix whats wrong (or what they feel is wrong lol) and new carpet/paint.    The style you choose typically is determined by the actual asset.

With that all said, if the flip isn't extensive.    I mean EXTENSIVE I wouldn't even consider giving a contractor 50% of anything.   

In your math you are thinking about doing 20k in repairs with 15k going to a GC.    Is that GC really saving you 15k by not hiring someone for a fee?    In my neck of the woods a GC at 5k for a simple 20k job would throw in a lap dance and even if that GC isn't perfect he is still going to not screw up the extra 10k you saved.

As green as you sound I strongly urge you to learn a lot more from a local investor before you deal with wholesalers "sharks" and GC's "typically even bigger sharks".    They will smell the blood in the water.

Originally posted by @Cody Kauzlarich :

I think you also need to schedule an appointment with this and numerous contractors, and if you don't have enough time to interview them then you don't have enough time to take on this project. Even with a GC you'll still want to be involved and make certain that things are progressing as planned.

Also, have a conversation with the contractor. This is business, but its much easier if you get along and respect what each party brings. 

 I agree with this.  It's amazing what you can learn in 30 min of lunch or drinks with someone.  Contractors are always offering to take me out for lunch or HH (I'm a PM so they're trying to get business out of me) and if I'm even remotely interested, I'll usually oblige just to see what they're about.  You can tell a lot about someone in a short time period, such if they seem like they're trying to sell you, if they seem honest, or if they seem like the do shady things; I had a guy tell me a story once about how he performed a shady repair on a building when they disputed an invoice he submitted.  Needless to say, he didn't get any work from me.  It's not foolproof but it's a good starting point and can usually tell you if you want to look into them further or if you should scratch them off the list.

@Leigh C Wow, thanks. So if she purchases a house for under 39k(as in the example), the contractor carries materials, salaries for his employees, and invests, I'm assuming 3-4 months on the rehab, then she is still the only one taking risks?

The major risk I can see is as follows.

The 20k receivable becomes delinquent and he is forced to lien and then foreclose the property.   I'm assuming he permits the rehab to begin with.

During the foreclosure process the house lacks insurance and it burns to the ground making the asset not worth foreclosing.      I'm sure there are other ways for this house to drop 80% or more in value so I'll yield that he has some risk.   However nothing to the scale as a green investor hiring a greedy contractor after purchasing from a wholesaler.  

I'd wager the contractor pulls out fine more than 99% of the time.    The investor in this situation might break even or profit 10% of the time.