Partnering with Realtor - How to Structure Partnership

Rehabbing & House Flipping
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Partnering with Realtor - How to Structure Partnership

Tim Porsche
Investor · Denver, PA · Member since 2015 · 193 posts · 55 votes

Hi All,

I was recently approached by my realtor who helped me purchase two rental properties over the past year, when he found out I was looking to start flipping houses come early 2016. He is interested in partnering with me, but we haven't worked out most of the specific details yet. I'm excited and think it would be a great partnership because...

1. I'm not a realtor, and do not have access to the latest listings on the MLS. This would solve that problem.

2. He knows the area very well and has been working in it for years. He seems to sell a good amount of houses every year, so he is good at that.

3. Since he is a realtor and could handle the selling part, that would save us 3% on selling costs.

My first question is, how should we go about structuring the partnership so that it is fair to both of us, and legally protects both of our interests? We were talking about going in together 50-50, we would finance with either hard money or private money, and each of us would put down 15% for the downpayment on the loan (to include purchase price + rehab costs), for 30% down total.

My second question is, for those of you who have done partnerships like this, what do the roles and responsibilities of each party look like? For instance I am thinking...

My Responsibilities 

1. Provide 15% downpayment on loan

His Responsibilities 

1. Do showings, get house sold, and handle the back end of the sale

2. Provide 15% downpayment on loan

3. Submit offers on houses we are interested in purchasing

Shared Responsibilities 

1. Actively look for good deals to put offers on, through Craigslist, auctions, etc

2. Each provide 15% downpayment on loan

3. Analyze the numbers on each deal in depth to determine if they work or not

4. View houses we are interested in together and estimate what would need to be done and what the rehab costs would roughly be

5. Analyze comps to come up with a good, solid ARV

6. Work with the GC on determining the scope of the renovation, setting a timeline, setting cost expectations, keeping everything on track, etc.

Since he would be doing a little more than I would and bringing more to the table, would something like a 45-55 split of the total profits make sense? Any advice would be greatly appreciated. Thanks! 

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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
10y

Basically, it sounds like his responsibilities include:

1.  Being a Realtor

2.  Providing half the invested capital, and half of the rehab work

For #1, above, I would pay him his typical commission on the purchase and his typical commission on the sale.

For #2 above, I typically assume that the money guy gets 50% and the guy doing the work gets 50%.   If he's providing half the money, he gets half of the first 50%, and then if he's doing 50% of the work, he gets half of the second 50%, for a total of 50% of the profit (after the realtor commissions are paid).

You are providing 50% of the money and 50% of the work, so you would get 50% of the profit as well (after the realtor commissions are paid).

Now, if he's not actually providing 50% of the money or 50% of the work, then you can adjust the values based on what he (and you) will be providing.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @J Scott@Jared Watson  when I am building a subdivision like I am now 27 homes I just pay a flat fee... and we control all money and everything is done at costs.

    sub checks are paid out of our generals account but its all very closely monitored as we have bank verticle loans.. and in our market a fee for this type of work for the GC is 7500 to 12k per house.. and after we pay that on 350k exits we make about 50k net per house sometimes a little less sometimes a little more.. but that's basically it for us on that price point and competing with DR Horton and Lennar which are my two main competitors in this particular area of town..

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  • Tim Porsche
    OP
    Investor · Denver, PA · Member since 2015 · 193 posts · 55 votes
    10y
    Originally posted by @Jay Hinrichs:

    @Tim Porsche  see my post above any of these deals that are basically just fix and flips my advice is to just put up all the money .. but be very careful who you select.

    you want to vette them like a tenant... full background.. credit etc.. being a realtor is another level of skill and trust as well.  turned out the guy I did my Atlanta deal with had his GA brokers license revoked.. I broke my Own darn rule there I did not do enough checking that would have kept me from doing any deals with that person.

    All the stuff you talking about is in my mind just super over kills for simple rehab deals.

    I would expect this type of detail if I was building a multi million dollar project were real money was on the line...

    the cost of enforcing all those provision etc your deals if they are under say 200k just not worth all the brain drain cost up front etc.. people are either going to execute or they are not.  If they do fine your the money pay them... If they don't your the money take 100% control and do not have to mediate or litigate or spend one dime controlling your money or asset..

    After almost 40 years of HML I learned this one the hard way..

     Hey Jay thanks for your input. I'm not sure I want to just be the money, at least at first, for a couple of reasons though. Number one and most importantly, I don't have the money to be the money haha. Right now I am only comfortable investing about 10-15k, so having a partner to split costs with me is ideal right now. I'm just starting off investing in real estate so most of my money is in equity in the two properties I currently own. Secondly I want to try to learn this business more hands on, so I think partnering with someone will help me more with that rather than just lending the money, but perhaps down the road after doing a bunch of successful flips I might do what you suggest. That is if everything goes well. 

    So as far as the written agreement with my realtor, you're saying you think it's better to just not bother since the money involved is (relatively) small? Like I said I am new to this, so perhaps I'm just overthinking things. I'm sure once things start to get rolling some of my questions I have no will dissipate and new ones will come and replace them.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Tim Porsche  Ok well then at 10 to 15k you don't bring much to the party but you did spark a very nice thread... best of luck to you !!! 

    Maybe what you do is put a little cabal together of your buddies were you guys cobble 100k or so together and try one.

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  • Jared Watson
    Investor · Austin, TX · Member since 2015 · 222 posts · 58 votes
    10y
    Originally posted by @J Scott:
    Originally posted by @Jared Watson:

    In my opinion, the ideal partner for an investor with capital is a builder (the right builder).

    Once you can build at cost, your whole strategy can change for the better. Control cost, eliminate the risks, and build fast!

    Assuming the builder is fronting the construction costs.  Otherwise, in my opinion, the builder will need to be bringing something additional to the table than just doing the work.  The typical builder fee will generally be smaller than 50% of the profits on a spec build, so bringing in a builder as a partner is going to be more expensive, IF ALL ELSE IS THE SAME.

    Then you are not building at cost.

    To each their own 

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    10y
    Originally posted by @Jared Watson:
    Originally posted by @J Scott:
    Originally posted by @Jared Watson:

    In my opinion, the ideal partner for an investor with capital is a builder (the right builder).

    Once you can build at cost, your whole strategy can change for the better. Control cost, eliminate the risks, and build fast!

    Assuming the builder is fronting the construction costs.  Otherwise, in my opinion, the builder will need to be bringing something additional to the table than just doing the work.  The typical builder fee will generally be smaller than 50% of the profits on a spec build, so bringing in a builder as a partner is going to be more expensive, IF ALL ELSE IS THE SAME.

    Then you are not building at cost.

    To each their own 

    My point is, it's often cheaper to pay the mark up on construction versus splitting the profits. Plus, when the builder has an equity stake he also has say in the project, can't be easily fired, etc.  

    Partnering with a builder has a number of extra risks, and those need to be outweighed by some advantages over and above building at cost (when building at cost is still more expensive after the profit split). 

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  • John Rogers
    Real Estate Investor · Davenport, FL · Member since 2015 · 516 posts · 152 votes
    10y
    Originally posted by @Jay Hinrichs:

    @Tim Porsche  Ok well then at 10 to 15k you don't bring much to the party but you did spark a very nice thread... best of luck to you !!! 

    Maybe what you do is put a little cabal together of your buddies were you guys cobble 100k or so together and try one.

     Agree ahead of time as to "members" and dollar amount.

    When you find a property, take title in a land trust where the "members" are the beneficiaries of the trust. Don't sell the "property"... sell the beneficial interest in the land trust to your buyer. This works great on "buy & hold" properties as you have already set us a business environment for your buyer.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @J Scott  I partnered with a builder in 09 not knowing he was in deep financial trouble.

    that turned into a 300k lesson for me... Never will I actually partner with a builder again.

    He went under and I had to honor the bank loans. ( since it was my bank).

    For me the only way is to pay GC fee end of discussion. If they bring a ton to the table then you can pay more.. If I find the deal and I am the money and am doing volume like I do then I enjoy the lower fee's I fully understand most GC can't build a house for 7 to 12k if they are only doing a few a year.  But that's our market.. What I do though is at the end of the project if we have done well I bonus them.. so they end up pretty close to 10% of costs.  But we CONTROL the MONEY period end of discussion  lest we build a home twice which is what happened to me.  Expensive lesson for sure.

    And for someone on BP who is not in the business and is just a private investor this becomes even more risky and crazy in my mind... Its one thing to be doing 30 to 50k rehabs its another to be doing 200 to 300k or much higher like there in ATL in Brookhaven deals ... the risk can be quite large for the investor

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  • Franklin Romine
    Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
    10y

    @Tim Porsche  Your plan outlined has a 50% chance of working.  

    The key piece would be the partner.  Is your partner financially stable?  People become very strange when they have cash tied up in a deal and problems arise.

    Frank

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  • Tim Porsche
    OP
    Investor · Denver, PA · Member since 2015 · 193 posts · 55 votes
    10y

    @Franklin Romine From all outward appearances he seems to be. I know he gets a good amount deals done as an agent on the selling and buying side each year, owns his own home, and also some rental properties. In this particular scenario what kinds of things would you recommend checking for to assess someone's true financial position? 

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  • Franklin Romine
    Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
    10y
    Originally posted by @Tim Porsche:

    @Franklin Romine From all outward appearances he seems to be. I know he gets a good amount deals done as an agent on the selling and buying side each year, owns his own home, and also some rental properties. In this particular scenario what kinds of things would you recommend checking for to assess someone's true financial position? 

     Yeah just access how he is doing, how he talks about money, how much much he has disposable, see if he has reserves and credit.  Not that you need it but you want him and your deal to be smooth.

    Frank

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  • Account Closed
    Investor · Atlanta, GA · Member since 2013 · 212 posts · 107 votes
    10y
    Originally posted by @Jay Hinrichs:

    @J Scott  I partnered with a builder in 09 not knowing he was in deep financial trouble.

    that turned into a 300k lesson for me... Never will I actually partner with a builder again.

    He went under and I had to honor the bank loans. ( since it was my bank).

    For me the only way is to pay GC fee end of discussion. If they bring a ton to the table then you can pay more.. If I find the deal and I am the money and am doing volume like I do then I enjoy the lower fee's I fully understand most GC can't build a house for 7 to 12k if they are only doing a few a year.  But that's our market.. What I do though is at the end of the project if we have done well I bonus them.. so they end up pretty close to 10% of costs.  But we CONTROL the MONEY period end of discussion  lest we build a home twice which is what happened to me.  Expensive lesson for sure.

    And for someone on BP who is not in the business and is just a private investor this becomes even more risky and crazy in my mind... Its one thing to be doing 30 to 50k rehabs its another to be doing 200 to 300k or much higher like there in ATL in Brookhaven deals ... the risk can be quite large for the investor

    Funny that you mention Brookhaven - finished up a teardown/new construction in the spring through a JV with a builder that I met through BP. Exit in the mid $700s. Net-net profit was $220k, split 50/50 with the builder. Sure, the risk may be higher, but I would call it justified where the project ROI was 45%+...

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Account Closed  Adam do you live in Atlanta if so you can greatly mitigate risk. its the out of state investors I was referring to.  congrats I looked at that market hard as well.

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  • Account Closed
    Investor · Atlanta, GA · Member since 2013 · 212 posts · 107 votes
    10y
    Originally posted by @Jay Hinrichs:

    @Account Closed  Adam do you live in Atlanta if so you can greatly mitigate risk. its the out of state investors I was referring to.  congrats I looked at that market hard as well.

     Yes, I do. Absolutely agree re out-of-staters. 

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  • Ronda R.
    Investor · Atascadero, CA · Member since 2015 · 238 posts · 90 votes
    10y

    I learned a lot here guys. Thank you!

    @Jay Hinrichs How do you handle the payout at the end? Since your name is on the title do you figure out what the profit is at the end and then just write them a check from your SCorp and call it what, an expense?

    I am going searching to read about your bad Atlanta deal. 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @?ronda

    @Ronda R.undefined            yup that's what I do.   I simply call it vendor proceeds.

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  • Ronda R.
    Investor · Atascadero, CA · Member since 2015 · 238 posts · 90 votes
    10y

    Thank you @Jay Hinrichs Good to know.

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  • John Rogers
    Real Estate Investor · Davenport, FL · Member since 2015 · 516 posts · 152 votes
    10y

    I run it past my accountant first. He knows all the costs involved and the sell price, does an estimate of capital gains taxes to the person whose name is on title, we take that estimate and show it as a cost so the burden isn't on the title holder.

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