Over budget with partner on a fix and flip in CA

22 Replies

Please I need help with a 2400 sf fix and flip SFR in Orange county CA. I put up the down payment and rehab money, partner found the deal and is working with the contractor of his choice, and the permits and locating the fixtures and appliances. We are tenants in common without an operating agreement. Yikes. I know. We each have a 50% interest. He grossly minimized his early projections of for the rehab and soft costs. Contractor omitted key areas of work when he submitted his initial invoice. I have done 3 flips of my own, but smaller projects. I do not have enough experience to manage this project.

I have around 220K so far into the project in down payment, soft costs and construction. Some of the costs are due to construction delays.  We will be into the project 9 months instead of 4 by time we close escrow. We will easily be 150K over the original estimate as provided by the partner. We will now have to get a loan to bridge the gap for the overages.

The comps that the partner provided suggested a 950 to 1MM sales price, but the math using sales price per SF from the comp he provided would indicate a valuation of 830K. We may break even, but will most likely be under water. He is providing figures that indicate we will profit when we close. My figures don't support that.

My concern is how to get control of the over spending. The contractor appears to give me reliable information regarding projected costs. But I don't have experience to know if his prices are in line or not. I had a reliable contractor lined up  initially but deferred to the partner for his choice of contractor. 

The partner is cancelling face to face meetings, and is not taking calls. He is still communicating with email and text and dragging his feet with solid accurate projections on fixtures and appliances. (On one occasion, this partner misused funds for personal use for $1400, and I have gotten some of that back.) 

I have stopped paying for the moment. 

How to cut my losses? Best exit strategy? How to get reliable comps? How to get the partner to respond so we can figure exact expenses and get moving again? I understand I may get an education on this one rather than profit. Thanks BP for the forum, and thanks you folks for advice.

Odds are he doesn't have the answers you are trying to extract from him and he feels annoyed with your constant nagging for clarity.   

Highly suggest having a realtor that deals with REOs walk through the house and see where you are at and give you some sort of valuation and end result comps if you finish.    Consider selling it as is and running away.

Wow, that sounds like a nightmare @Jennifer Duke . It really frustrates me when people don't do what they say they are going to do. 

I am based in Orange County and have a lot of experience. For what it's worth, there isn't a whole lot I haven't had the unfortunate experience of dealing with myself at one point or another. I've been at this 7 years and completed about 200 flips all right here in Socal.  

Give me a call, I would be more than willing to help in any way that I can. At the very least I can go through the numbers with you and compare them against what we are used to paying for construction here in the local market. 

Even though there isn't an operating agreement, it doesn't mean that you don't have options, legal, or otherwise. 

So sorry to hear that. But I really mean it when I say I'm happy to help in anyway that I can from a completely altruistic standpoint. 

-James

May be time to cut losses and sell.

At least you will be splitting your losses 50/50. Better now than later unless you think you can turn a profit.

Doesn't seem worthwhile to continue this stressful situation if your best projection is to break even.

@Jennifer Duke   I would also be willing to go over your numbers with you.  I have over 40 years of experience and I am in-between flips right now.  I can tell you that the only way out of your situation right now is communication with all parties involved.  PM if you wish.

Other than the outcome of being ahead or being behind, I Think you have a larger problem.  Without any kind of operating agreement, hopefully you have Something documenting your agreement, your partner owns 50%, there seems to be no mtg on the property to you, and without some legal intervention it seems he'll be entitled to 50% of any sales proceeds.  You need an attorney now, particularly with your partner dodging you.  Your partner is screaming at you that you're going to get screwed, hopefully you're listening.

@Jennifer Duke

Yea you need to get some legal advice.  You're the only one putting you cash in.  You need to make sure you protect that position.  With no formal agreement, that is not clear at this time.   Time for a legal opinion and potentially speak with another more experienced partner.  

@Jennifer Duke Rehab numbers look ok - if and only if all itemized list is complete (unlike the pictures), I am wondering what "per contract" means, if you could, elaborate and let me know or post here, what's the call-outs (what needs to be one) for the other 40k more? What was the reason for a remodel to be +/- 5 months? I don't understand how a regular rehab could take more than 2 months, normal gut out rehabs even only takes a month. I am sorry to hear about the over budget, sincerely, if you need some contractor side opinions, just give me a call. I hope your partner does not have the contractor's side with him and won't post liens on the property.

@Manolo D. @Jennifer Duke True, the contractor could post a lien, but most contractors don't understand the legal ramifications that occur after the lien is recorded. For example, he would have to follow up by filing a law suit within 6 months or the lien wouldn't stick. Either way, you could still sell the house by bonding around the lien, filing a complaint with CSLB to go after his bond, and then fighting the contractor in court. 

Usually when they file the lien they don't think it all the way through. Most contractors think that a mechanic's lien is a big deal and that they can use it as a high leverage point, but to the experienced investor it's really a non-issue if you know your way around the legal system. The assumption, of course, is that we are considering this lien to be in dispute, or not justified. If the lien were justified, my advice would be to pay your bills. But that's not the case here. 

@James Bowie True, but bonding companies expect that they will have no loss, if they are to pay for something in the issuer, they will for sure pay him. If contractors are not aware of what they are doing, they sure are at fault. Bonding around the lien is a temporary fix so you can sell the house, but ultimately, you still have to answer the mechanic lien, in the event that the contractor built the case and in court, both will need to go to arbitration and present their cases. Most mom and pop contractor that doesn't follow through a lien will lose their advantage, but for someone who does, it is still an advantage, although the house has been sold, it is now bonded, and the bond company is now acting as if it were the house holding the money for the transaction, either way, there is still money to be collected in case the contractor wins the case, the house being sold is now irrelevant and has been replaced by the bond.

@Manolo D. Of course you are correct when the contractor has a legitimate claim. That's why I added the last sentence to my comment. Regarding the bonding company, I was not insinuating that you should not settle the dispute. 

Further explaining my comment - It has been my experience that many contractors use a lien as a means to stop an investor from selling a house. In that sense, bonding around it would allow you to sell the property and then address the lien separately. Of course you would still have to address the lien, but you could do so without having to make thousands of dollars of interest payments while going through the arbitration process. 

If the contractor completed 50,000 worth of work on the house, but was only paid 35,000, you could be facing a lien for 15,000. While it's true you have replaced the house with the bond, as an investor I would much rather address a 15,000 lien with 15,000 at stake, not by holding my 850,000 house hostage over 15,000. 

That's more the point I was aiming to make. 

@James Bowie So true, that last post nailed everything. Only an experienced contractor and experienced investor totally know what we are talking about. Any newbies have more questions than answers if they are reading this. lol.

@Jennifer Duke Chances are, you will walk away with bonded liens and it will follow you until it is resolved at worst, but still cutting your losses. Do the same thing to them on what they did to you, don't connect with them anymore.

@James Bowie   bonding around liens are easier said than done .

IN our state properly filed mechanics liens are superior liens and jump ahead of everything but RE tax's  OUch.. this is a great place to be a for real sub contractor.

@Jennifer Duke I do this for a living IE provide capital for fix and flip. and for all the issues and reasons your stating.. I NEVER give the JV partner an ownership interest in the property. If its my money its my property.. this way if they turtle up I just move on without them .. sure they could try to sue and lis pendence but if its this bad they are in the wrong and just kind of go away not to mention they usually do not have the wherewithal for a legal fight.

Hope it works out..

@Jay Hinrichs Is it almost the same as bonded projects? that you need to post collateral to get it bonded, that's what I was told by my bonding agent a few months back, I asked him technicalities on liens from subs and me being a contractor against a client, but never got into details deeper since I wasn't that interested on it then. There are very limited articles online and it might be better answered by someone who has undergone it.

@Manolo D.   getting the bond is not the issue ... getting the title company to accept the risk is the issue... I have personally never seen a title company step up.. But they may for mega rich type folks that will personally imdenify the title company.. my personal indemnity gets me a cup of coffee from their Kruig machine  LOL

@Jay Hinrichs So in layman's term, owner still couldn't sell it? Sorry, not there yet on title companies, lol. Ugh, I need to change the language of my subcontractors then. Look on the bright side, at least it is fresh coffee lol.

The new contractor wants some assurance that the old contractor won't come after him for stepping in on the job and using the materials on site. I am working now to itemize what has and has not been paid for for the old contractor. What I am seeing is the old contractor has been more than paid, and no further payment is necessary. How to terminate with old contractor?

Please, What to do to protect the new contractor so that he feels secure moving forward without possible interference? 

How to terminate? Keep quiet? Send a letter?