Should I pay my partner's wife for her design help?

Should I pay my partner's wife for her design help?

Investor · Minneapolis, MN · Member since 2015 · 23 posts · 3 votes

My partner and I just closed on our first flip together and when it came down to dividing up the profit we've run into some issues. He wants his wife to get paid a separate design fee for her involvement. This had been brought up when we bought the deal but nothing was agreed upon, which is our fault. I am really trying to see this fairly and thats why I would love some outside unbiased opinions. She is a designer, but not an established one, more of a hobby. She's done a few rehabs and jobs here and there, but she is very good. I agreed to give her full design power over the project, we made some decisions as a group but for the most part she just had the go ahead to make the final decisions on anything design related. In that way she isn't like a normal designer we would hire, in that she doesn't present options and pricing and give us the final say on what we choose, she just gets to go ahead and designs how she best sees fit. I always wanted to avoid trying to put a monetary value on what each person brought to the table in the partnership because that can get ugly. I did put in $50K more money and we used my $250K line of credit I already had from the bank to fund the rehab (which I already paid closing costs on). She did put in a lot of work on the project and I guess I am not opposed to paying for that, just how much that is has been bothering me, because any amount he comes up with is fine because essentially whatever fee we pay her goes to him anyway. I Would love an outside opinion on this because I really want to do whats fair and make the partnership go smoothly from here on out because we have more projects already underway. 

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Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
10y

I find it very hard to believe that they "assumed" she was going to get paid given that you did not agree to any number before she started.  Thats nonsense.

They knew exactly what they were doing. They didn't say anything because you didn't say anything and then they were waiting til the end to spring it on you. 

Here's the problem I see. You put 50k more money at risk and used your 250k line of credit to fund the rehab? Where is your return on that? Where is your reward for taking the additional risk?

What I would say is you'll give her a 1k out of your end on this one and tell her that her husband can give her another 1k but going forward you need to even steven the partnership for it to make sense.  

You're risking a lot more money on the deals so either they pony up everything 50/50 or else you're going to need a larger percentage of the deal. 55/45 seems more than reasonable. And then you two pay the wife out of the shares EQUALLY.

So maybe each of you gives her 7.5% so she gets a 15% stake in the profits as her pay.  

But honestly, her real "pay" or return on her time is that her husband is getting half the profits and with her help his profits should have been more than without it - if she's as good as she's suggesting.  So she technically did get paid. 

But I would not pay for design unless you really don't think you can do this without her. If so, then come up with some number you think is reasonable. And then renegotiate your percentages based on the amount of monies you're risking compared to them.

Ultimately, the obvious solution is to tell them that they need to put up half of ALL funds needed for the deal. Half the purchase. Half the rehab. Half the carrying costs.

And if they don't like that, I'd tell em to take a flying leap. Why should you risk so much and still split the profits 50/50. Is the partner guy finding the deals? Does he have some special skill that you would not be able to do the deals without him? If so, then maybe its a wash. Your money for his super special skill so thats why 50/50?

But honestly, the fact that they just "assumed" she was going to get paid is still a huge put off to me. How much are they assuming she was going to be paid? Noone would ever assume something like that. Ever. If she really believed she was going to get paid, she would have asked how much you guys were going to pay her - BEFORE she even started.

I'd throw her the bone and give her 2 grand. One from you and one from her husband's cut.

Then you're at least making a gesture to acknowledging the effort she put in. But after that, you need to get the agreement locked in. After all, that was your first one so you write it off as a misstep and move forward. I would not want to jeopardize something thats working. But don't let them pull a fast one on you either.

And no way would I pay her the going rate for a designer. Thats ridiculous. She was clearly never "engaged" for her services. Or else she would have a number from you already.

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  • Newark, IL · Member since 2016 · 45 posts · 15 votes
    10y

    What's the split with you and your partner? 50-50?  Is he doing any work? Are you? Lots of things to do when figuring in compensation.

    Tom

  • Real Estate Broker · Indianapolis, IN · Member since 2014 · 3k+ posts · 2k+ votes
    10y

    @Brandon Giarusso Call a few interior designers and get a quote on what they'd charge. 

  • Investor · Minneapolis, MN · Member since 2015 · 23 posts · 3 votes
    10y

    Yes the split is 50/50. We are hiring out almost all of the work. We chip in where we can, I probably spend more time at the projects but i would say the sweat equity is a pretty even 50/50 split. 

  • Newark, IL · Member since 2016 · 45 posts · 15 votes
    10y

    So no extra compensation on your end for the money and credit line? Sounds to me like a wash on her (extra) designing.  Pay her out of both 50% his and yours. Then tell him if you invest more than him you get a higher percentage going forward.

  • Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    10y
    That's pretty avaricious considering your partner had a financial interest in the success of the project. If you have to throw some money her way to avoid a conflict so be it, however I wouldn't base her recompense on market rates or competing bids as she had an exclusive inside contract with no formalized expectations.
  • Flipper/Rehabber · Montgomery, NY · Member since 2016 · 2k+ posts · 1k+ votes
    10y

    Did you determine how much money she would like?

    If your wife owned a flooring company and they installed the carpet, would you expect her to receive her normal pay, or would you expect her to not be paid at all, due to your financial interest in the sale of the house?

  • Rental Property Investor · New York, NY · Member since 2011 · 956 posts · 510 votes
    10y

    I would say yes she should get paid for her time and talent, but you put in 50,000 more than your partner?did you take that money out when sold? 

    Because there is no agreement beforehand , she should get paid if you want the partnership to continue smoothly. 

    You may not have sold it quickly or got the same price for it had she not done her design part. As you know, best to have an agreement beforehand next time.

  • Investor · Minneapolis, MN · Member since 2015 · 23 posts · 3 votes
    10y

    Thats a good point, if my wife had a flooring company I would expect her to get paid, but I would expect an extreme discount, because she also has a vested interest in the profit of the house. They do flips on their own as a husband and wife team, and obviously she doesnt charge her husbands company then, I guess it changes when a third party gets involved. It is just a slippery slope because I am not asking for any compensation for the extra money or line of credit I am using. It is all of my assets that line of credit is collateralized against. So if disaster struck I have all the risk. I will take that $50k back but with no interest on top.

  • Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
    10y

    Does she deserve to get paid? Sure

    You already know everyone should have been more diligent about agreeing before the project was done. Obviously any contractor who came up after the fact and asked for money would have the least leverage possible.

    I say do this: ask her a price, if reasonable pay it and don't make that mistake again.

    if unreasonable, negotiate and realize that she has the least leverage possible. you can't include your partner since his opinion is bias.

    lastly, her payout should get split between you.

  • Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    10y

    I find it very hard to believe that they "assumed" she was going to get paid given that you did not agree to any number before she started.  Thats nonsense.

    They knew exactly what they were doing. They didn't say anything because you didn't say anything and then they were waiting til the end to spring it on you. 

    Here's the problem I see. You put 50k more money at risk and used your 250k line of credit to fund the rehab? Where is your return on that? Where is your reward for taking the additional risk?

    What I would say is you'll give her a 1k out of your end on this one and tell her that her husband can give her another 1k but going forward you need to even steven the partnership for it to make sense.  

    You're risking a lot more money on the deals so either they pony up everything 50/50 or else you're going to need a larger percentage of the deal. 55/45 seems more than reasonable. And then you two pay the wife out of the shares EQUALLY.

    So maybe each of you gives her 7.5% so she gets a 15% stake in the profits as her pay.  

    But honestly, her real "pay" or return on her time is that her husband is getting half the profits and with her help his profits should have been more than without it - if she's as good as she's suggesting.  So she technically did get paid. 

    But I would not pay for design unless you really don't think you can do this without her. If so, then come up with some number you think is reasonable. And then renegotiate your percentages based on the amount of monies you're risking compared to them.

    Ultimately, the obvious solution is to tell them that they need to put up half of ALL funds needed for the deal. Half the purchase. Half the rehab. Half the carrying costs.

    And if they don't like that, I'd tell em to take a flying leap. Why should you risk so much and still split the profits 50/50. Is the partner guy finding the deals? Does he have some special skill that you would not be able to do the deals without him? If so, then maybe its a wash. Your money for his super special skill so thats why 50/50?

    But honestly, the fact that they just "assumed" she was going to get paid is still a huge put off to me. How much are they assuming she was going to be paid? Noone would ever assume something like that. Ever. If she really believed she was going to get paid, she would have asked how much you guys were going to pay her - BEFORE she even started.

    I'd throw her the bone and give her 2 grand. One from you and one from her husband's cut.

    Then you're at least making a gesture to acknowledging the effort she put in. But after that, you need to get the agreement locked in. After all, that was your first one so you write it off as a misstep and move forward. I would not want to jeopardize something thats working. But don't let them pull a fast one on you either.

    And no way would I pay her the going rate for a designer. Thats ridiculous. She was clearly never "engaged" for her services. Or else she would have a number from you already.

  • Investor · Richmond, BC · Member since 2013 · 316 posts · 133 votes
    10y

    I'm a designer but I'd still need more information to give fair input on this. You mentioned that you were deciding on how to divide the profit and that you had brought more money to the table. I'm assuming that your partner(s) bring more expertise. Not only in the 'which property to invest in', but also 'what to include in the rehab' as well as the estimating and use of their contacts. Seeing as much of the work will be hired out, let's assume that you'll be using an electrician (or a plumber of whatever). Those fees are taken off the top, before any profit is divided, just as the design fees should be.

    You are already in this too far to backtrack much (and, as you said, cause tension). What you DO need to do now, however, is agree on how much those fees will be and draw up a contract with her company (which, as you'll need to declare as an expense, she'll need to declare as income) just as you'll be doing with the electrician and the plumber. You'll want to do that before the 50:50 is explicitly addressed. It is also not unreasonable to ask that she do a comparative analysis of her fees to the going rates. It's good for her business to be aware of the market. It would be a bit weird, though, if she charged her husband full price.

    Just out of curiosity though, is this about choosing colours and finishes or about moving walls? If it's the former (and probably the latter too) you may be able to phone somewhere like Sorted Affairs CSPs and get a rough estimate.

  • Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    Should've been explicitly agreed to ahead of time, but that is water under the bridge. If your partner's wife were not a designer, would you have hired another designer to help you. If yes, then I'd pay the going rate because that is what she likely saved you. If no, then you were using her design services just because she is the partner's wife ... at that point, it is more a decision of what it is worth to preserve the relationship with your partner. 

  • Investor · Minneapolis, MN · Member since 2015 · 23 posts · 3 votes
    10y

    Thanks for all the responses everyone, much appreciated. As stated the agreement will be agreed upon ahead of time moving forward. He does bring some skills to the table because he has a company in the construction business. So his expertise was needed for me to gain experience, which is why initially I offered to put in more money and use the line of credit. However, the people we used of his, (GC, structural engineers, and all the subs) were paid and not done at any discount, so its not like I couldn't have found these people on my own. I have found all the deals we have done so far. As far as her design, she did pick out colors and tile and all that, but we all chipped in. I had a say in the major decisions, but she did get a designer discount on a few things, which is worth something. And no, without her I would not hire a designer, I feel confident in my own skills enough to do this. That is another issue I have. I feel it is a fee I normally wouldn't pay. For are next project , we borrowed money from a family member of mine and he is not asking for any interest return on that. Which is incredible, and I am grateful, but in that case if who I have told him she cannot ask for a design fee for his wife if who Im bringing is willing to do that for us. I feel that is more than fair. He hasn't agreed to that yet, because he wants to back his wife and I get that. But if we pay her fee then I will be obligated to pay the interest fee. It wouldn't be right other wise. 

  • Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    10y
    Originally posted by @Brandon Giarusso:

    For are next project , we borrowed money from a family member of mine and he is not asking for any interest return on that. Which is incredible, and I am grateful, but in that case if who I have told him she cannot ask for a design fee for his wife if who Im bringing is willing to do that for us. 

    That's very nice of your family member but you should probably pay that person some amount of interest on their money.  I had a family member willing to do the same thing, but I insisted that I pay them a fair interest rate.  After all, if I'm using their money to make money on a deal, why shouldn't they profit from it too?  Plus, they could be liable for the tax on imputed interest with the IRS even if interest wasn't charged, so they might as well charge it.  

  • John CasmonPro Member
    Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes
    10y

    @Brandon Giarusso As you've stated, these are the types of things you need to agree upon upfront, which you already plan to fix moving forward. The family member loaning you money has nothing to do with the wife getting a design fee. You should offer to pay the fee and deduct it from the expenses, that way both parties are paying it. It should NOT come out of the profits. Check to see what's reasonable, but ask them to throw out a number first and go from there. 

  • Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    10y

    Pay the wife, verbal agreement is still an agreement. Re-assess your profit share on the 50k more cash and 250k loc, that's not something to be taken lightly, on his end also even if you did not get his subs at a discount, he is not charging you a GC fee also, that lao has a value just like your cash and loc. And no, situation will be different if you hired someone else, you would have found another sub that might do better or give you the nightmare of your life.

  • Investor · Minneapolis, MN · Member since 2015 · 23 posts · 3 votes
    10y
    Originally posted by @Manolo D.:

    Pay the wife, verbal agreement is still an agreement. Re-assess your profit share on the 50k more cash and 250k loc, that's not something to be taken lightly, on his end also even if you did not get his subs at a discount, he is not charging you a GC fee also, that lao has a value just like your cash and loc. And no, situation will be different if you hired someone else, you would have found another sub that might do better or give you the nightmare of your life.

     We paid a GC separate from him, and it turned out to be his wife's father, and we paid him $8k a month which I feel was way too high, but thats not relevant here. I agree from where you are coming from, which is why I put the extra money up and offered the line of credit. However I don't feel the project went smoothly, we went WAY over budget and his subs didn't prove to me to be worth that. The deal is done, we made a profit, smartest thing seems to be to pay his wife something and decide before hand in the future. The problem now is deciding what that number is. I offered $6500 which is way higher than I comfortable with or think is deserved, and he didn't think that was enough. His bias makes it difficult, of course he wants it higher because he wants his wife to feel worth it, and it all goes to him anyway. 

  • Investor · Independence, MO · Member since 2016 · 89 posts · 70 votes
    10y
    I wouldn't give her a dime then. This is starting to sound a little scamy to me. I also wouldn't do anymore deals with them. Tell him to pay her out of his share of he is so inclined too.
  • Developer · Philadelphia, PA · Member since 2015 · 2k+ posts · 905 votes
    10y
    Brandon Giarusso how many hours would you estimate she spent on the project? You can get hourly quotes from designers who help make finishing choices and even offer to shop for you. I generally only pay $300 for a 2-3 hour consultation. Based on what you have stated, it does not seem like the split should be 50-50%
  • Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
    10y

    Ask the partner if he and his wife file taxes jointly , if so and he got his cut , she got paid .

  • Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    10y

    @Brandon Giarusso Why are you still with this kind of partner? Separate GC fee, separate profit, separate designer fee. Wow, it seems like you're the money guy and its an 80/20 split, not 50/50. 

  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    10y

    Do what you feel is ETHICALLY correct.  If you feel that the ethical thing is to pay her a fee determine how much is a reasonable fee, sent a certified letter to the wife explaining how you arrived at the fee amount, and offer to pay your share (50%). In return she will need to sign a statement that she accepts this as payment in full.

    Send copies of this SEPARETLY to your partner.  In addition send him a cover letter detailing your disappointment with his performance via the cost over runs, the nepotism of the GC, and anything else that needs to be said.

    Let him respond and see what he says. Whether or not you'll be able to salvage this partnership for future deals will be dependent on his response.  

    Private Mortgage Financing Partners, LLC
  • Flipper/Rehabber · Montgomery, NY · Member since 2016 · 2k+ posts · 1k+ votes
    10y

    I have not read back through every reply... But am I reading this right?

    $8000/month for a GC?

    $6500 for a designer to pick colors and tile, and they want more than that?

    Are you flipping $500,000+ large homes?

    I just finished a house and if I had to pay both of these fees above would have cost me $30,500.

    As someone who doesn't hire these people, I have always figured a GC would fall into the 15-20% of the rehab costs ($5,000-15,000 on the flops I have completed) and a designer simply picking out colors and tile I would honestly be willing to pay up to $1,000-1,500 TOPs, however would also expect them to helps with all aspects of design, inside and out. your GC costs to his family at first seemed high, but I guess wouldn't be over the top when really broken down (assuming he is running the job full time, and the time was agreed to, not allowing him to drag it on and continue to make more and more money while you lose money). The designer costs seem outrageous to me. How much does he want his wife to be paid? I assume he wants it to be paid as an expense for the flip eating into both yours and his profits (not just yours)?

  • Investor · Minneapolis, MN · Member since 2015 · 23 posts · 3 votes
    10y

    She did a bit more than just pick out colors and tile. Her and her father (the GC) basically came up with the design, which was a complete gut, removing walls and a complete new layout. She also staged it, which was a group decision that she wanted to do, in order to save staging fees. We plan to sell most of the furniture bought for it. It was a large project. Purchases for $565K, roughly $350K put into it, sold for $1.165m.  We spilt the purchase of the house. My line of credit covered most of the reno, I put in the additionally money to fund the rehab. 

    The GC did go above and beyond the normal GC duties on the project, and he was absolutely vital to the project. But there were ways he bogged it down. We were initially paying him $4k a month with the plan of giving a bonus at the end to compensate the extra work he did. The problem was he was earning a $4k a month salary already from my partners other company. And since he dedicated almost all his time to our project my partner asked to be reimbursed that money. That is the problem I have. Because we talked about this early on in the project and i told him to take him off his payroll or else lets figure out a fair compensation to pay his company back for that. But back paying the whole thing seems fair after the project is completed. Because I never would have agreed upon an $8k a month pay for a GC. Bottom line is to get all of this figured out prior to the project. Im learning that the hard way. My partner is a good friend of mine and good person so I thought it would go more smoothly. I just think he is too biased because all this extra money goes to him,even if it comes out of joint profits.

  • Newark, IL · Member since 2016 · 45 posts · 15 votes
    10y

    Brandon, a GC usually charges a percentage on the project. It's not an 8hr on the job every day deal. A GC's job is scheduling materials,trades and inspections with the local municipality.

    Most of the work is done on the phone literally. I GCed several projects personally and doing 1,2-10 all at once is not inconceivable. I'm sure your GC was making money on other projects at the same time as yours. Just an FYI 

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