What is a fair profit split for this scenario?

Question

First of all thanks for reading this as I realize it is a bit lengthy. I just think this info is important in order to give proper context to my question.

What would be a fair profit split on a deal where i bring all the down payment funds, good credit and stable job?

My potential partner will not put any money but will put in his time as he is self employed (he is a RE agent), has a more flexible schedule and obviously RE experience although I suspect not with RE investors. In my case, I will expect to spend as much time as I possible (around my 8h FT job shift) so I can be on site the majority of the time while the deal is taking place. I don’t want to just be a “silent partner” that only helps with the funds and then just collects a check. Instead I expect to deal with contractors, materials purchasing, planning and anything else needed throughout the deal in order to make it a successful one. So I also expect to work on the deal. I just know there will be a mostly consistent 9 hour time slot where I may not be available on. I have even considered moving my regular work hours from 9am - 5pm to something along the lines of 12pm - 8pm during the duration of the project (I think the morning time may be more productive time for project related work).

I have very little experience in Real Estate other than some small properties I purchased out of state, the reading and studying I have been putting on BP since August of last year (studying J Scott's books and using the houseflippingspreadsheet to learn how to analyze deals). My potential partner on the other side has more experience with RE transactions given that he is a RE agent. As far as I know and like myself, he doesn’t have experience rehabbing or flipping properties and has only dealt with contractors whenever some of the properties he has tried to sell or purchase (for his clients) needed work in order for the deal to go through. His time flexibility in addition with his RE experience would prove very valuable for the times when I will not be able to be onsite as well as being able to view many properties, making many offers that could take time and maybe frustrate another agent.. I even thought as part of the partnership, he could be the listing agent once we are ready to sell the house back and have him not charge his part of the commission which we may offer in part or fully to buyer’s agents in order to help the house sell faster.

The reason why I ask this question is because I have seen numerous times in posts and heard in podcasts how partners would split the profits 50/50. But of course in most those cases someone always did all the time and work without putting any money while the other put all the money but didn’t put any time nor get involved with the property.

In our case that wouldn’t be the same because as I explained previously I EXPECT spend time in addition to my money. I want to participate in the decision making, planning, materials purchasing, dealing with contractors, etc… as I intend this to be a learning experience where I can do this around my job and not just "collect a check". I can’t quit my job and I won’t at this time (it’s a good job) but I do want to create and grow the capital I’ve saved over the last few years.

So going back to my original question: would it be reasonable to offer something like a 65/35 or 60/40 to start instead of 50/50? I hope I don’t sound greedy as I mostly want to be fair. My thinking was that this way could work until he has some capital saved up and maybe then is able to assist with the down payment on a later deal and then at that time then do it 50/50.

What are your thoughts on this?

Account Closed · Answer

I believe if I were you I would try to do the entire deal myself. Your potential partner is bringing very little to the partnership.

Wes Blackwell · Answer

@Patrick Boutin -- Here's my 2 cents:

First and foremost, it sounds like you are doing at least half of the work, and since it's your money you're taking ALL the risk. This is not a 50/50 partnership.

Second, the thing to understand about friends who are agents is that just because they are your friend DOES NOT mean that they are good at their job as an agent.

I don't know your friend and their skills as an agent... they could be the best Realtor on the planet for all I know. But you should know that any regular joe shmoe can get their real estate license by taking an online course for $99 and they only have to get a 70% on the state exam to pass.

Further, half of all licensed real estate agents conduct ZERO transactions each year. And 50% of the other half conduct 4 transactions or less. So hopefully your friend is not what we professional Realtors refer to as a "part-timer."

It's evident you know this to be true since you said "making many offers that could take time and maybe frustrate another agent.." and "other agents many not want to do all of that at first"

0_o wut? What kind of lame agent gets frustrated submitting offers?!?! But still... you know that some amateur agents do, and that's why they're still amateurs, and that's just sad.

Because you're doing more than half the work involved, don't bring the Realtor in on the deal. Hire him. Split it 97/3. He'll get commission when you buy and commission when you sell.

And if you're hiring a Realtor, you want someone with a proven, professional track record and business model for getting you a fast sale at the highest price.

Here's some questions to ask your friend (or yourself if that's too uncomfortable):

• How long have you been a real estate agent? Is this your only job?
• How many homes did you sell last year?
• How many of them sold in 30 days or less? What was the average DOM?
• How many sold for asking price or above?
• What was the average % of listing price the properties sold for?
• What do you do to market the home besides MLS, Facebook, Zillow etc., "email blasts," Google Adwords, print media or open houses? (if they don't have an answer, they suck)
• What's the most important to consider in calculating ARV? How do you calculate it?
• What other kind of knowledge or expertise can you bring to this deal besides your skills and services as a Realtor? (like investing experience)

Market knowledge (calculating what to pay for a property and what to sell it for) and Selling the home are the two skills a Realtor brings to your transaction. If they screw either one of those up, you could have some serious problems.

Miscalculate the ARV too high and have to sell it for $20k less? Big problem. Do a crappy job of marketing it and sell it for an additional $20k less? Bigger problem.

Your friend simply isn't bringing enough value to the table to justify being paid more than his 3% share. And the worst part about hiring friends is that they're a whole lot harder to fire if they do a bad job. Plus, it puts your entire 17 year friendship at risk. Money changes people. Big time.

If you feel confident that he's the right agent for the job, hire him as your agent. If not, find someone who is. But no matter what don't cut him in on the deal. As soon as you get a few deals under your belt you'll quickly see how little he's bringing to the table.

Best of luck!

Patrick Boutin · Answer

Hi Account Closed thanks for providing the scenarios as it makes for good "food for thought". In this case both me and him would have sweat equity while I would put the funds.

I hope more people chime in so I can get more opinions but I is relieving to know that my original thought (60/40 or 65/35) wasn't wrong.

Thanks guys!

Account Closed · Answer

It looks and sounds like a 65/35 partnership to me.... 50 to you for being the money partner and an additional 15% stake for being actively involved in the project. A full third to your friend for his expertise and the time he will put into identifying properties, viewing them and placing offers, and overseeing/participating in the rehab.

Christopher Phillips · Answer

@Patrick Boutin

Tough call. You're providing the financing. Your friend will provide property searching, analysis, day to day project management, and eventually list it.

If your friend can list the property and not take a commission, then it would fair to suggest he hold out for 50/50 on the profits -- your money, his sweat equity. But, if there is a loss in your initial investing, your friend doesn't have any skin in the game since everything will be in your name. You would also get all the tax implications since everything is in your name.

The problem is that the math can be a little tricky. A few scenarios: the commission and the profit is close to 50/50, then let your partner take the commission and you take the profit. But you might have situations where the profit is higher or lower than the potential commission. Or worse yet, your partner takes a commission and the deal has a loss, leaving you with nothing.

So, it would make more sense, if possible, to simply share profits and losses 50/50. This way, both can share in potential upside in profits, and losses from any individual project will offset by gains in another.

Christopher Phillips · Answer

@Patrick Boutin

All things considered above, regardless of the split, you also have to decide who gets to make decisions. By committee or do you make the calls...

While you're at work and something needs to be decided, will you have to get calls every hour or will you delegate that out to your friend? You don't want to say "it's your call" and then show up at the site after work to see work being done that you don't agree with.

The two of you are growing this together. At some point, your friend will hopefully be putting cash into it as well, even if it's just from profits from prior homes. But, the biggest problem in any partnership venture is laying out the ground rules up front so that there isn't any miscommunication.

Patrick Boutin · Answer

My first option would be to do it with someone who actively does rehabs rehabs but I have yet to know someone like that.

My second option if option #1 doesn't work was to propose the partnership to this person which is why I was asking about the split.

It's still early so at the right time we can make sure roles are clearly defined do avoid the issues @Bill Hinshaw points out. It might turn out that we still need to use a GC so that's not out of the picture.

As far as my potential partner, maybe he does have the funds to "have some skin in the game". If he doesn't, at least I won't feel bad asking for a 65/35 split for the first deal (we can always adjust it on the next one based on how things went as you state @Naveed Q.). If he does have the funds then this will be easier as I won't be risking it all.

This is a long time friendship whom I can trust as I have known him for about 17 years. He has always been been very loyal to me through thick and thin so I would be greatly surprised if I had the issues that @Bryan Creed had. Sorry to hear that and hopefully you get help with your questions! I am curious to see how to handle it.

Bill Hinshaw · Answer

@Patrick Boutin I agree with others who have said 60/40 or 65/35. I also caution that your arrangement will likely create much conflict and frustration. Partnerships are hard. Partnerships where the roles are not clearly defined (which is what you have here) are going to be even harder. Ideally you would have one GC, not 2 part timers whose availability is going to vary day to day.

That said, you can still get the learning, experience, and maybe even the profitability that you are looking for with your first flip. Just be aware that there will be multiple challenges along the way and significant stress on the relationship with your partner, and you probably won't structure your 2nd one the same way.

Partnering is an excellent way to start out. However, if I was in your shoes, my first preference would be to partner with someone who had already flipped a few houses, the more experience, the better.

Patrick Boutin · Answer

He will be able to be at the property during times when I won't be able to. Because he has a license we can look at as many properties as we want (other agents many not want to do all of that at first). He has experience buying and selling which I don't so he can help negotiating. I can help with numbers and can help with research on the MLS which I don't have access to.. At this point given my experience and availability (I think) it will be imperative to partner up as I am not sure I can handle one on my own without taking an extra 2 or 3 months with the rehab.. Specially that the target area is between 1 and 2 hours away from home due to the high prices here in the Bay Area..

Do you still have the same opinion @Account Closed? Besides all of that he is trustworthy something which I think is very valuable.

Do you still have the same opinion Account Closed? Besides all of that he is trustworthy something which I think is very valuable.

Naveed Q. · Answer

@Patrick Boutin, I started in an similar situation as you are planning but in my case the RE agent was also going to put 50% of the money or the Rehab cost. The agreement was that he would oversee the rehab etc. as I was working full time. But after first deal, I was doing most of the running around, dealing with contractors, overseeing the rehab because I wanted to learn and understand the whole thing. At the back end we will split the profits 50/50.

In your case if you are putting 100% of funds and also will be managing portion of the rehab I will say 60/40 or 65/35 will be fair.

What is a fair profit split for this scenario?

What is a fair profit split for this scenario?

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