Profit Sharing with a Contractor... what's fair? %$%$

5 Replies

This is going to be a very broad question and I'd love to get some feedback from people who have direct experience with this.

Tomorrow I'll be sitting down with a friend and his brother to discuss a potential partnership for rehabbing.  We have both been starting to  look for rehabs and with this market, I think we'd be better served to join forces. 

1st Scenario)  I purchase the property, they put up the rehab money, and handle the rehab?  

With this scenario, I feel 50/50 is the fair and smart route.  Cost of money, holding costs deducted before profits split. 

2nd Scenario) I purchase property, they put up the rehab money, and get a flat weekly pay for work

This scenario, I'd say 50/50 less the total pay for the work?

3rd Scenario) I purchase property AND put up the rehab money, they don't take any pay for the work.

70/30?

Just throwing out some random ideas.

What have you guys done or had success with in the past or present?

I would never partner with a contractor.  I've seen too many situations where investors do this, and then the contractor either can't keep on schedule, can't keep on budget and/or does low quality work.  The investor should -- theoretically -- fire the contractor as soon as one of those things happens, but if the contractor is an equity partner, this essentially becomes impossible.

So, my recommendation is that, if you want to partner with a contractor, you separate the contracting part from the equity partner part.  Pay the contractor for the work he's doing at a fair rate, and then provide equity ownership for the other stuff that he's bringing to the table (money, other efforts, finding the deal, etc).

That way, if the contracting isn't going well, you can fire your partner as the contractor, keep him as your partner, and still not get screwed in terms of profit on the back-end.

Appreciate the quick reply @J Scott

why didn't your book go over this! I guess that could be an entire book alone.  I read your book beginning of the year and plan to re-read once I'm under contract for a rehab! Loved it.

They are not a licensed Contractors as of yet. They currently do random jobs such as flooring, carpentry etc.. if the job requires a permit and a licensed contractor we'd probably have to hire out or at least get them to do the work under someone else's license if that trust is there. The main point is there aren't many jobs they can't do and it's quality work.

These people are close friends and a rehab with their vested interest would become their sole focus being that it's what puts food on the table. They usually just schedule one job at a time out.  I know they say to be careful working with friends and family, but there is a close trust level and you live and you learn.

I like the separating the rehab work from the equity partner part.  I'll now have to weigh this out and it sounds like more of a per deal decision.  Thinking long term though if this went well on the first it'd be nice to have a standard formula for what we do.

People, more so contractors, tend to be really bad with money. If you pay all upfront or all at the end they lose their motivation to finish or more realistically don't budget correctly. Then you have a half finished project that someone else is going to have to take over and it's a disaster all around.

If it was me I'd get the bid and treat it like any other contract. We'd have milestone and the payments that go along with them. Make it like your flat weekly rate scenario and toss in the bonus for the job as % of the profit at the end. This will keep the contractor hungry through out the job and give more incentive to finish it. It'll also help reduce change orders/overruns because his bonus at the end is directly tied to profit...

@Dane Peterson

I'm a GC and have a cash partner that I've been working with on a couple deals. Typical split is 50/50 if they provide all funds or 65/35 (65 to me) if costs are split. Keep in mind I bill at cost with no markup for my time as a GC. You must build a solid relationship and be able to trust your contractor in order for this to work. We have a separate JV agreement stating terms and that they are only cash investors and do not make any decisions in regards to rehabbing or sales price. Both are companies are on deed. I'd strongly recommend hiring them first as strictly a contractor and seeing how things go before being tied to them.

@Dane Peterson I’d never take any of your scenario, what you do is only put up a loan and very little exposure than my rehab money if I were the contractor. Rehab can go between 10-200k, and a loan can be as low as 20k and the property is yours. What if I expose 50k and it takes you a year with you exposed at 20k, and you decide that that since it has already been a year, you need to break even, or a 10k profit. So this case my 50k is tied up to gain 5k for one year? How will I eat? There are too many factors in being a partner, I’d say be a cash partner with fixed interest or them hired at a fixed rate. Keep em easy.

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