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

[Dane Peterson]

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?

[J Scott]

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.