Profit split question

5 Replies

My husband, who is a contractor, and I have been rehabbing and flipping homes for years. A neighbor has approached us and would like to partner with us to get his home sold. He wants us to do the rehab, all costs would be on US for said rehab, and then splitting profits at the end. I have never structured a deal this way before as we are normally buying outright. 

We will be doing all design, rehab, and marketing after the fact as the owner lives several hours away. Is there some kind of guideline for how much our split should be?

Thanks for any and all input.

@Theresa Allison  By "profits" do you mean the excess of the proceeds over the mortgage (if any), rehab costs, and holding costs?

I don’t have any opinion on the split, but basically you’re giving them a loan for $xxK for materials and labor.

What happens if they don’t sell the house? What happens if they get less than expected?

I’d consider writing it up like a normal construction contract, with a 6-month due date or something similar. That way you’re not out the money if something unexpected happens. Though your normal recourse of putting a lien on the house may not work out if the house has already sold and you didn’t get paid...

Hi Logan, yes, that's what I mean by profit.

Can you run through a rough outline of the numbers? What is the value of the house if they tried to sell it today? How much would you put in it and what is the ARV? What is their mortgage balance? I assume if they want to do this they do not have much equity in the house, because they are effectively splitting their equity with you and unless you are able to force a lot of appreciation I am a struggling with how they would be better off.

As far as protecting yourself, I would be a little leery and cautious without knowing the neighbor and their philosophy about money. 2 good people and have an ugly disagreement because they view the value of money differently. 

Make sure you are on the same page and write out eaxctly how “profits” would be defined and split. 

As a flipper your goal is typically to optimize profit on as short of a timeline as possible. A homeowners typical motivation is to list it as high as possible and wait for the best profit possible. Who is going to decide the sells price? Who decides whether or not you take a contract? What happens if you disagree? 

Are they financially stable? What happens if they stop paying the mortgage and get foreclosed on? 

The house is paid off. As their Grandfather built it, it has a very strange configuration which isn't marketable but it's sentimental to them. They haven't even been able to rent it because of its issues.  

They could sell as a total gut at $235k but that runs the risk of being a total tear down which would upset the kids/grandkids. 

We can move a few walls and update quite easily in the 30k range.  It's a mid century Spanish style ranch, good bones, just VERY unfortunate layout issues and no updating since it was built. 

They have no money to do the updating themselves. ARV quick sale price $399k.

What's in it for them is a higher sales price and the knowledge that their family home will remain standing. They offered to split profit over and above the $235 plus the cost of the reno. As this is the first time we've partnered in this way, I'm trying to figure out what an equitable split would be as we are doing the reno and all marketing/showing of the property.

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