Deal Pending: Joint Venture Structure: Advice Needed

4 Replies

Hello BP!

I am working on getting a property under contract that I plan to wholesale. I have finance and some real estate investing experience, but no construction or GC experience.

In the process, I met a General Contractor in my area that is looking for a JV partner to do a fix and flip with. I did some checking and he has 20 years of experience, a website with lots of good testimonials, BBB A+ rating, and Home Advisor screened and approved. He says he has 3-5 crews at any given time working that business, but wants to start doing fix and flips for himself instead of just renovations for homeowners.

He proposed a 50/50 profit split, my question is how are these normally structured? 

He is interested in doing a JV in which he would act as the GC and manage the renovations. I would find the deal, put up the capital required by one our hard money lenders, and line up the financing and sale of the property. He proposes we would split the profits 50/50.

My first observation was in the project he submitted to me that there was a repair budget, but no consideration for the settlement costs x2, holding costs, financing costs, etc. So we would need to go over the numbers in detail before proceeding. Likewise, he may think my rehab budget is not accurate so I am sure our estimates would be better together.

For the deal I am working, our numbers are:

My question is, how are these JV's normally structured?

In the scenario above, I would put up the $29,000 in capital. The rest of the purchase and reno cost would come from a hard money lender.

To me, profit would be defined as anything leftover from our sale after the hard money loan is repaid and I get my $29,000 dollars back. Then whatever is left over would be split. Does this make sense?

Then if we lose money on the deal, at a minimum, I think we should split 50/50, but that also means I lost $29K.

What are some other ways that you have used to make this work? I think we both will do better with each other's strengths at play, but I want to make sure the JV is structured in a way that is equitable based on capital and work we each put into the deal and I get some benefit for taking most of the risk.

Thanks in advance.

You'll definitely want to purchase/rehab properties with a buffer of at least 15% built in for contingencies. Because stuff happens as we all know. For example, if the home is appraised at $100k, you'll want to keep your total investment, including labor, closing costs, below $85k. Look at the comps in the neighborhood if you don't want to pay for the appraisal yet. 

Personally, I would add another 15% to his estimates as a margin of error as well. Should help you avoid some predictable issues... like being upside down on the deal when it's ready for sale. If all goes well and within budget... you'll have extra cash to play with on the next deal.

Hope that helped...

N

Most of what I do in real estate is through partnerships.  Profit is exactly what you mentioned, and it should account for all costs.  What I do is keep track of the flip through QuickBooks (but you can use an Excel spreadsheet), and then present the final numbers to your partner at the end for the split.  The profit isn't simply what's returned from escrow, and you're going to have to be able to explain that.

What's even more unclear, especially with GC partnerships, is the rehab cost.  Is the GC giving you a bid at his cost?  Is he still charging you for his time?  Is he funding the rehab, or are you taking care of that?  Keep in mind that rehab loans are reimbursements based on progress, so who's going to front the initial rehab?

I'd also argue that you should be getting a greater share if you are finding the deal as well. Maybe a 60/40 structure. And if it's a true JV, he should lose some money too if the deal goes south. Maybe you don't make that final GC payment or something; that's one way to do it.

Thank you for the great advice. We are going to meet at the property today to go over the scope of repairs together and discuss our JV arrangement. Then it is just waiting to find out if the bank will accept our offer.

Is your partner being paid as a GC, or is he not making any money until the home sells? Are his crews, ones that work for his company, or does he sub everything out? If they work for his company, and they charge their rate for the rehab work, I assume he has his profit built into that price? Will he remove this profit and only charge your project materials, labor and overhead, and only take profit out of the back end? I would just make sure the deal doesn't work that he charges his standard rate, and then after the house sells he gets 50% of the profit. If that is his plan, no wonder why he wants a JV flip... he will make what he would working for someone else, and then get money on top of it!