My first house is under contract with the plan to fix and flip. I am the primary money investor, deal finder, deal analyser but also have a secondary money investor. We also have a construction manager who will be providing GC services free of charge for the actual rehab part of the job (our monetary investment to fund all construction costs, he will be providing general labor and management). So, I’m trying to come up with an equitable way to set up the partnership. My thought is to give the CM a set % off total profit and then primary and secondary investors get % of remaining profit based on total invested. For instance, a rudimentary example:
Total $$ Invested: $100,000
Primary Investment: $80,000
Secondary Investment: $20,000
Total Profit: $20,000
CM @ 10% Fee off top = $2,000
Remaining Profit: $18,000
Primary Investor @ 80% of remaining profit = $14,400
Secondary Investor @ 20% of remaining profit = $3,600
My only thought is that I, as the primary investor, have put in a ton of time finding the deal and financing it in my name. Do I take an extra percentage for that work or is that looked as being greedy/selfish? I want everyone to make money and desire to work with me again. Thoughts? How has the community structured similar deals?
First, your methodology above doesn't factor in the amount of time/effort you and your other money partner put into the job. If you get a percentage of the profits proportionate to your monetary contribution, what happens when one of you puts in a lot more hours than the other? That person will be getting less than they deserve.
For example, imagine if the GC walks away and you have to find another GC and then you have to start managing the job? That could end up being a full-time job.
Second, I don't understand how the GC is getting paid. Is the $2000 for his labor and management? Or just management? What happens if you don't make a profit -- does he get nothing for his time/effort, even if it's not his fault? Is $2000 enough money to keep him motivated if the job goes over schedule/budget?
What happens if the GC does a crappy job and has to be fired? Does he still get a percentage of the profits?
Who decides what fair market value of the renovations is if he's not giving you a bid and charging you?
There's a lot of details here that probably don't seem important right now (while you're optimistic that everything will go well); but if things go south, you're going to wish that you had worked out all the details before moving forward.
@J Scott , first of all, thank you for responding. I am almost finished with “The Book on Flipping Houses,” and have already referenced several times “The Book on Estimating Rehab Costs.” Both have been huge assets to me as I begin this journey. Also, I have greatly utilized the spreadsheets that came with the books!
Your questions are exactly what I need to make sure I consider. I agree with your first point as I have spent countless hours (in the evening after my day job) studying our market, looking up properties, visiting them, analyzing them, getting my finances in place, etc. I am the one taking the majority of the risk and putting in a ton of effort on the front end. I think that should be compensated.
The GC in this flip isn’t an actual GC, just someone I know who has GC experience who wants a side hustle and is willing to risk making $0 for his time and effort in managing the construction end. We all realize that this project could end up being a huge learning experience with little to no profit.
Maybe part of my question should be if there are some structures in place that folks have used (and we can make it easier with just one monetary investor) - whereby the investor is taking risk with $ and time put into the deal and the GC is taking risk by investing his time to the project for a % of the profit. How have these risks been quantified so we can put it down on paper before we get into the project. I realize part of this is subjective and has to be figured out between parties involved. Hoping there are some proven and already implemented structures out there. Does this make sense?
@Dan Buhr Pay investor $3,600, Pay CM $2,000, pay yourself the rest (whether income or loss). Pretty easy structure, no percentage needed and lawsuits fly with a 20k profit.
On CM, pay him per passed inspection / milestones, back-load his pay on finishing touches, i.e finishing / final punchlist completion 800, the 1,200 regular milestones.
You want a percent structure when it’s worth it, potential income 100k, personally i’d only do it if potential income is 250k and above.