Partnering with contractor - how to split profits?

4 Replies

So I know this contractor who has done a few jobs for me at my own home.  He does high-quality work and is trustworthy.  During the most recent time he was at my house, I asked him if he ever does any flipping.  He said yes, he does and in fact has a few prospective deals coming his way.  I mentioned that I have some capital that I'd like to put to use and we should talk about partnering.  He agreed but since he was busy on the job we didn't really have time to discuss it further.

So of course, one option would be for me to just be his private money guy and structure it as a debt deal, but I'd really rather get a little more skin in the game and partner with him.  My question is, how would we divide the profits?  My first thought is that we'd split them after his expenses, proportional to the amount we each had in the deal.  For example, say we bought a property for $200k, $150k of it mine and $50k of it his.  Then he rehabs the property at a cost of $50k, and we sell it for $400k.  He takes his $50k rehab cost, then the $150k profit is split $112.5k to me and $37.5k to him.

I realize that this requires me to have a certain degree of trust in him to not inflate his costs but I am willing to take that chance.  He is really a nice guy and I don't think he would rip me off, and if he did, well, that would just be the last deal we did together.

Does this sound fair and reasonable?  Am I missing anything?  What about closing costs (e.g. realtor commissions)?  Should they be paid equally or proportionally?

Thanks for any input.

I have done twelve deals in california. All but two I structured 70% me and 30% of equity to contractor, he even put up money for materials etc. In other markets the contractor put up the materials for a new development deal I used a lender for the land, but the contractor paid for permits etc. We structured a 65% me 35% him on the back end. The profit was so huge we both were happy. Before long he told everybody he knew.

@Jim M. you'll likely get varying opinions, but let me share with you what I've done.  I partnered with a local GC with rehab knowledge and time.  I don't have time but I do have financial resources.  After some discussion, we decided to structure our partnership 50/50, because we each feel the other brings as much value to the table as we do ourselves.  Really, it just comes down to that... how much value do you each feel the other brings in relation to your own.  It's a negotiation for sure.

But let me go down a different path briefly. You alluded to the trust that must exist between partners. That is absolutely HUGE. Try to build in some sort of checks and balances that enable you to lead with trust but also have a way to verify. As time goes on and trust is reaffirmed, you might change things a bit.

Another absolutely critical ingredient is communication.  It's easy at first when everything is new and exciting.  But when you're in the trenches, and reality is clobbering you in the face, you MUST be able to get everything out on the table, discuss what's going on, and make hard decisions.

Trust but verify.  And communicate, communicate, communicate.  Nothing new here, just sharing some of the lessons I'm learning.

Best of luck,

Chris 

@Chris Jensen 

Well, here is the proposal he has come up with.  I put up 100% of the purchase money.  We're talking anywhere from $100k-350k although most likely toward the lower end to start.  He does the rehab and does not bother me for any more money to pay subcontractors, if any.  Then we split the profits 50/50.

This wasn't exactly what I had in mind at first (see OP).  I mean, if I were to buy a deal and then hire him to do the rehab, I'd get 100% of the profits.  So I'm not sure I agree that he's entitled to 50% of the profits when he's putting up no money (just sweat equity unless subs are involved).  

I think I will go along with it for a while, as a learning experience.  Once we've done a few deals together and I feel like I've learned all I can from him, I might ask for a 60/40 split next time unless he is putting some money into the purchase too.