How To Approach A Potential Partnership?

8 Replies

Hello! We’ve been approached by a potential partner for a flip we are considering. My wife and I are still relatively new to this business, and we want to make sure that we’re taking all of the necessary precautions to protect our best interests. We met this gentleman at a property auction. He invited us to come see his current project. I offered to wash and paint the exterior, and we came to an agreement on price. There was a bit of miscommunication along the way, but it was primarily due to technical difficulties - he is admittedly not good with computers. We have since been to a couple REI meetings that he has hosted. We have slightly different communication styles, but the guy has a construction background which could be extremely beneficial. Our knowledge of construction timelines and costs is limited. WHOA, thIs post got away from me. My question is, how do you determine whether a partner will be a good fit? Once you make that determination, how do you set up the contract(s)? He has suggested that if we buy the property, he will handle the renovations. Thanks BP!

Two big criteria for my partners:

1.  They have to have complimentary skills to me (in other words, skills I don't have);

2.  They have to have skills that I can't get from a contractor.

Sounds like this guy satisfies #1 for you, but if he's basically going to just be a contractor on the project, you can hire other contractors without having to give up equity.

Also, I'll *never* partner with a contractor, simply because it makes it very difficult to fire the person as a contractor if he's not doing a good job.  Given that there are a lot of bad contractors out there, you want the flexibility to fire someone if they aren't living up to their end of the deal -- that's tough with a partner.

@J Scott thanks for the reply. This gentlman is a fellow flipper who also happens to have a wealth of construction experience. He does really nice work based on what I’ve seen, but I do have some concerns similar to what you have expressed. As far as the location of the flip, contractors are pretty hard to come by in this area... so it might make sense to have a contractor who is invested in the flip as a partner. You’ve given me some great points to think about, much appreciated.

Asking for references. Interview them. Ask for credit reports.

If there is a flaw, stop right there.

Both sides need to put in their own money. If he invest 100% you are his contractor and vise versa.

Originally posted by @Stanford Neal Mead :
Hello!

We’ve been approached by a potential partner for a flip we are considering. My wife and I are still relatively new to this business, and we want to make sure that we’re taking all of the necessary precautions to protect our best interests.

We met this gentleman at a property auction. He invited us to come see his current project. I offered to wash and paint the exterior, and we came to an agreement on price. There was a bit of miscommunication along the way, but it was primarily due to technical difficulties - he is admittedly not good with computers.

We have since been to a couple REI meetings that he has hosted. We have slightly different communication styles, but the guy has a construction background which could be extremely beneficial. Our knowledge of construction timelines and costs is limited.

WHOA, thIs post got away from me. My question is, how do you determine whether a partner will be a good fit? Once you make that determination, how do you set up the contract(s)? He has suggested that if we buy the property, he will handle the renovations.

Thanks BP!

 If you are using "partner" generically, that's fine but I doubt you want to have a partnership. It rarely works out happily for both sides. It's better to do a  Joint Venture. Talk to an attorney about liability and asset protection.

@Stanford Neal Mead When I interview General Contractors, I always ask the following questions:

1. How many homes have you rehabbed and/ or renovated? What was the magnitude, of your projects?

2. How many projects is your company currently undertaking?

3. Do you work with Investors that need to adhere to strict timelines and scope of work?

4. Do you have multiple Sub Contractors, for similar trade skills, such as plumbers, electricians, flooring crews, painters, etc.?

5. Would you be willing to provide a copy of your GC License, your Certificate of General Liability Insurance, and your Certificate of Workman's Compensation Insurance?

6. Are you bonded?

NOTE: To be “bonded” means the Contractor must purchase a Surety Bond, which serves as a form of Insurance to protect the Contractor’s Customers if he or she fails to complete the job properly or fails to pay for permits, subcontractors, or other financial obligations.

7. Are all of your Sub Contractors Licensed and have Workman's Compensation Insurance? Would your Sub Contractors be willing to provide such information, or would you be willing to sign a waiver stating "All your Sub Contractors have Workman's Compensation Insurance?"

8. Do your Sub Contractors have the ability to verbally communicate, with English Language Only Speakers?

9. Do you pull all necessary permits?

10. Do you provide a written warranty, for all labor? If so, what is the length, of the warranty? (a minimum of 1 year)

11. Do you provide all applicable warranties, for materials?

12. Who is in charge of the job site, to ensure timelines are met and the Scope of Work is properly completed?

13. How do you handle dirty work such as debris disposal and clean up?

14. Would you be willing to receive four draw payments that would correspond to four phases of the rehab project?

15. Would you provide references, from past clients?

@Stanford Neal Mead Many Investors that flip homes use the 70% Rule that says 0.7 x ARV - Repairs = Your Maximum Allowable Offer (MAO). What hurts Investors that use this formula is it does not account for Holding Costs, Backend Selling Costs, etc.

I use the following formula to determine my Maximum Allowable Offer (MAO). This formula is the Profit Margin Formula that accounts, for 99.99%, of everything.

ARV - Desired Profit - Closing Costs to Buy - Repairs - 10% of Repairs - Holdings Costs - Concessions - Realtor Fees - Closing Costs to Sell = Your Offer (MAO or Maximum Allowable Offer).

ARV: After repaired value or what you think it will sell for once repaired.

Desired Profit: This should be taken off the top first. Most people run their numbers to determine what their profit should be. That is backwards, you should use your profit to determine what your offer should be. As a General Rule, my Desired Profit is $20,000 or 20% of ARV whichever is greater. To have an offer accepted, one may need to adjust their Desired Profit; however, it should not be below $20,000, or what one feels is acceptable.

Closing Costs to Buy: What is it going to cost you to buy the property? If you are using hard money you need to budget for the points and fees as well as traditional third party closing fees.

Repairs: The money it is going to take you to rehab the property plus an extra 10% of estimated repair costs to account for unexpected repairs.

Holdings Costs: Here is where a lot of investors get tripped up. Start by determining an amount of time that you will hold the property, probably 4-6 months. Then add ALL costs related to holding the property (utility costs, property insurance premiums, property taxes, loan payments, HOA Fees, etc.).

Concessions: Concessions are what you give back to the buyer at closing. It could be for closing costs, unfinished repairs or something else. I typically subtract 3%, of the ARV.

Realtor Fees: What is the commission you are willing to pay your listing agent (unless you are the listing agent) and the buyer's agent. Utilize 6% of ARV.

Closing Costs to Sell: Title fees and other closing costs. You can budget around 4% of the sale price to cover these.

This is a conservative formula. If you come out ahead without Buyer Concessions, on budget, etc., this puts more money in your pocket, when you close at selling.