Rental Property Investor · Crown Point, IN · Member since 2019 · 16 posts · 5 votes
Had a meeting today with a broker/attorney and a general contractor for a house flip. The idea is for a 50/50 split on the net profits between myself(capital investor) and general contractor. I would pay acquisition and materials cost upfront, the broker/attorney finds and analyzes the deal (makes6-8%), contractor estimates all rehab costs & takes on labor risk but makes 50%. This setup is very hands off for me, but I take a majority financial risk and lose a large profit margin due to the contracting partner’s share. I agree with a win-win scenario for all parties.
Can anyone provide me with insights into the following: 1. Is a legal structure required and if so which is the best for this partnership? 2. Is this generally a good arrangement considering I have zero real estate investing experience (been educating myself through BiggerPockets materials)? 3. Any pitfalls or major concerns you can share would be extremely valuable.
Lastly, the broker is recommending a minimum cash on hand amount of $150,000.
Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
7y
Hi Eric,
This deal does not sound great for you. The broker and contractor have zero risks. You also said you don't know them that well. What if the contractor doesn't complete the job? Now you gotta go find the people to finish it. What if the quality sucks? I am sure he is not going to do all the work himself and will need to hire subs which you will have to pay for.
Just because a broker teaches at a school doesn't mean he can find deals that are ready to be flipped. The reality is if he really knew what he was doing he would be doing it or have done it. Does he have deals he completed? What proof of concept does he have?
For all the risk you are taking and sharing the profits with others you be better off finding an experienced team and being the money guy for that.
Rental Property Investor · Crown Point, IN · Member since 2019 · 16 posts · 5 votes
7y
Thanks Lexi! I do not know these people well. The broker was also a realty school instructor and the contractor is his realty student. I am the odd man out in a way. I performed a background check on the contractor. As a non-experienced first-time investor, I am not sure how else to experience rehabbing first hand.
Rental Property Investor · Austin, TX · Member since 2019 · 19 posts · 4 votes
7y
Hey @Eric Clement, I'll be interested to hear how you end up handling the legal structure, as I'm considering a similar 50/50 split on some deals myself. If you remember, come back here and update us once you've got it figured out!
Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
7y
There are many of us on BP that have flipped houses for a decade or more and my guess is none of us have done a deal like this nor would we.
First off..will anyone but you be contributing if the “deal “ turns out to lose money?
- Hopefully if you do choose this route, you will create a lien on the property and be paid first
- The Broker can easily be paid 3% on the buy and get the listiton the sale. No way should they make more than that
- How will you force any timeline restrictions on the GC ? What is another job presents itself and it pays $$ Now? Which job do you think would get priority?
Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
7y
Hi Eric,
This deal does not sound great for you. The broker and contractor have zero risks. You also said you don't know them that well. What if the contractor doesn't complete the job? Now you gotta go find the people to finish it. What if the quality sucks? I am sure he is not going to do all the work himself and will need to hire subs which you will have to pay for.
Just because a broker teaches at a school doesn't mean he can find deals that are ready to be flipped. The reality is if he really knew what he was doing he would be doing it or have done it. Does he have deals he completed? What proof of concept does he have?
For all the risk you are taking and sharing the profits with others you be better off finding an experienced team and being the money guy for that.
Lender · Chicago, IL · Member since 2018 · 352 posts · 147 votes
7y
@Eric Clement I would do a renovation loan with FannieMae HomeStyle which allows investment properties, 1 unit; its only 15% downpayment and this way you don’t split anything with the GC, you just hire a GC. Example you find a $150k that needs $75k in repairs, purchase price becomes $225k, it needs $33k in downpayment, build 3% in seller credits to cover closings costs and money are disbursed directly to the GC, 50% of the material costs at closing and the rest in 3-4 draws. Best part is that you don’t need to make mortgage payments during reno, you can roll up to 6 months into the loan. You can sell or refi after reno
Property Manager · Centennial, CO · Member since 2019 · 95 posts · 63 votes
7y
So in essence, you're covering everything but the labor? Since you'll be covering the material cost on top of the purchase, this doesn't sound like a fair deal to you. If the GC wants a 50/50 split of the profit, then s/he can cover the material cost. The problem then may be will the GC install the material/finishes you want to flip this for top dollar? Also, you need to negotiate better terms with the broker. Going in on the buy side is a set commission from the listing agent, but you're giving the broker a sale on the back-end and there's no reason to pay a full commission on the sale. If this broker/attorney wants to make more, then s/he can buy the home and wholesale it, but since that's not the situation this broker/attorney is just looking to make $$ off of you without taking any risk. Minimal risk should = minimal reward. This current set-up just doesn't seem like a good deal for you. Negotiate different terms with the broker and GC. And if you have the funds to pay the labor, find a different GC.
If you were to do something like this, you absolutely need an agreement between all the parties. But a few thoughts:
I don't know whether you are using this attorney as your own lawyer, but I would never have considered this kind of arrangement as a lawyer during my practicing days. It's a crazy path to go down for an attorney due to the ethical rules.
You also have to be very careful about the contractor claiming that they will cover "labor" costs. Many smaller contractors are often barely floating by. It's already difficult when your contractor fails to pay their employees or their subs. Adding this 50/50 split to it can make it worse.
There could be some interesting tax and legal consequences as a well depending on how exactly this is set up. But that's a more complex topic.
Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.
Investor · Chicago, IL · Member since 2015 · 138 posts · 54 votes
7y
@Eric Clement My husband and I are experienced flippers. Have done 15 flips and 3 new construction homes. I live in NWI and Chicago. I just completed a new construction in Portage, Indiana. PM me and I will have my husband reach out to you to offer you some assistance.
Phoenix, AZ · Member since 2019 · 2 posts · 1 vote
7y
@Eric Clement
I would say if you trust the contractor and know his quality of work VERY well, then it could be a great partnership for both parties. I’ve known a couple of different people who have participated in this exact situation and it worked out flawlessly...
That being said, there’s a lot of terrible contractors out there who do very poor quality of work and just don’t know what the heck they are doing. You have the most to lose here and there’s no guarantee he will even finish the projects, which leaves your assets vulnerable. If you don’t 100% trust this guy and know his quality of work is 100% quality, I would say no.
Rental Property Investor · Honolulu, HI · Member since 2018 · 335 posts · 251 votes
7y
Like others have pointing out, there are HUGE risks involved. It all comes down to how well you trust the broker and contractor. You probably want to ask what kind of track record they have and actually call previous people they have worked with or done deals with. My advice would be to hold off on this for now - you can always circle back with them later. I've known people who have done this type of deal successfully, but it was always among friends who already had a long established relationship.
Rental Property Investor · Crown Point, IN · Member since 2019 · 16 posts · 5 votes
7y
@Marcin Nurek
I decided not to pursue the arrangement. After collecting everyone's advice, it became apparent that I had not collected enough information about the potential partners involved. The local REIA appears to be a good place for me to screen local contractors.