First time partnering into a deal

11 Replies

Hey all,

Long story short, after some extensive networking I finally found an experienced investor in my area of 15 years willing to partner with me, a new investor. He will walk me through the house-flipping process with a current deal that he's working on that's local to me. We will be seeing the property tomorrow (ARV ~$700k, all-in $600k) and he is promising a decent percentage of return if I fund part of the project. Afterwords once my prove my commitment, he will show me the ropes and will have access to partner up with his other projects.

We will be going over the paperwork tomorrow at his brokerage office and I want to know if there is anything I should watch out for. He has proven his portfolio to me but I just want to be careful. Would I need to call an attorney to take a look at the partnership contract to be safe?

Thanks for reading! Any advice would be extremely helpful.

@Jobee Vincent Buenaventura yes you definitely want an attorney to look over the paperwork. How much money are you putting in the deal? How is the commission handled? 

This deal is a bit thin for the price point. All in for $600k should have at least $150-$200k upside potential not $100k

How are the comps at that price point on your area? Are houses selling fast at that price?

Definitely check the DOM for listings at that price point.

In most markets the higher the ARV the longer it takes to sell.

You'll want to account for that when underwriting the holding costs.

@Greg Dickerson

Thanks for the quick reply!

He is asking $60k worth of funds to complete the all-in acquisition and construction of $600k. I'm not sure how the commission would be handled nor do I know the process in detail. I will be partnering with him using my LLC.

The $700k ARV is a conservative number. It can potentially hike up to $800k once home buying season starts. It is a 4bd 3.5ba property and slightly larger houses in the same street that are 5 or 6bd went for $900-$1mil this year in the area when he showed me the comps.

In my area, if homes are priced fairly, they’re usually sold within a month, since it is near NYC.

As others pointed out, $600k all-in with an exit of $700k is an 85% deal which is not a deal at all. You need to be sure BEFORE you put $60k into anything, that your funds are protected by a decent enough spread and 15% is not enough. That barely covers holding costs and resale costs.

Yes, higher priced homes typically have smaller buyer pools but just like CA, our $700k value homes are equivalent to the rest of the country's $200k homes and NY and parts of NJ are similar. SO, is your $700k exit the worst case scenario with $750k the very likely minimum exit and $800k the better case scenario in your analysis? Who did this analysis of exit value - the experienced investor or you? Get help from a third party on this number as it is one of the most important numbers you need to know and lock in.

Lastly, don't do anything or give any funds without having a solid operating agreement or partnership agreement drafted and or reviewed by your real estate attorney.

@Will Barnard

As per the contract (which is currently being reviewed by a hired real estate attorney), I will only be assisting in funding the completion of construction of the project and nothing more than the agreed amount. The house’s exterior is already done; drywall plumbing, and wiring is all set up. The house just needs paint, flooring, fixtures, and appliances left. I know this because the experienced investor walked me through the property personally. I am not required to cover holding costs, insurances, closings costs, etc., as it will be covered by the other party. Only the $60k to help complete construction is required from me.

The ARVs I mentioned earlier had verbally come from the investor. And we passed by those houses as well. They were less than a block away and were very nice properties. However, I have asked a realtor friend to gather me comps for this particular area anyway. Pending results at this time. 

Originally posted by @Jobee Vincent Buenaventura :

@Brian Garrett

Thank you for that! That idea never even crossed my mind that the pool of potential buyers may be less since it is a more expensive home. I will take that into consideration.

Ok, you are putting 60K in on a 600K deal. But you don't say where the 540K is coming from. Him? Borrowed? It is a big difference. If he is leveraging your down payment to borrow the money.... first, you are going to have interest costs eating into that profit margin. Second, if you lose money, whose pocket is it coming out of? Don't just think about how the profits are split. If you are the only cash in the deal and it loses money, it's your cash. Think of the numbers if budget goes 10% over AND ARV is 10% under. That is pretty easy to happen. And commissions are a big expense. Find out what is happening there.

Prices in many parts of the country are beginning to fall. I don't know about Jersey. Some parts of Jersey, 700 is nothing and some parts it is expensive. But in most of my area, 700K is beginning to be upper end and is pretty slow there right now. There is a risk of the market changing at any point during a flip. If i could find someone to offload that risk on, then I would be more comfortable doing thin deals like this one. You might be that person who is accepting the risk.

 

Originally posted by @Jobee Vincent Buenaventura :

@Will Barnard

As per the contract (which is currently being reviewed by a hired real estate attorney), I will only be assisting in funding the completion of construction of the project and nothing more than the agreed amount. The house’s exterior is already done; drywall plumbing, and wiring is all set up. The house just needs paint, flooring, fixtures, and appliances left. I know this because the experienced investor walked me through the property personally. I am not required to cover holding costs, insurances, closings costs, etc., as it will be covered by the other party. Only the $60k to help complete construction is required from me.

The ARVs I mentioned earlier had verbally come from the investor. And we passed by those houses as well. They were less than a block away and were very nice properties. However, I have asked a realtor friend to gather me comps for this particular area anyway. Pending results at this time. 

My point is, cover all your bases. Looks like you have the attorney help on contract which is good, but there are other even more important factors here that your attorney is not capable of assisting with. Read Eric’s post right above, it makes excellent points of the risk factors that may exist in this deal which is why Eric and myself are questioning why this experienced investor needs you and how your funds will be protected, just trying to look out for you.

 

@Will Barnard
Yes, you and everyone's advice have been extremely supportive in helping me make the right decision and in making sure that I start off on the correct foot. I am grateful you all are taking your valuable time in helping the people of this forum, especially newer investors.

Moving forward, I plan to compile a list of questions to validate this joint venture and my protection in it when i finally sit down with the investor if everything checks out with the attorney. 

@Eric M.  And after reading Eric's advice on offloading risk, I actually thought of an idea: I currently have a pre-approval with a hard money lender for a flip deal which was approved for way more than $60k. I am thinking of explaining my situation to the lender and will see if I can use their cash instead. One concern I think may arise is if I use the hard money lender, will it cut into my profit of the deal than if I just used liquid cash? Probably right? But will that outweigh my risk of using the my own money?

Originally posted by @Jobee Vincent Buenaventura :

@Will Barnard
Yes, you and everyone's advice have been extremely supportive in helping me make the right decision and in making sure that I start off on the correct foot. I am grateful you all are taking your valuable time in helping the people of this forum, especially newer investors.

Moving forward, I plan to compile a list of questions to validate this joint venture and my protection in it when i finally sit down with the investor if everything checks out with the attorney. 

@Eric M.  And after reading Eric's advice on offloading risk, I actually thought of an idea: I currently have a pre-approval with a hard money lender for a flip deal which was approved for way more than $60k. I am thinking of explaining my situation to the lender and will see if I can use their cash instead. One concern I think may arise is if I use the hard money lender, will it cut into my profit of the deal than if I just used liquid cash? Probably right? But will that outweigh my risk of using the my own money?

Happy to help. As to your reply to Eric, I do see where you are going with your thinking but please keep in mind that it is not just the idea of avoiding or mitigating risk with your own capital, but of any capital you are responsible for and borrowed funds is not different to me then my own cash. As such, the numbers play a huge role in keeping you out of harms way.