Originally posted by Will Barnard:
Some great thoughts above, I am going to take devils advocate position here. I am not a fan of partnering with the GC and here is why: What incentive does he have to keep the rehab costs down? If he has the cost of one item at $1000 when it could have been $600, he pockets $400, then only splits the balance cost of $600, thus his cost from his profit share reduced by $300, yet he pocketed $400, creating a net gain for himself.
Secondly, if a GC is going to be a partner, he better be bringing more than a construction team at " cost" to the table and should be bringing cash or rehab and acquisition.
I personally would rather JV with another investor who was a money partner so that we both have same goals and incentives to keep costs down, liquidation quick, rehab quick, etc.
Just my .02 cents.
Will, I see where you're coming from, but I could only agree with your scenario if trustworthy contractors didnt exist. They DO exist. And I would think that by the time a decision is made to partner, a level of trust has already been established. If the GC signs the agreement stating he will bring materials in at his cost, whether that be at wholesale or retail, he should be trusted to do so.
These are details to work out, but if an investor has an established pipeline to plug properties into, I guess he wouldnt look to partner with a GC in the first place. Consider a scenario from the GC's perspective...
...The GC can save a crapload of money on materials and says that because of the high cost of the money the investor brings to the deal, he thinks it fair to charge the rehab retail for his materials. If he floats both labor and materials at cost, and then the investor cant move the property untill 180 days past projection, what then.
Ideally, we would all approach our business dealings from a position of strength. A GC worth his weight looks to do the same. The challeng, once a relationship based on mutual respect and trust is formed, is in crafting an agreement that covers any and every eventuality and reflects the true picture of their strengths and what each brings to the table.
I guess the bottom line for me is that if you cant trust those you need to run and grow your business, you resign yourself to flying solo, putting a whole lot of energy into babysitting, and only grow your business at a rate you can manage thru your own resources.