partnering with a GC

12 Replies

I am an interior designer who has had the opportunity to work with a sub contractor on 4 consecutive remodels for various clients. Recently this sub approached me to see if I would be interested in flipping homes with him. We have a decent track record and the homes that we have worked on together have turned out beautifully. He is a master carpenter that fully understands the construction process. We work really well together and he shares my desire for perfection. He is trying to branch out and take on the role of GC. He has a very good rapport with the other sub contractors and is a really hard worker. He does not have the money to put down on a flip but I do. What do you think would be a fair opportunity for us both? I will purchase the home and material. I will also develop the design concept and provide drawings and he will manage the labor and trades. I welcome all and any feedback. Thank you so very much- Sharon 

Hi @Sharon S. ,welcome to the Biggerpockets forums!  This is an exciting tag-team you've got going on here! 

There is a similar duo in my market that I've gotten to work alongside a few times and the arrangement I see with them is that the GC does everything at cost and the partners share the profits (50/50 for them, but whatever makes sense for you guys consider risk exposure and buy-in).

A word of caution . . . as I'm sure you know trim carpentry (and any subcontracting trade) IS NOT general contracting and effective labor management.  There almost certainly will be a learning curve here as he steps into the GC role.  Find and maintain healthy habits of communication so that you can both navigate that growth curve well, and let that be a boon to your relationship and not a bust.

Hi Will- Thank you for your input and responding to my post. Really good advice and something that I also feel is very important. As you you know yourself developing and enforcing good habits of communication as you wrote are going to be essential to your success. Have you yourself been involved with similar projects as a RE Broker? 

Regarding this new partnership If I am understanding you correctly your opinion is that even though the GC is not investing capital it is not unreasonable that he/she be entitled to a 50/50 split? 

I had similar reservations that my sub has not officially managed and quarterbacked the job as the GC. I will add that I have worked alongside him for other clients since 2015 and I am very impressed with how vast his knowledge is about the construction process, his attention to detail, his professionalism in dealing with me, his thick skin, network of trades and ambition. For those reasons I am very enthusiastic about this opportunity.

Thank you again,

Sharon

Hi Sharon, I have a client that is a GC and has a similar arrangement with an investor and their split is 50/50. However, the GC identifies the opportunity and pays for all material. The investor only provides the financing. This seems like a more fair arrangement to command a 50/50 split because my client, the GC, is financially invested and did the heavy lifting of identifying the opportunity while the investor incurs the big financial risk. 

In your case, if you identify the opportunity, do all the design, and finance everything. It seems like you are disproportionately exposed to financial risk and effort for a 50/50 split. If a deal goes sour, your GC doesn't have much to lose if he chooses to just walk away. Perhaps, if your GC is the one identifying the opportunity that may change the balance of things. 

I don't mean to step on any toes, just providing some food for thought. Hope this helps!

Here is why I believe these types of partnerships are not a good idea:

-Believe it or not, sometimes flips lose money.  When the deal heads south you are going to be the one holding the bad.  ie Splitting the profits but taking 100% of the losses.  You are the one taking 100% of the tangible risk

-Most GC cannot afford to wait a few months to collect.  Their subs are not going to want to wait to get paid. 

-Goes with above.  What do you think will happen if the GC gets another big project while working on the flip.  The big project will be paying while the flip will not.  Your project gets moved to the back burner

I agree. I have seen it time and time again. The GC is not going to pass up starting a new job while they are finishing up yours. That is why I think it's important to incentivize the GC and partner with him/her to get in and out quickly. 

I am not endorsing a 50/50 split because I dont see that been equitable. Perhaps an 80/20 split and the GC provides labor at cost. 

Nothing comes easy especially dealing with construction but this has been a dream of mine for sone time now. 

Thank you again for your input.

Sharon

The designer always loses in those type of arrangements when things go sour unless it is very well managed from day one. The moment you take your eyes off the ball you and your reputation are at risk.

I feel Will Fraser made an important observation. There is a very big difference in being a subcontractor and being the General Contractor. Not saying he does not have the capacity to be a good GC and manage a project but there may be a learning curve. 

I used to see zero positives in partnering with a GC. A friend of mine recently started partnering with GC's and it has allowed him to attract much higher quality contractors to work with vs hiring them out. The reasons are obvious but it has made the rehab process completely stress free for him.

@Sharon S.

I think its covered here and its been discussed on BP before, but I just want to add my two cents..  One major sticking point is who is carrying all the risk?  Everybody always talks about splitting the profits, but never about the losses.  Its the investors who lose if the project goes sour.  So, if your friend is going to invest with you, that means he needs to take a share of the losses as well.  That could mean he doesn't get paid for his work or has to cover the expenses for subs.  Its not fair to the "investor" if "we split the profits" but the "investor" takes all the losses.

Since you say your friend doesn't have any money to put up, you may need to come up with some sort of graduated return.  Or, if he is very open about his costs, then his labor is his investment.  But, he has to be ready to work for "free" if the deal goes sour.

I hope that helps.  Good luck.

The idea of partnering with a GC seems very attractive. The lure of getting great work done at "cost" seems great. But it is often very messy in the implementation from what I can tell.

The big question (and I bet I know the answer) is whether he is "contributing" the costs of the renovation out of his pocket. In other words, is he buying material and hiring labor and charging you/the partnership nothing? If so that is good for a few reasons. #1 he has skin in the game. Since you are contributing purchase price, if he contributes rehab price this lends itself to a real 50/50 partnership. #2. His incentives are in the right place to manage the budget and process well, because it is out of his pocket.

However, likely he doesn't have the funds to bankroll the rehab and he will want you to pay as you go. If that is the case, you need to ask yourself some questions. Where is his incentive to keep costs low? If he pads the rehab bill, that goes fully in his pocket and comes half out of yours.  If he is not finding the property and not funding and not designing, what is he bringing to the partnership? Only GC skills. You can get GC skills by hiring a GC. Which costs 10%. Is there value to having a "trusted" GC who really cares about the project? Yes. So maybe another 5-10%. But also, you can theoretically develop a trusted relationship with any GC without making him your partner.

Originally posted by @Sharon S. :

Hi Christopher B- Did the GC that partnered with your friend have skin in the game or did they do the work at cost? 

What was their profit split? 

Thank you- Sharon


 He does pay for everything. However, they fund the costs upfront and then get reimbursed when draws are made. So they do have to use their cash/credit to float the project between draws. Currently he does a 50/50 split but is looking at changing this structure more in his favor since he is taking all the financial risk. 

I agree with some of the posts after mine as well. You want the GC to have some skin in the game. How my friend has it setup is the bare minimum,  preferably they're covering the rehab cost or at least putting in $X of cash towards it so they have something to lose. 

I've seen things play out when the GC doesn't have skin in the game. They'll take on other projects in addition to yours and because their money is in those others they will give them more attention. Your project will drag and drag, losing money and precious time. It can work but it's a tough balance.