Investor and spec home builder Partnership Structure?

Question

So I recently moved back home to start building a spec home on one of my 3 lots. My partner is my builder and I wanted advice on how to structure our splits and such. The only problem is that I had to open a bunch of accounts to help him start up. Also we agreed to split the house 50/50 but he also wants $3500 a month for a max of 4 months so $14000 total. I planned on continuing the partnership, but he is building a custom home on the side using my accounts to charge to. He pays them off with the custom home owners construction loan. He hasn't told me about me seeing any money from that and I don't know if I should.

Bottom line, I just threw out everything that is going on with my build and am searching for advice about all of it.

Logan Hicks · Answer

The deal isnt balanced well at all.

First of all, your credit, and therefore your over DTI, is tied up with those lines.You will find this to be an issue in the future once you start to grow into the MM range in value.

Secondly, you are incurring risk just by allowing access to those credit lines. Anytime there is risk, there should be profit. That is how money works. Risk > Profit > Reinvest > Repeat.

Next, You are paying him for financing him? Since when is that reasonable? His pay is the fact that he has the means to be able to do the jobs at all. Without the lines, he cant build. Period. Its by your grace that he makes 50%. He is just another GC in the ocean of GCs, and countless GCs would rise to take his place.

A job on the side? Say what? Why is he going outside of the partnership, while still using partnership resources, to do a non partnership resource? Think about that from an employment perspective.

An employee, is using company resources, at company cost, to do non company related work, and is financially benefitting from it. Regardless of the fact of whether or not he pays it off. Also, what happens if he doesnt sell? Then the lines are tied up, you are on the hook for them, and he cant finance them out. Again, Risk > Reward concept.

Lastly, Judging by the fact that you had to even open accounts in order for the guy to "start up" tells me he doesnt have that much experience in the GC arena.

Are you sure he is qualified to be doing your work for you? Any GC worth anything at least has a credit line at or contractor account at Home Depot or Lowes, as well as a lumber yard, if nothing else.

All in all, very concerning conditions.

A very trusting man is a lot like a gambler, and they lose for the same reasons.

Linda Shiro · Answer

This sounds like a mess.  I know a builder personally who received funding from a lady who owned a cleaning franchise.  The cost to build the home was $175,000, which those costs were spelled out in detail before she gave the money, and at the end they split the deasl 50/50.  They contracted for 3 homes, which were built in the same year.  She said it was the easiest $135,000 she ever made in her life because she didn't have to do a thing for it.

Mark Nolan · Answer

@Wyatt Johnson

Welcome to the Bigger Pockets community. It is a great place to learn about real estate.

Karen Margrave · Answer

@Wyatt Johnson  A 50/50 split with you paying him wages on top of that, PLUS letting him use your accounts seems to me like you should rethink the split.

How well do you know the contractor? Did you check references?

If I were you I would get control of those accounts, and not allow him to use them on other jobs. You have no idea whether or not he is within budget on those jobs, and if there's enough money in the construction accounts to get your accounts paid. You don't need him maxing out your accounts, then have no money left to pay off your accounts, and there's no room left for the materials you need for your job.  If you want to let him use your accounts, do some type of set up where you approve all purchases, etc., but get control.

What will the value of the house you are building be? What is the loan amount? I assume the construction loan is in your name too?

Keith Bloemendaal · Answer

I actually created a new entity with my investor, we each own 50%. I used my own credit to get the accounts going. Flat fee or cost plus is a good way to do it.

Jay Hinrichs · Answer

well how I handled this was pay a flat fee to builder.. and I allowed them to build their credit up using my credit to help them. .but of course watch it like a hawk in turn I got a pretty super deal on the GC fee... no way is it worth a profit split.. Of course depending on the house if your building just tract type 1500 to 3000 sq ft basic designs and not custom build jobs that take year.. the 14k is all I would personally pay

Investor and spec home builder Partnership Structure?

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