Splitting profits with a contractor

14 Replies

Had the idea of purchasing a property that fits the bill for a flip, working with a reliable (previously used) contractor, letting them handle the renovation and then splitting the profits. The idea being that we can focus on the purchase and they can focus on the reno and everyone works on their specialties.

Anyone have a history of working a deal like this, and how did you structure the deal?

Thanks!

CB

@Christian Beyer

I am working a deal like that right now.  We are 50/50 partners and just took title to the property as Joint Tenants.  It is secured by a mortgage from our private lender in the amount of the purchase price plus rehab costs. 

We are good friends and work well together, so we haven't really had very much disagreement about any particulars.  We expect to sell it for a $60K+ profit and just split the money (or possibly put into the next flip if we are happy with the way the first deal works).

As far as liability, we just got a $1M homeowner's policy. Because the property is not occupied, it was a little pricey, but still cheaper and quicker than going through the LLC process. If we do more, we plan to set up a series LLC or Delaware Statutory Trust to hold the properties. We just wanted to get one under our belt to see if we like it.

I plan to start a post outlining our process so others can see - and learn from - our mistakes, LOL!

I would not consider doing this with most people, but this particular contractor is not only a very good friend and completely upright guy, he is also a very talented builder/contractor.

Thanks Brian, that's helpful. We are already organized as an LLC, and I had not thought about joint tenancy as an option for ownership. I'll consider that!

Originally posted by @Brian Tome :

@Christian Beyer

I am working a deal like that right now.  We are 50/50 partners and just took title to the property as Joint Tenants.  It is secured by a mortgage from our private lender in the amount of the purchase price plus rehab costs. 

We are good friends and work well together, so we haven't really had very much disagreement about any particulars.  We expect to sell it for a $60K+ profit and just split the money (or possibly put into the next flip if we are happy with the way the first deal works).

As far as liability, we just got a $1M homeowner's policy. Because the property is not occupied, it was a little pricey, but still cheaper and quicker than going through the LLC process. If we do more, we plan to set up a series LLC or Delaware Statutory Trust to hold the properties. We just wanted to get one under our belt to see if we like it.

I plan to start a post outlining our process so others can see - and learn from - our mistakes, LOL!

I would not consider doing this with most people, but this particular contractor is not only a very good friend and completely upright guy, he is also a very talented builder/contractor.

 Wow a reliable and talented contractor.  Who knew they even existed!  

Originally posted by @Jeffrey Giffin :
Originally posted by @Brian Tome:

@Christian Beyer

I would not consider doing this with most people, but this particular contractor is not only a very good friend and completely upright guy, he is also a very talented builder/contractor.

 Wow a reliable and talented contractor.  Who knew they even existed!  

He is the best Jeff!  I wouldn't work with anyone else if I had the opportunity to work with him.  His name is Joe Wey.

Originally posted by @Brian Tome :
Originally posted by @Jeffrey Giffin:
Originally posted by @Brian Tome:

@Christian Beyer

I would not consider doing this with most people, but this particular contractor is not only a very good friend and completely upright guy, he is also a very talented builder/contractor.

 Wow a reliable and talented contractor.  Who knew they even existed!  

He is the best Jeff!  I wouldn't work with anyone else if I had the opportunity to work with him.  His name is Joe Wey.

 Man I wish I knew about this before I hired my most recent contractors becuase they are the worst...ugh

Originally posted by @Christian Beyer :

... letting them handle the renovation and then splitting the profits. The idea being that we can focus on the purchase and they can focus on the reno and everyone works on their specialties.

Naturally I'm biased, but I couldn't agree more with this approach since it's near and dear to my heart.  And from my perspective, you're not splitting the profits with your contractor, you're splitting them with your partner!

Semantics perhaps, but if more investors started partnering with, instead of hiring contractors, I suspect that profits will rise and complaints will fall.  

Solid reliable contractors exist - they're in such demand though, they rarely need to seek work and get to cherry pick the jobs they want.  Not only are investors competing with others investors for the select few contractors available in a given area, they're competing with the retail consumer from whom they can command a higher margin.

It's a rare conversation I have with another investor that doesn't include me challenging them to answer the question: with the laws of supply and demand in play, and the shortage of high quality contractors, what do you have to offer a contractor to make sure that your project is their highest priority?

Paying them a fee, to perform a service, at a lower margin than they get elsewhere ain't it...

P.S. - Love the "previously used" reference - for those of us who have been in the construction industry for a long time, you can bet we've been used and abused!

Originally posted by @Michael Paris:
Originally posted by @Christian Beyer:

...Naturally I'm biased, but I couldn't agree more with this approach since it's near and dear to my heart.  And from my perspective, you're not splitting the profits with your contractor, you're splitting them with your partner!

For me the motivation was aligning my contractor's interests with mine.  The more money I make, the more money he makes, the quicker I get paid, the quicker he gets paid, etc.  Plus, I don't have to pay him up front and he doesn't have to worry about losing out on future work.  If he gets a job that makes him more money than our flip, he still has the same incentive to finish our job fast and will put some of his guys on it as overtime or hire another contractor to finish it.  Either way, he knows what it should cost and what is worth doing ourselves versus hiring someone else to do. 

I completely agree with you Michael.  It really is the best of both worlds, and I am not splitting a deal with a partner, I am sharing a deal with a guy who made it sweeter.  Without his expertise, it would be taking much longer and costing much more.

BTW - You can check out the progress of my first flip here.

I have been thinking about the same thing recently and would like to share my thoughts with BP and get comments.

First, I think no matter how you decide to share profit/loss; the most important thing is to make sure both my partner and I feel comfortable about the plan. If either party feels the plan is not fair and being taken advantage of, the partnership is not going to work.

Questions to ask to determine a fair split should include:

  • Where does the money come from? Are you using your own money or it’s financed with private money or hard money?
  • Is the contractor partner doing the work himself or he just manages sub-contractors.
  • Is the contractor partner’s labor included in the cost? In other words, does he get paid for his labor?
  • Who

I think the simpliest way is to treat the contractor partner’s labor as money he puts into the deal.

For example, if I put in 100k to purchase the deal, he put in 50k worth of material and another 50k worth of labor, then we each have 100k in the deal. Say the house is sold for 300k and all other costs (holding costs, selling costs etc.) are 40k, our profit is 60k. Each of us will get 30k profit. 

Originally posted by @Yinan Q. :

First, I think no matter how you decide to share profit/loss; the most important thing is to make sure both my partner and I feel comfortable about the plan. If either party feels the plan is not fair and being taken advantage of, the partnership is not going to work. 

 Agreed... resentment will most assuredly rear it's ugly head otherwise.

Originally posted by @Brian Tome :

For me the motivation was aligning my contractor's interests with mine.  The more money I make, the more money he makes, the quicker I get paid, the quicker he gets paid, etc.  Plus, I don't have to pay him up front and he doesn't have to worry about losing out on future work.  If he gets a job that makes him more money than our flip, he still has the same incentive to finish our job fast and will put some of his guys on it as overtime or hire another contractor to finish it.  Either way, he knows what it should cost and what is worth doing ourselves versus hiring someone else to do. 

I completely agree with you Michael.  It really is the best of both worlds, and I am not splitting a deal with a partner, I am sharing a deal with a guy who made it sweeter.  Without his expertise, it would be taking much longer and costing much more.

BTW - You can check out the progress of my first flip here.

Aligning interests, increase profits, managing cash flow, doing what needs doing in the best manner at that given point in time... approaching things from a business perspective... imagine that!  Sweeter indeed!  Best of luck to you, your partner and your disproportionate dormered cape project!

Interesting topic - we are going through this now and reving an agreement with a contractor we've worked with before. Lots of trust and everything, but still finding it easy only in theory.

Easy to establish the broad concept, difficult when trying to write a formal (read: legal) agreement.

Originally posted by @Justin R. :

Easy to establish the broad concept, difficult when trying to write a formal (read: legal) agreement.

Consider hiring a professional mediator (or the like) to hear out each of you to gather your wants, needs, hot buttons items, etc. (independently from each other of course) and have them prepare a draft agreement/outline summary that aims for common ground.  If you can find that common ground informally, then you each give it to your attorney and ask the two of them to hash out the leaglese.

An unbiased party may provide insights and suggestions that prove helpful... even if it's to say that they don't think the parties personalities/goals/objectives are well matched.

Hi @Christian Beyer

I guess I am the only one who disagrees. Contractors should be paid as soon as the work is done and they sign a lien release. This allows them to pay their people and move to the next property (for you or someone else). It is sort of like 5 friends running a bar. Unless one person is actually "In charge" it just causes problems. One person is "back end manager" and one is "front end manager" but they all report to the "General manager". There has to be one person who makes the decisions and has the most on the line.

With one person finding the property and securing it under financing and the other spending countless weeks/months repairing it and putting materials on net 30 accounts. Who decides that the price should be reduced? If your 100K money is on a 11% loan and his 100K is on 22% credit cards and employees wanting to get paid on Friday, he has more of an interest in a quick sale than you do. In my opinion contractors wanted to run a contracting business. That's why they got into roofing or kitchen remodel for, I am all for being a client to a good contractor. But their motivations are different (generally speaking of course) from an investor.

I would recommend getting everything on paper and wish you the best of luck!

Those are all good points, and I appreciate the contrarian view. I got the idea because our renovations went over on time, although the quality was excellent. They had to take on other jobs to supplement the job we had them on because the bank backed financing required progress reports and receipts that took time. They mentioned that if they knew that they were splitting profits that the job likely could have been completed in half the time. As angry as I originally was, it made sense.

I think that the best plan may be for my LLC to take ownership solely, and incur the cost of down payment and carrying costs (my investment). Then have the contractors tear in and put in the time and labor and materials for the flip (their investment). If they are trustworthy and share openly their costs we should be able to display our total costs at the end and distribute profits accordingly for an even split. Does this make sense to you guys?