Partenering agreement for fix and flip

5 Replies

Hello,

I am based out of Chicago.  Was hoping to get a few thoughts on what would be a fair agreement for a possible deal with a partner.  We'e already began discussing and seems like it will be happening soon.  The plan would be to do a fix and flip within 6 months (hopefuly less but worst case 8months).  The following would be what each person brings to the table.  The deal will be based off the assumption that we would have the following figures

Purchase price $175K

Rehab Costs $60K

Sell Price $300K

Estimated Total Profit (after all expenses including selling costs) $25K-30K

The goal of this partnership would be to allow partner 1 to build capital for future flip and flips and start their LLC after this deal. For partner 2, they want to buy a home soon, but do not have money for the down payment, this deal will help them earn $ to use for a down payment on a home after this deal is complete.

Partner 1: 

  • Will utilize a HELOC loan to cover down payment, holding costs(utilities), rehab costs(estimating $60K-rehab) (estimated total HELOC of $80K-100K, but will have access to about $125K)
  • Will manage the overall project and obtain and manage the contractors and RE agents
  • If necessary will also cover mortgage and escrow payments- also holding costs

Partner 2:

  • Will obtain loan from bank to purchase home- (can obtain a low down payment 5%, no PMI,)
  • Will pay bank mortgage loan monthly payments (estimated $7K total)

Hope this is enough info to get the basic idea, otherwise please ask to help fill in the blanks of anything I may be missing.  

What would you think would be a good/fair way to split the profits?

This is a great partnership! I would say that is a even split 50/50

Equal risk equal stake equal profit

I am also looking for the same.

Partner 1: cover purchase of home plus holding costs.

Partner 2: find deal and complete rehab.

Also Split 50/50

I want you to look at this really carefully.

Initial Cost: 175k

Estimated Renovation Cost: 60k

ARV: 300k

REA Fee: 10% (30k)

Estimated Net Cash flow: 25-30k (6 month time frame, ideal)

So we begin.

Off the start, you expect a 235k cost, just to get the project done. What you dont project for is the usual 10-15% additional unexpected costs, or another 30-45k in additional costs. (which is more than your expected profits)

You seem to have a 10% fee or something, which is out of this world, missing from the fray, stated under "expenses and selling costs"?.

You are selling above the average american median home value.

Source:

http://www.huffingtonpost.com/2014/03/13/median-ho...

You have it priced above what the average american can afford.

Source:

http://www.fool.com/investing/general/2015/03/23/h...

You are selling in a buyers market at the moment.

Source: pretty much any financial RE site on the planet. 

Your breakdown of your profits are this:

30k (Ideal) / 6 months (Ideal) / 2 (current situation) = 2500/ month. Minus the mortgage for the one guy, cause hes forking out 7k, or in other words, 8000 / 6, which is roughly 1335/ month.

Divide your values by 160, for standard work hours, and you get 15.63 and 8.35 respectively.


In other words, less per hour than your drywall hanger or painter are making.


And thats all assuming you have ABSOLUTELY NO unpredicted costs. 

Take that 235k, and put it into an MFU with an already established portfolio, or a portfolio of preestablished SFRs.

Trust me, youll thank me later.

Originally posted by @Alexander Chavez :

What would you think would be a good/fair way to split the profits?

In your example partner 2 will be liable for the mortgage & payments on the property.  If partner 1 reneges on his obligation partner 2 will still have the liability.  In a scenario like this, my opinion is partner 2 should receive a higher % of the profits since partner 2's credit will be @ risk.  

@Logan Hicks

and all BP members who wish to join on this discussion

Thanks for the feedback.  This was more of a general example to get an idea what the best split would be for each partner.  However, if you don't mind I would like to discuss and analyze the numbers, here is how I ran my numbers. (based off 6 months)

Escrow =$3k ($5k tax/yr and $1100/yr for insurance)----partner 1 pays

Utilities= $1,100 ---- partner 1 pays

Mortgage = $5100 ($850/mth) --- This is the only payment partner 2 will be making---

5% down payment = $8750---partner 1 pays

Interest only payment on HELOC = $230/mth = $1400 total---partner 1 pays

Purchase  costs- I estimated $5K for this, which in a lot of cases can be covered by the seller. (this will cover any buying REA fee and closing costs, am i misinformed on this cost?)

Selling costs- I have asked around and have been told to calculate 6% of the sell price for this, at least in Chicago (anyone care to provide some feedback on this? is this correct or maybe I was misinformed?) so 6% of $300K = $18K, then i added another $5k just for fluff(for the overall project) so have a total of $23K----partner 1 pays

Rehab costs- I originally planned to estimate $50K, but decided to add another 20% to this for unexpected repairs that can occur. total = $60K---partner 1 pays

With a purchase price of $175K and a sell price of $300K it will leave me with a profit of about $27K to be split between the two partners (whatever the agreement ends up being)

As far as your statement that $300K is asking too much, I would have to disagree. At least for my target areas in Chicago (Avondale, Logan Square, kilbourn park, portage park, cragin, and belmont craigin neighborhoods). This ARV for the areas I am planning on focusing on I believe are realistic (anyone wish to confirm/refute?). Depending on which neighborhood the property is in it can even sell for $350K or $325K but i decided to low ball it and say $300K for now. I am not a REA but have concluded this from my research and asking around.

This is also dependent on what type of property it is. I will only look at a place with the following minimum requirements 1200sqft and at least 3bd/2bth. This can allow me to obtain either a SFH or a two-flat (chicago term for a two unit multi family home). However, in order to acquire the property for the price of around $175K it will most likely need to be a distressed property(might even be able to find a plae for around $150K). The trick is going to be to find one that is not too distressed that a bank will still allow us(partner 2) to take out a loan on it and not have to pay cash for it.

Now, I have a few questions in regards to the profit split.  So far on this post many think a 50/50 split seems fair.  I would like to understand why they believe that?  I personally think partner 1 has more in the deal.

Partner 1 will be putting in 94% of the costs in actual cash and managing the project.

Partner 2 will be obtaining a loan to acquire the property and only need to pay the mortgage payment ($850/mth) until the project is complete.