Partnering on a flip deal

19 Replies

Hello,

We need your help! Wehave been presented a deal for a property by a friend who wants to partner with us, he says he would pay 50% of the purchase price. We would pay the other 50% and also do the work for the rehab. None of us have partnered before, any suggestions on what a fair proposition would be in regards to how to split the profit. We would also ask him to pay 50% of the rehab cost. Thank you 

There's been many posts on this subject over the years, if you do a search, you'll find many answers. I will say, be sure everything is spelled out in writing and agreed to beforehand. Cover how all bills will be paid, who will pay them, who will work with and hire subs, what happens if something unexpected comes up. etc. Nothing ruins friendships faster than misunderstandings over money. 

First question, and only question, is why are you forming this partnership?

Hi Joe, well it was not planned he is our realtor and someone offered him this property that is not listed it came from another source so he asked us if we would be interested Anyway he doesn't have money to purchase by himself. We are newbies, we are working on our second flip so this would be our third deal.

Originally posted by @Diego Montoya :

Hi Joe, well it was not planned he is our realtor and someone offered him this property that is not listed it came from another source so he asked us if we would be interested Anyway he doesn't have money to purchase by himself. We are newbies, we are working on our second flip so this would be our third deal.

 Well, there are a lot of things that come to mind here.

A -  in regards to the "deal".  What makes it a "deal"?  What are the actual $###,###'s?

B -  in regards to partnerships.  There are three reasons, and ONLY three reasons to form a partnership:

1 - Your partner(s) will/can do something you "can't" do....as in fill a void.

2 - Your partner(s) will/can do something you "don't want to" do...if you don't want to do it, you won't do it well.

3 - Your partner(s) will/can do something you "shouldn't" do....just because you can do something, doesn't mean you should.

In this case, I don't see any answers to either "A" or "B"...yet.

@Diego Montoya I recommend you make it a full 50/50 and outsource the rehab so you are not actually doing the work yourself. 

That way everything is split down the middle and you guys can manage/oversee the rehab, and the realtor can manage / list the property. 

If you really trust this person (and you should determine his/her reputation and references asap) Get a good contract and a good lawyer to review all.

But looks like if the numbers make sense, you'd rather have 50% of something and learn the game then 100% of nothing and stay on the sidelines. 

Thanks,

sjw

What are the numbers, that will tell if any further investigation into a partnership needs to be done.
Originally posted by @David Weintraub :

Is not the partner doing #1, getting the property?

 Bringing in a property isn't something that anyone couldn't do.  That's not the same thing.

Originally posted by @Nicholas Scatton :
What are the numbers, that will tell if any further investigation into a partnership needs to be done.

 The same numbers that will tell us if this is a "deal" to begin with.  All we know so far is a person came to us with a property, and needs us to come up with 50% of the purchase price, and do the rehab.

@Diego Montoya When I partner, I always separate out capital from non-capital contributions.  So, for example, I always structure this way:

1. Every dollar of capital gets a return equivalent to 10% annual.

2. After all capital and returns have been paid, the partners split proceeds X/Y%.

So, in this case, if you're truly committed to splitting all costs 50/50, #1 isn't really relevant (though it is if, part way through, someone ends up contributing more money than someone else).

From there, consider the main components:

A: Deal Acquisition

B: Renovation Work (actual construction work)

C: Oversight Work (accounting, arranging insurance, picking finishes, dealing with neighbors, blah, blah)

D: Sales

In my market, A is difficult - if my partner is an agent and is handling A and D (with no sales commission), I'd split profits 50/50.  Or, if deals are prevalent and we're hiring a GC for B while I handle C, I'd probably still split it 50/50.

Point is just to separate capital from effort - establishing a return on capital first simplifies the conversation greatly. 

Unless you have a long standing relationship with this person, I would definitely not structure it like a "partnership" with equal splitting of everything.  Instead, consider drawing up the whole scenario with how you think it will go and then one of you becomes the developer and the other becomes a lender.  Meaning...

Let's say it's $100,000 to purchase and $25,000 to rehab, selling for $185,000.  If this were an all cash scenario, you each bring $62,500 to the deal, but one of you is the lead developer and title holder, and the other puts a lien on the property. Each of you gets a guaranteed pref on the $62,500 you each put in, and then you split profits 50/50.  That way only one of you is making all the developer decisions so there will never be a fight. Whoever becomes the developer should also be prepared to bring more money to the table to complete the job if the costs balloon (rehab, holding costs if you are a getting hard money in first position, etc).  But keep in mind that bringing that extra money also comes with the pref, so it is not for nothing.  You can also have an agreement that the realtor in the equation will take a discounted listing fee, but they are at least making something as well no matter what it sells for.  The point I am trying to make is that you can get creative and slice up the profit sharing any number of ways -- just as long as you don't do it as equal partners expecting to make equal decisions and still come out of this as friends.

@Diego Montoya in a partnership different people bring different things to the table and there are different rolls. For instance, in this type of deal you have the person who finds the deal, the person who funds the deal, the person who manages the project, and the person who sells the property. Each of these parts are important and necessary for the deal to happen. Each part has a value that may not necessarily be equal. Determining the value that each has can help you decide on how the profits or losses should be split.

I have partnered with probably 10-12 different people in the past 3 years some have gone well and others have not gone well. The ones that went well had everything defined really well. The ones that didn’t go well had more emotion and excitement than structure and then when things didn’t go as expected then there were hard feelings.

In the partnerships that have gone better we gave a value to what each role would be and what would happen in case of a loss. For example if I found the property then we would get a hard money lender and split the down payment, I would take care of all of the other costs such as the rehab and the holding costs and he would sell the property and put his commission back into the deal. I would get reimbursed for all of the money I put into the deal and then we would split all of the profits 50/50. If he found the deal everything would be the same except I would pay for all of the down payment that the hard money lender did not pay at the time of purchase. The property would be held in my company’s name and I would be in second position to the hard money lender. I would manage most of the project but would be open to his input.

In this situation, if the guy who found the property is a realtor, why doesn’t he just use a hard money loan and do the deal himself? If he has enough to pay half of the purchase and rehab then he could do the deal himself with a hard money lender and only have to pay 10-16% plus points to the lender and he would likely make and keep a lot more of the profit. 

Does he want to partner with you because of your experience and contacts and he wants you to manage the project? If that is the case then I could understand more of a split. I would just encourage you to decide on why each part of the deal is worth and then get it in writing and then follow it. And absolutely define how things will be handled if things don’t go as planned such as in case of a loss.

@Diego Montoya Currently in a partnership myself and what I'd say is ensure you guys create a new LLC stipulating initial capital injections in the front end and profit splits on the back end. At the end of the day, he brought you guys the deal and you guys would do the reno. I think its best to keep it simple and make it 50/50 all the way. 

Honestly, the numbers on the deal are irrelevant. Some of us investors can get a little Gordon Gekko and want to make the most money from every single deal. Sometimes it should not be about the money, think about it—you guys can work with this partner once, making some change, or work on numerous deals, making a killer. 

Think long-term, real estate investing is a marathon, not a sprint. Pace yourself. 

Hope this helps. Goodluck. Thanks! - Ola 

Thank you yo everyone that replied, unfortunately the seller accepted another offer but we certainly learned a lot from your responses. Thank you again!

Originally posted by @Joe Villeneuve :
Originally posted by @David Weintraub:

Is not the partner doing #1, getting the property?

 Bringing in a property isn't something that anyone couldn't do.  That's not the same thing.

 Maybe in Michigan.  In New Jersey, finding great investment properties is competitive.  

Originally posted by @David Weintraub :
Originally posted by @Joe Villeneuve:
Originally posted by @David Weintraub:

Is not the partner doing #1, getting the property?

 Bringing in a property isn't something that anyone couldn't do.  That's not the same thing.

 Maybe in Michigan.  In New Jersey, finding great investment properties is competitive.  

 All states are competitive.  You just need to find the right market...and all states have the "right market".

Originally posted by @David Weintraub :

@Joe Villeneuve you're making an argument for the sake of it.  Reality is, if someone has a good deal at hand, that's not necessarily easy to come by.  So that in and of itself is bringing something to the table.  

 Deals are everywhere.  When someone brings me a deal, they need to bring more than that to be a partner.

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