50-50 partnership with a contractor in a fix and flip?

Question

Hey guys, looking for advice on how to structure a partnership with a contractor for some fix and flips. If anyone has experience with this I would really appreciate your feedback.

I have a good relationship with a contractor that is interested in doings some work together. Little background, I'm not handy but can do little things when told what to do and how to do it. I'm primarily the partner bring the capital to the projects. But what does my contractor bring besides the updating and know-how that is different from just hiring him? We would need to finance our purchases, so do we both go 50-50 on the loan with a bank? Do I pay for all the supplies and labor minus his? Does he get paid once its fixed and sold on his end?

Looking for some guidance as we hash out the details of an agreement. Thanks!

Will Barnard · Answer

These percentages you are quoting are not going to be equal across the hoard in all areas. As an example, here in Southern CA, the funding is not 80% of the deal value, nowhere close. Secondly, there are 3 parts of any deal in my book, the sourcing/finding/negotiating of the deal, the funding of the deal and the management of the deal and the 3 parts are not equal in almost all cases. Funding certainly holds the largest value in most cases but not 80%.

Eric M. · Answer

Sorry but these are questions you need to be asking yourself and your partner, not us.  What does he bring to the table? Is he prepared to split downpayments and costs 50/50? Can he source deals? We don't know the answers but they certainly make a difference.

And is this a 50/50 company you are forming, or a 50/50 deal on one project? Makes a big difference.

Most contractor "partnerships" I have seen simply involve him floating the cost of the rehab until sale and occasionally hearing about a deal. To me, that is not worth 50%. But to you it might be especially on a specific, big construction project.

The other question only you know is what do you need from a partner? Do you need more money? Help finding deals? Or do you just want to have a good long-term relationship with the contractor. You can have that by just hiring him over and over. He will appreciate the steady work and hopefully you get fair pricing. Warning: My experience is that ideal relationship with contractors is a pipe dream. Even contractors who I do 4 great jobs in a row with somehow implode one day for no apparent reason. Some other job goes bad and it ripples through all other jobs and he disappears.

A partnership only works if both people get what they want/need from it and you have to discuss it with them. If you both can discuss and come to an agreement you both like, then it doesn't matter what we think or even what is normal or common.

Greg Dickerson · Answer

If you are finding the deals, have the cash and can provide the all the financing you should just hire the contractor turn key and keep it simple. Make sure to get several bids even if you do decide to partner. If the contractor is putting up cash, supplying materials, bringing the deal thats a different story. Then you could do an appropriate split in relation to the cash value of the contributions.

Calvin Ozanick · Answer

I saw somewhere on here recently that an investment partnership should be split into 2 parts. Capital and project management. 80% of the ownership falls into the capital category and the other 20% is project management. So treat them like individual entities, if you do all of the funding and no project management, you would get 100% ownership of the 80% group and 0% ownership of the 20% tier. If the contractor goes 50-50 capital with you, he would get 50% of the 80% tier (40%) and 100% of the 20% tier for a total of 60% ownership.

Dallas Easter · Answer

Super helpful with all the replies. Thank you for the input.

Darius Ogloza · Answer

If the contractor/partner is bringing in capital to the deal, you may want to consider a structure where he/she plays two distinct roles.  The way I like to do it is to set up a partnership at the "investor" level (in a role proportionate to his/her investment) and then have the partnership hire the contractor to perform the work at a rate negotiated by the partnership.  This allows you to avoid a lot of the inevitable misgivings about who is being compensated fairly or not.  Of course, this structure requires a good deal of trust but then I try to void dealing with people I do not trust.

Don Petrasek · Answer

@Dallas Easter Greg is right, unless your contractor is bringing something of value that you can’t yourself- stay away from a partnership.  Even if he is, I’d still try and stay away from a partnership as they tend to go south more often than north in my experience.....unless its someone you’ve worked with before and have history with.

If you want to incent your contractor - give him some skin in the game- think about a bonus for finishing on time/early and/or helping you achieve a certain sale price.   E g if property sells for at least $250,000 by XX/XX/XX contractor receives $XXXX.XX bonus.  This is in addition to his normal rate.....not in lieu of it. Far better doing something like that then creating a partnership in my opinion.

50-50 partnership with a contractor in a fix and flip?

Most Popular Reply