Posted by JASON on May 26, 2006 at 13:33:19:
My friend and I are ina similar situation. I did all financing/materials, we are SUPPOSED to go 50/50 on labor. My cut is 70%. He is getting lazy and its very aggrevating.
I work 10 hour days and own a small business. All he ahs to do is this rehab. He has been getting there at 2 or 3pm, and working til 6 or 7pm. Not goo.
Cover your self!
Rehabbing/Flipping with a Partner - Posted by John
Posted by John on May 26, 2006 at 06:35:36:
I just come into what I believe is a great rehab project… Since the price is a little over my head (well actually a lot heheh ) I presented it to a potential partner (friend)… I agree to take care of all the grunt work, gutting the place, putting fixtures in, etc. and he simply finances the project. He works 12 hour days and doesn’t really want to be involved in that part of it. We split the proceeds 50/50. My question is, how do I protect my interest in the property? I’ve done a lot of reading on rehabs, but can’t find anything on this. I would love to hear something from the pros. Thanks for any advice you can give me.
John
Partner with a 50/50 split? Better way… - Posted by John Corey
Posted by John Corey on May 27, 2006 at 07:53:07:
Look at the replies where people tell of long term friends that turned on them once they had a deal set up.
Note the comments about getting everything in writing so stuff you did not expect is covered (death, divorce, law suit from an third party).
Consider that the standard logic is the person with the money gets what they have into the deal back before the profits are split. 50/50 split of the profits is what you find in most books.
How about a iron clad way to partner with a split closer to 75/25 (cash investor gets the smaller percentage)? A true silent partner that will not want a say in the day to day details.
Then consider hard money. The ‘expensive’ “15%, 5 points financing”. If you can run a financial calculator will HM come out less expensive than an equity partner on a 50/50 split.
Note that if the hard money is not less expensive you likely have a very bad deal. The suggestion is to bail rather than do the deal.
Hard money is not for every deal.
I do find it really funny watching an audience groan when I tell them the typical hard money rates. Then I ask the same group if they would take on a partner for a 50/50 split (double the cost of hard money). The audience lights up and uniformly says yes with no concerns about the true financial cost. They hear 50% of the profit with none of their own money. They do not think about how they could have had closer to 75% of the profit with none of their own money.
If you do want to go the route of an equity partner (HM does not work for some deals where the amount of work relative to the present value is high) consider using an option agreement. One partner has full control while the other partner has an option. Money guy normally has full control with the labour person holding the option.
Note that in some states it would not be legal for the labour partner to do any work on the property is they did not have an ownership stake in the property.
John Corey
Don’t do it… - Posted by David Krulac
Posted by David Krulac on May 26, 2006 at 15:43:48:
been there done that, have the scars to prove it.
someone else said it but I’ve said this for a very long time, borrowing money, from a bank, institution or even hard money is cheaper and less painful than a partner.
want to end a friendship? easy become partners.
if you still foolishly want to do this get EVERYTHING in writting, and both partners need seperate attorneys. its just like a marriage prenuptual.
you think you and your partner are on the same page now. Just you wait. I’ll bet that you are not on the same page by the time this first project is concluded.
real estate is a dynamic business, thing change, one of the problems with partners is one will change and adapt and the other won’t. There goes the same page business.
The money partner ALWAYS feels like they are the most important partner. Without them there would be no project. The sweat guy feels like he does all the work and only gets half the pay. The money guy feels that he can get any grunt to do the work, he doesn’t need a partner, he needs a contractor. The sweat guy ends up working for low wages or free wages. The sweat guy always resents the money guy sooner or later. I’m doing all the work and that guy’s getting half the profit.
Don’t do it.
IMHO the only way to partner is with each partner contributing the SAME amount of money and the same amount of work. Even Steven is the only way to go.
Re: Rehabbing/Flipping with a Partner - Posted by Frank Chin
Posted by Frank Chin on May 26, 2006 at 12:37:15:
John:
When you do this, make sure:
Write down the responsibilities of each, profit distribution etc. in a written agreement.
In signing agreements with the seller, make sure the P&S shows the buyers as you AND your partner.
Frank Chin
Re: Rehabbing/Flipping with a Partner - Posted by DSmith
Posted by DSmith on May 26, 2006 at 09:58:12:
It took me a while, but I finally figured out that Hard Money and contractors are cheaper than a 50% partner.
Re: Rehabbing/Flipping with a Partner - Posted by michaela-FL
Posted by michaela-FL on May 26, 2006 at 09:41:03:
Something that happened to me
Found a property at a great price. Had a money partner. I waa to do the work/contracting, designing etc, while he’d pay the material,labor etc. We’d then split 50/50.
Halfway through he stopped paying a subcontractor, I stopped working (because it was my contract with the subs and my reputation was at stake). He then held out long enough that he could foreclose on the property, which was in my name
Protect yourself against that.
Michaela
Re: Rehabbing/Flipping with a Partner - Posted by Owen
Posted by Owen on May 26, 2006 at 08:27:32:
John,
Learn from my mistakes… I had basically the same arrangement (except I was the investor and my partner was the labor) with a long-time friend who is a contractor. Our arrangement was going to be that I provided all of the financing, purchased the materials, etc. I also agreed to pay him a weekly salary for the duration of the project to cover his living expenses. After sale of the property, we would “back out” the money I had already paid him from the net profits and would split the rest. My mistake was not getting it all in writing before I closed on the property. After closing, he insisted on a higher percentage of the profits, which I refused. By this time I was now stuck with a property and had no contractor for the labor. After that, I never heard from him again and we are no longer friends. Hard lesson learned.
Make sure you go over all the details verbally with your partner, and get it all down in writing. See if your partner will agree to having both your names on the title- this will help protect your interest.
Make sure you cover all the details, not just the basics. When will you receive your profits and how? Is he going to pay the taxes on the profits then “gift” you your portion? Will you have a joint checking/credit account so that you can purchase the needed materials with his cash/credit (so he does not have to be present every time you need to buy something)? Is he going to give you any type of payment for your labor as you are going along doing the repairs so that you have something to live off of? Is he going to include any interest on the money being used for the repairs (on top of any mortgage, if there is one)?
These are all questions that should be addressed and put in writing before you close on any deal.
Best of luck!