What is fair distribution of a profit from a flip deal.

Question

Hello everyone! Working on my first fix and flip deal with a partner. He brought a deal (through his contractor). I brought an investor who finances the cash we need for downpayment/closing cost (at a low rate of 8% only, no points). I also found a hard money lender who will finance the rest what we need (i understand it's not that hard to find though).

How would you distribute the profit between 2 partners after we sell the property and pay off our passive investors?

My partner proposing 90% of the profit to him and 10% to me with both of us putting zero own money in the deal and only using my investor plus hard money.

Or if we borrow less from hard money lender, keep my investor in the game, but I put $20k and my partner put $100k. He is proposing 20% to me and 80% to him.

I'm not greedy but I want to learn how to play fair in that kind of a deal. I feel me bringing an investor at a lower rate has more value than 10%.

All your opinions will be appreciated!

Kat.

Andy Mirza · Answer

If you're bringing the financing, who's taking the financial risk if things go wrong? It sounds like you and your investor are. That's worth something, too. 50/50, in my opinion, is what your first scenario should be at.

If he wants a better split, he can find his own money. I agree that he might not be the right partner in the first place if he's suggesting 90/10 and 80/20 splits.

Ekaterina A Khayrulina · Answer

Thank you, Michael and Lydia for your input. I wanted to confirm that it's not only your own money that matters in the deal because that's what he thought. So maybe he is not a right person to partner with :)

Lydia R. · Answer

@Ekaterina A Khayrulina Fair is in the eye of the beholder...or in this case the eye of the person writing the check. I agree 10% sounds slim, especially if the investor you brought in wants to do(fund) more deals with you and your partner. I would say thats pretty valuable. A 70/30 or 60/40 split sounds a bit more equitable. Be sure and have these things nailed down before you do your next deal!

Michael Glist · Answer

My question is how much if any is the contractor getting. That is the only reason I can see as to why the numbers are so far apart in my opinion is because he needs to have enough extra to pay the contractor a finder fee or a cut as well. Otherwise if he brings the deal, you bring the lender and you both manage it I don't see why it wouldn't be a 50/50 deal or even a 60/40 deal on his end but a 90/10 split when you brought the lender and will be actively involved does not make sense to me. But again this is just my opinion.

Brian G. · Answer

@Ekaterina A Khayrulina the deal is definitely the most difficult and most important component obviously. No deal = no project = no profit. I do think 10% is a little slim if you will be actively involved in managing the project. Both of you should be thinking, "how can I sweeten the deal for the other so that we can do many more deals together?" This doesn't answer your question but just making a point. This deal isn't what's most important. How this deal goes however (ie how well you work together) could determine the next 10+ deals. In the end, the deal split is a matter of negotiation. If I'm him, I want you to make enough money that you will help finance another deal in the future. If I'm you, I want him to make enough money that he will cut me in on another deal in the future. Remember, if he ever finds a great deal in the future, it's pretty easy to find a HML to lend on the project and not split the equity/profit at all.

Ekaterina A Khayrulina · Answer

@Brian Gerlach thank you! We both will be managing the project from start to finish as a partners. That's why I think that not only money matters. His deal, my investor plus mutual effort managing the deal.

Brian G. · Answer

@Ekaterina A Khayrulina which one of you is the project manager on the deal? Are you brining anything to the table besides the financing? In the future, you two definitely need to negotiate the terms before moving forward on the deal.