Should it be 50/50 ?

Question

I am working on a fix and flip with a partner. He got the property off market for a really good price under contract. We want to rehab the property and sell it ARV. I am coming up with all of the money for the deposit on a hard money loan. Should we be splitting the profits even ?

Initially he wanted to wholesale the property.

JD Martin · Answer

I (personally) would never do a deal 50/50 if I am putting up all the cash. Anyone can say anything they want about "the deal", but without real money there's nothing. I would consider being close to that number if *all* I was doing was funding the deal and the partner was doing everything else - but more likely I would simply become the bank and finance the deal that way, with a lien so I'd simply foreclose if they couldn't make it work. Then I'd be guaranteed either the property or my money back.

Frank Chin · Answer

@Edwin Valdovinos

The dynamics of every deal is different. I find that with a 50/50 arrangement, there's less of an argument as to who contributed more, and if you play you cards right, as everything is a gamble, you might even wind up ahead.

I once did a rehab and flip deal with a local agent, who made it his business to find such deals. He schtick is he work with a group of investors, he find the deals, the investors fund it, and in the end, the split is 50/50.

Even though I thought my cut should be bigger, his argument is he would go to another one in his group for funding. In the end, this is back in the early 80's, we'll split a 60K profit, so 50/50 vs 60/40 is not that much of a difference to me, so I said lets go and see what happens.

His schtick is he's in charge of the deal, buying, selling and I contribute the cash. Fortunately, I insisted on a written partnership agreement, and for all his boast of being the best deal maker, I had him agree that is it did not go through  as a flip, we're stuck with it, he gets nothing, and any profits if any, title to the property, I get to keep. With his mindset, he's more than OK with it.

Long and short, we go it for $70K and ARV was $130K. I thought it was a bit lofty, but in the 1980's, with prices appreciating at a crazy pace, it was no shock that someone agree to buy it for $130K. We couldn't believe it. The buyer even got a mortgage on it.

What happened? The buyer called to say he lost his job a week before closing. Plan B was for me to close on the property. The partnership agreement calls for me to have 100% control is this happened, as it's only 50/50 if it goes through. He grudgingly agreed with that.

At that point, I had $30K tied up, all through my HELOC, not bad. I closed on it, with the bank only giving me a $70K mortgage, not considering the ARV of $130K. It turned out that I did not negatively cash flow, a good thing, with the smaller mortgage the bank gave me, and hold that property for a few years.

Would you  believe I still have it, after 37 years, now mortgage free for 10 years, cash flows at $1,500/month. The ARV is now $460K. I wouldn't have this if I was stubborn about the 60/40 split. In the back of my mind, I gambled if something would go wrong, as it normally happens, and I get to keep everything, My hunch was right.

The only thing we didn't fore see was the purchase falling through at which point we held on to the buyer's escrow of 10%, which comes to $13K. Finally, after laughing off the buyer's attorney threat that we had to refund it, they agreed to take half back. The attorney called me twice, rude, bellicose, threatening, and I hung up on him. On the 3rd call, he apologized, promised to be nice, and pleaded mercy for his client, now jobless. My partner also pleaded with me that at least he could have half as that's not in the partnership agreement. I felt sorry for him also and gave him $3000.

I got a good laugh being the money guy going through this. At the end, the buyer, his attorney. my partner, all pleaded mercy with me. Feels good to be the money guy even at 50/50. I got all the fun playing with $30K. I thought I got leverage and did OK also. Do you?

Jonathan R McLaughlin · Answer

@Edwin Valdovinos

I’m a little nervous for the partnership if you are already talking in terms of who has the leverage instead of mutual benefit, but anyway....

I get the desire to go 50/50 but it feels one sided in his favor. Sketch out a scenario where you LOSE money...it’s your funds, your credit, your reputation. He risks NOTHING and you risk a lot. I’d want to be compensated for that.

It’s a whole different ballgame when you are sharing losses, not profits.

Maybe you could structure something like it’s 75% you/25% him until you reach a certain return then it’s 50/50. Or he gets an additional x amount if you go over a certain resale price or the rehab is under a certain budget.

At least have him put his wholesale fee into the deal. He has no skin in the game here. If it’s too much trouble and he just walks away you are the loser.

JD Martin · Answer

Yes. You better have a rock-solid partnership agreement, in writing, addressing how everything is going to be paid, split, profited, liquidated, and arbitrated. Partnerships go south all the time, for lots of reasons, and *you* are the one that's going to be on the hook for actually paying anything back and losing your principal.

I am not going to tell you not to do the deal, but the person with the deal does not have "all the leverage". The person with the money has all the leverage that's worth having. Deals are everywhere - everyone and their brother will tell you about all the deals they have. The limiting factor of being able to invest in real estate is always, always, always how much money you can access under favorable terms. Look at all the BP posts of "I have a great deal, where do I find some money?"

Edwin Valdovinos · Answer

@Cameron Rockwell

Yes I am excited and nervous !

Anything I should know about before I go to a hard money lender ?   I have comps and will also have the estimate on repair cost.

I don’t have a track record so I am worried they will not fund the deal.

Edwin Valdovinos · Answer

@Cameron Rockwell

Yes I agree !

He does have the deal and has all the leverage. Initially, he was thinking of wholesaling it. I talked him into rehabbing it and putting it on the market ARV.

I would be the one getting the hard money loan and qualifying. I also have the funds for the deposit and money needed.  In other words I’m the one coming up with the money, he has the deal and has it under contract at a massive discount.

This is my first time getting a hard money loan. Any suggestions or advice I would appreciate.

NaDean Bowles · Answer

@Edwin Valdovinos

Even then, you wouldn’t have the deal without him.  He wouldn’t have the funds without you.

NaDean Bowles · Answer

@Edwin Valdovinos if he’s running the rehab, yes.

Cameron Rockwell · Answer

@Edwin Valdovinos Like I said before the deal is the most important. If the deal is good enough any lender should be willing to lend on it. Most lenders have a newbie interest rate which may be a little higher but if the deal is good enough, and you have a good network to handle everything, there will still be lots of profit in it for both if you.

Cameron Rockwell · Answer

@Edwin Valdovinos Yeah that sounds like a great plan and a solid partnership! I'm excited for you guys. Just understand that your Hard money lender is on your team and wants you to succeed as well. Make sure you have all your numbers sorted out before going to them. They are probably going to ask for a CMA, a repair budget and a copy of the contract so they can verify it is actually a good deal. Make sure the Loan to Value is less then 70% and if its even lower than that you might be able to get a better rate (less risk). It already sounds like you're getting another estimate on your rehab budget which is good. As long as you be smart and keep working together it sounds like you guys will work through this as a team. Good Luck in the future and feel free to reach out if you have any other questions.

Should it be 50/50 ?

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