GC cut of the profit on spec home

Member since 2019 · 15 posts · 12 votes

I have completed my first spec home sale, and it went extremely well. I had a GC build it turn key and it went under contract before it was completed. I made quite a bit on it and it was a complete success.

I did nothing except supply the lot and money. He picked all the finishes, built it, and worked with the buyers once we got it under contract. He is someone I know well and have done flips with. I am out of state so he managed it all from start to finish.

We have a contract to do a few more but I was wondering if any of you share your profits with GC’s, or if the price they quote to build is enough. I have found a honey hole and want to keep this relationship going well…..so what would you do? I could sense that he was unhappy with how much I made.

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Austin F.

Investor · MI · Member since 2015 · 227 posts · 478 votes

"I did really well and couldn't have done it without you, here's a little extra to show my appreciation" Goes a long way, especially if there is a future with the contractor.

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Matthew Irish-JonesBusiness Member
Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
4y
@Davey V. You took all the risk. Would he have offered you a discount On his services if there was a downturn in the market and you lost money?
He built his profit into the job and made money. Don’t feel guilty about making money, you did good. Sometimes you will do bad and you will be stuck holding the bag and NOBODY will bail you out.
If he did a great job give him more business, pay him on time, answer your phone when he calls, and support his business. Those are the requirements of a happy customer.
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Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
If he did all that, he should be charging you above market prices..i.e. 30% markup. If he is just getting the typical 20% then you are ripping him off. IMO.
A typical GC hired by a homeowner to build a home does not do everything you listed. If I were this GC and got the usual 20% to do this for you, I would be looking elsewhere for investors to work with......I guess the question is - how much do you value this guy and his work? If he is easily replaceable then keep doing what you're doing. If he is a rare find (which seems to be your opinion?) then you better hang onto him.
A case in point - when I worked with a money partner and I did all of the things you listed i.e. everything except the money - I got 50% of the final profits....and my partner was happy to pay it.
And yes, you are taking all of the money risk....but you will still be taking all of the money risk with a average or bad Contractor if you aren't careful.
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Davey V.
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Member since 2019 · 15 posts · 12 votes
4y
@Bruce Woodruff I do believe that he is irreplaceable, it’s good to hear your view from a contractors perspective. But…..to be fair, he knew what the work entailed, he set the price with no counter from myself, and it went to plan. It wasn’t until I made a profit that it was an issue. Like Matthew says, I took all the risk, so why am I not allowed to profit…..
But again, I understand your perspective. I’m not a greedy person in the least bit. He is building for $131 per foot in a small town in Texas, but that seems to be a fair price. I do 2 houses at a time as a part of our agreement. In order to keep him happy, I may try to give him a few more dollars per foot. I really appreciate you guys input.
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Lucia Rushton
Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes
4y
@Davey V. Have a conversation with him. My gut is he is going to raise his prices for the next one to take a bit more of the pie. But if you have a conversation first you can control the narrative. Best wishes.
Would love to hear how it goes.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
4y
Originally posted by @Davey V.:
@Bruce Woodruff I do believe that he is irreplaceable, it’s good to hear your view from a contractors perspective. But…..to be fair, he knew what the work entailed, he set the price with no counter from myself, and it went to plan. It wasn’t until I made a profit that it was an issue. Like Matthew says, I took all the risk, so why am I not allowed to profit…..
But again, I understand your perspective. I’m not a greedy person in the least bit. He is building for $131 per foot in a small town in Texas, but that seems to be a fair price. I do 2 houses at a time as a part of our agreement. In order to keep him happy, I may try to give him a few more dollars per foot. I really appreciate you guys input.

well if your paying him a per foot price.. then you dont really know how much he is making correct.. Unless he is giving you the actual invoices to pay yourself ( how i do it ) Myself we pay all invoices and GC gets a set fee and a profit bonus.. IN our price points 20 % of the build cost is way more than we are paying but we are giving him 30 houses a year to build.. so there is that.
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Davey V.
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Member since 2019 · 15 posts · 12 votes
4y
@Lucia Rushton I agree with you and have had a brief conversation already. When I sense issues, I go straight at them. But I don’t feel like I got the whole story in return. So there are more discussions to come!
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Davey V.
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Member since 2019 · 15 posts · 12 votes
4y
@Jay Hinrichs you are correct, I have no idea what he is making. I doubt that he would tell me, and I don’t want to know. Your arrangement with your GC is really clean. I wish that I could set up our deals in that manner but he doesn’t use a lot of subs, they are his hourly guys and he has a ton of them. That muddies the water a bit.
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Justin Fox
Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes
4y
I mean, by definition you shared in the spoils by hiring him. He just needs to adjust his price/sqft for doing more than a typical contractor does. $15/sqft under roof instead of $10, for instance. We build cost plus, so our fee is set and the client/owner is responsible for the labor/material costs during the build whether they end up being lower, higher or right at the estimate/bid price for the bank.
This is really up to him to do. He can either up his price to what he thinks he's worth or keep feeling underpaid and bitter.
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Austin F.
Investor · MI · Member since 2015 · 227 posts · 478 votes
4y
"I did really well and couldn't have done it without you, here's a little extra to show my appreciation" Goes a long way, especially if there is a future with the contractor.
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Rob Westerman
Flipper/Rehabber · Cincinnati, OH · Member since 2017 · 19 posts · 10 votes
4y
I believe you should always take care of your people. With that said, would he lower his pay from you if you found yourself upside down in a house?
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Karen MargraveBusiness Member
Moderator
Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
4y
From your post the contractor acted more like the developer/project manager/general and Realtor, so compensation cannot be figures as if he were doing construction only. Did he handle getting all permits, plans drawn, etc.? Did he show house, talk details etc. with the buyer, get contracts drawn, title and escrow, etc. The devil is in the details. Finding someone that is trustworthy that will do all of that while you are living out of area, and providing money and the lot has value. At the same time, it is you taking all the risks. Have an honest chat with him and ask what he thinks is fair, and the both of you work it out.
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Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
4y
@Davey V. the best answer I can give you is - talk to him. Ask him for his input on how he thought it went. Say you want to do more as it went so well... see what he says.......
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Curtis Mears
Property Manager · Raleigh, NC · Member since 2014 · 729 posts · 596 votes
4y
@Davey V.
He gave you a price, you paid his price. Sounds like you did all you should have. If he was upset with what you earned, then that is on him. Unless, he gave you a discount at the outset, you are ok. Just remember, he will probably adjust his prices up in the future.
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Davey V.
OP
Member since 2019 · 15 posts · 12 votes
4y
Thank you everyone for your advice, everyone has great viewpoints! I will try speaking with him again. Like I said, the first time I did the response that I got was "no I am fine". But I know that he was not fine with everything. We have another lot under contract so I will see if the price gets adjusted. I have a total of 3 lots for him to build 3 more on now. So this will dictate how it will go going forward.
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Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
@Davey V. Really important I think, to buy him lunch and chat about both of your expectations. He sounds like a great and irreplaceable part of your team. Like you said, I doubt he is really fine with his cut of the pie. If you proactively offered him even a small extra piece, say 5%, that would be huge in his eyes and buy you a lot of goodwill.....
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Michael Arnold
Grand Rapids, MI · Member since 2017 · 71 posts · 16 votes
2y
I'm reading some responses that seem pretty dumb. You funded the spec build, and GC agreed to a cost + % fee arrangement. You took all the risk, and he profits no matter what because it cost + % fee. So now YOU close your deal and do very well, which should be the goal for everyone involved so you can repeat the process/deal. ...but GC is sour because you made a bunch of net profit????, which is the entire point of building a spec! good grief. Pigs get fat; hogs go to slaughter.
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Karen MargraveBusiness Member
Moderator
Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
2y
I just ran across this post again and was curious what you ended up doing, and how it all turned out?
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