Joint Venture with builder. 50/50 but I put all the cash, fair?

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

4y

Yeah but how does the builder in this case have skin in the game? Just by offering to work at cost just only means he won’t lose money. That’s not the same.

Lesley Resnick

Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes

4y

Originally posted by @David M.:

Yeah but how does the builder in this case have skin in the game? Just by offering to work at cost just only means he won’t lose money. That’s not the same.

So what would be an a example of a fair dea?

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

4y

hmm? That's what I'm asking you. Your post says the builder has skin in the game. How so? He has absolutely no downside risk. Depending on the price points, he stands to make more off the deal just be reducing the investor's cashflow requirements. In the worse case, he covers his costs (which depends how much of that includes other's profits or even his own). The investor is carrying all the risk. In the worse case, he/she could lose it all or even owe money.

So, I ask you again, how does the build have skin in the game as you said?

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

4y

Originally posted by @David M.:

hmm? That's what I'm asking you. Your post says the builder has skin in the game. How so? He has absolutely no downside risk. Depending on the price points, he stands to make more off the deal just be reducing the investor's cashflow requirements. In the worse case, he covers his costs (which depends how much of that includes other's profits or even his own). The investor is carrying all the risk. In the worse case, he/she could lose it all or even owe money.

So, I ask you again, how does the build have skin in the game as you said?

65 dollars a sq ft profit on a new build ?? say its 3k sq feet your talking 195K profit for a builder I think not.. thats insane.. If I am reading this right.. builders charge 10 to 20% mark up would be normal and appropriate.. so if he can build for 125 a foot your price whould be about 150 a foot max.. I am building in your area and we are paying a flat fee per house that would equal about 10% of costs.. we provide the land and the construction loan.. Just sayin..

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Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

4y

agreed, but wasn't trying to complicate the conversation. Either the builder's costs are way low, he is offering to work at a loss, and/or he has a massively huge markup. In my area its roughly $200/sqft. if he is saying cost is $125/sqft, he is either doing some sort of hard sell(???), i guess allegdely lying, or I don't know...

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

4y

I've done deals on 50/50 before. It is considered fair - for a really good builder. The 'skin-in-the-game' for the builder is that they are contractually obligated to finish the project for the amount listed in the contract (this should be a hard number, not Cost Plus).

So if I've said, in the contract, that I will build that house for $200,000, then I must make sure that I build it for that...any cost or schedule over-runs are on me....It is actually quite the inducement, trust me... :-)

Matt Devincenzo

Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes

4y

@David M. he has skin in the game in that his 'sunk cost' is the actual time spent. He isn't getting paid for his time and so that investment is physically costing him money out of his pocket. So his only opportunity to make anything is if the project sells and sells for a profit. He is also sharing in the downside risk in that if his 35% would have been (for example) $70K, but the whole project only ends up profiting $100K he now only makes $50K essentially 'losing' $20K in income potential.

To your point the risk is 100% different in that there is a cash risk for the funding partner, and the build partner's risk is in lost earning potential, reduced profit potential etc. But it does have value as well.

Darius Ogloza

Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes

4y

In analyzing these issues I tend to focus on who bears the risk when things do not go as planned (because, in fact, things seldom go exactly as planned). Who will be responsible to repay the loans (especially if you live in a deficiency judgment state)? What happens if the builder flakes? What happens when there is an uninsured/uninsurable loss of some kind - who goes out of pocket? What happens when the schedule gets extended "indefinitely" because the builder has some kind of emergency? What happens when the loan funds do not adequately cover build costs? Who is responsible for securing more loans/making additional cash contributions? In short, the details should drive the equity split and not vice versa.

Also, to echo Jay above, I routinely pay 15% profit on deals in "insane" California. 35% seems like an exorbitant profit margin unless you are hiring DaVinci himself.

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

4y

Originally posted by @David M.:

agreed, but wasn't trying to complicate the conversation. Either the builder's costs are way low, he is offering to work at a loss, and/or he has a massively huge markup. In my area its roughly $200/sqft. if he is saying cost is $125/sqft, he is either doing some sort of hard sell(???), i guess allegdely lying, or I don't know...

Two words:

Change Orders

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Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

4y

Thanks. I "get it." I don't fully agree, but as I said earlier this deal structure may work...

Basically, the contractor's time isn't a sunk cost, to me anyway. If it is a cost, the investor's time should also be included with some valuation. But, this will go round and round similar to those who try to figure out an "hourly wage equivalent" for commission-based compensation. It usually doesn't work since the systems and work is entirely different.

Yes, fixed price contracts, assuming this will be a fixed contract is a very strong inducement. Honestly, its also an inducement to cut corners. Just saying, not throwing mud or point fingers at anybody --- I've just seen it too often.

This all being said, do you see how risk in the whole deal is shared? For example, its not the first time a contractor has walked off the job... That's nice there is a contract, but legal fees and then trying to collect somehow on the contract is pretty cost prohibitive. Meanwhile, the investor's cash is stuff in the deal, if there is anything left. Seen this, too, many times. Actually, just closed on a transaction where this just happened and the investor/owner sold to just "get out."

Honestly, then I don't see this as some sort of partnership/joint venture, whatever, with the builder. This is just a contract negotiation. Instead of the usual $190/sqft and fees (just going off the OP's second paragraph), the deal is $125/sqft with no fees (lets assume fixed price) with a performance award fee of half of the profit (lets just skip the definition for simplicity). Not to be a broken record, if structured well both parties can make out. That is, the basic elements for a good business contract. But, this is not some sort partnership in my opinion, and the builder doesn't have skin in the game (at least to my view of the term). The builder just has a contractual incentive.

1 Reply

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

4y

Yup... Saw that in my day job. Contractors make more money on changes than they do the actual bid! Absolutely agree!

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

4y

Originally posted by @Darius Ogloza:

In analyzing these issues I tend to focus on who bears the risk when things do not go as planned (because, in fact, things seldom go exactly as planned). Who will be responsible to repay the loans (especially if you live in a deficiency judgment state)? What happens if the builder flakes? What happens when there is an uninsured/uninsurable loss of some kind - who goes out of pocket? What happens when the schedule gets extended "indefinitely" because the builder has some kind of emergency? What happens when the loan funds do not adequately cover build costs? Who is responsible for securing more loans/making additional cash contributions? In short, the details should drive the equity split and not vice versa.

Also, to echo Jay above, I routinely pay 15% profit on deals in "insane" California. 35% seems like an exorbitant profit margin unless you are hiring DaVinci himself.

Especially in todays market to do a fix cost bid at a low amount is darn near suicide for the builder and will lead to future negotiations when the investor has all the monetary risk and the builder says sorry I am just going to bk this LLC and move on..

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1 Reply

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

4y

Quote from @David M.:

Thanks. I "get it." I don't fully agree, but as I said earlier this deal structure may work...

Basically, the contractor's time isn't a sunk cost, to me anyway. If it is a cost, the investor's time should also be included with some valuation. But, this will go round and round similar to those who try to figure out an "hourly wage equivalent" for commission-based compensation. It usually doesn't work since the systems and work is entirely different.

Yes, fixed price contracts, assuming this will be a fixed contract is a very strong inducement. Honestly, its also an inducement to cut corners. Just saying, not throwing mud or point fingers at anybody --- I've just seen it too often.

This all being said, do you see how risk in the whole deal is shared? For example, its not the first time a contractor has walked off the job... That's nice there is a contract, but legal fees and then trying to collect somehow on the contract is pretty cost prohibitive. Meanwhile, the investor's cash is stuff in the deal, if there is anything left. Seen this, too, many times. Actually, just closed on a transaction where this just happened and the investor/owner sold to just "get out."

Honestly, then I don't see this as some sort of partnership/joint venture, whatever, with the builder. This is just a contract negotiation. Instead of the usual $190/sqft and fees (just going off the OP's second paragraph), the deal is $125/sqft with no fees (lets assume fixed price) with a performance award fee of half of the profit (lets just skip the definition for simplicity). Not to be a broken record, if structured well both parties can make out. That is, the basic elements for a good business contract. But, this is not some sort partnership in my opinion, and the builder doesn't have skin in the game (at least to my view of the term). The builder just has a contractual incentive.

Instead of worrying about how much money he is making, look at your own numbers. What will the property be worth when complete? How much will you get for rents and what will your cash flow be? What is your cash on cash return? Take those numbers and compare it to doing your own project, where you own 100% of the deal. Which is a better investment for you? Structure it so that you make money and worry less about what others are making. Maybe there is a way to do a cash out refinance when the project is done, to dial down your capital into the deal. You both still retain 50%, but you get some cash back. You both get what you want. Look for win/win solutions.

Dan Nutter

Investor · San Diego, CA · Member since 2021 · 16 posts · 17 votes

4y

@Aris Alexiou

If you're fully funding this deal, why not just sign a contract with a builder to design/permit/construct the home at a fixed price and you keep all of the equity? I can see some pros for having the builder keep an equity stake, but in my naive brain it seems like you're in a position where you don't need to give somebody a cut of the pie.

Also, nice job with your English, I think it's better than mine (and this is my first and only language) :P

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

4y

Originally posted by @David M.:

1-If it is a cost, the investor's time should also be included with some valuation.

2- Honestly, its also an inducement to cut corners. For example, its not the first time a contractor has walked off the job... Meanwhile, the investor's cash is stuff in the deal, if there is anything left. Seen this, too, many times.

3-Honestly, then I don't see this as some sort of partnership/joint venture, whatever, with the builder. This is just a contract negotiation. Instead of the usual $190/sqft and fees (just going off the OP's second paragraph), the deal is $125/sqft with no fees (lets assume fixed price) with a performance award fee of half of the profit (lets just skip the definition for simplicity).

1 - Its not the same thing at all. Apples and Oranges. Every second the Contractor is onsite or even working at home, he is providing value. The only value the investor provides for the whole course of the project is his $$...

2 - You have been choosing the wrong Contractors my friend. Remember my first post said this will only work with a great Contractor....years of experience, tons of great references.

3 - No good (let alone great) Contractor would take the deal you just set up. We'd be better off just continuing to build/remodel/invest on our own. You want the Contactor that can make this type of deal work? Give him half the equity.

Account Closed

Rental Property Investor · Indianapolis, IN · Member since 2020 · 562 posts · 554 votes

4y

@Aris Alexiou you bring the capital, they do the work. Seems fair to me if you structure it correctly. Make sure managing the construction budget is on them. If they go over budget, then it is on them and they have some skin in the game.

Ed Hoffmann

Member since 2022 · 25 posts · 19 votes

4y

Some serious questions you need to consider.

Can the builder pay all his guys?

Can the builder support no income for 6 months building this property?

Have you searched his license on the contractors board?

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

4y

Sounds like we are saying the same thing

Matthew Olszak

Real Estate Broker · Chicago, IL · Member since 2015 · 1k+ posts · 2k+ votes

4y

Originally posted by @Jay Hinrichs:

Originally posted by @David M.:

agreed, but wasn't trying to complicate the conversation. Either the builder's costs are way low, he is offering to work at a loss, and/or he has a massively huge markup. In my area its roughly $200/sqft. if he is saying cost is $125/sqft, he is either doing some sort of hard sell(???), i guess allegdely lying, or I don't know...

Two words:

Change Orders

Yuuuup. I've seen it frequently. A mason knows damn well that a wood header needs replaced (and now with a steel i-beam) and waits until all the bricks are torn off. A roofer sees step-decking and waits until all shingles are off the roof to tell the the owner that they need another $5k to replace the decking with plywood. I'm sure its the same with full builders/GCs. And if its not a huge company who wouldn't be playing these games to begin with, you can't simply force them to do the job for what they originally agreed to because they'll either disappear or file bankruptcy.

1 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

4y

Originally posted by @Bruce Woodruff:

Originally posted by @David M.:

1-If it is a cost, the investor's time should also be included with some valuation.

2- Honestly, its also an inducement to cut corners. For example, its not the first time a contractor has walked off the job... Meanwhile, the investor's cash is stuff in the deal, if there is anything left. Seen this, too, many times.

3-Honestly, then I don't see this as some sort of partnership/joint venture, whatever, with the builder. This is just a contract negotiation. Instead of the usual $190/sqft and fees (just going off the OP's second paragraph), the deal is $125/sqft with no fees (lets assume fixed price) with a performance award fee of half of the profit (lets just skip the definition for simplicity).

1 - Its not the same thing at all. Apples and Oranges. Every second the Contractor is onsite or even working at home, he is providing value. The only value the investor provides for the whole course of the project is his $$...

2 - You have been choosing the wrong Contractors my friend. Remember my first post said this will only work with a great Contractor....years of experience, tons of great references.

3 - No good (let alone great) Contractor would take the deal you just set up. We'd be better off just continuing to build/remodel/invest on our own. You want the Contactor that can make this type of deal work? Give him half the equity.

The issue is a builder who can do this does not need and investor like you said they will do it themselves investment money for experienced cashed up builders is simple they dont need partners... finding this great contractor to me is a unicorn.. ANd we have not even gotten into when the GC takes your money and does not pay the subs or the suppliers and you find yourself with a bunch of liens on your property.. I had this happen to me in 07 08 as a lender and thats how I became and accidental builder.

But as such even with us hiring our GC we pay all the subs period and all the suppliers period .. except when we doing little dinker 20 to 50k remodels.. but any new builds 100% control of all dollars.

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Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

4y

@Jay Hinrichs As I said, this model only works with a really good, older, skilled, honest Contractor. Otherwise, yes it is a crap shoot.....

Lesley Resnick

Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes

4y

There are a lot of turnkey providers that will deliver a completed building with a tenant. You will pay market price or above. It is low risk. If you are looking to lower the cost, you need to move upstream in the process. Risk reward takes over. You can actually build it yourself, hire the contractors and supervise the project. If you don't have a background in construction and do it full time, you are in trouble. Alternatively, you can hire someone else someone to build it, they will want 15-20% fee and the investor will own all the risk. It is a builders / sellers market. Demand is through the roof in all areas of construcion and contractors attention is at a premium. You are going to face challenges either way. Material availability and cost are variable beyond sensibly. If the builder has any experience and skill, they can borrow the money for less than 20% (2 points funding and 1% a month). The builder would need to fund horizontal construction including the land. Unless we are talking about 10+ builds 2m+, In this market I am not seeing a reason a builder would make a deal under a 50/50 split. Plenty of people will take jobs with no sense of urgency. They will finish the most profitable jobs first and if it is not your build...

Has anyone actually done a JV new build for under 50/50 in the last year?

Seth Young

Specialist · Southlake, TX · Member since 2021 · 213 posts · 157 votes

4y

It depends on how active you want to be!