How do I go about structuring a deal with a partner?

Question

I have several options where people want to partner with me on a Flip.  I don't know where to start as far as how do I actually structure what is fair for both and then once we know how to structure...how do I set it up with paperwork to make it legal?

Jeff S. · Answer

There are a few ways to do this, @Parker Shoaf.  Traditionally, when someone is paying all the costs, i.e. purchase and rehab, and you are doing all the labor (acquisition, rehab, selling, etc.) then you would split the profit 50/50 as a partnership.

Your partner would buy the property in an entity he controls 100% and there would be a partnership agreement between you and that entity.  Don’t forget, he’s taking all
the financial risk.  If you are not able to perform, per your partnership agreement, the entity could “fire” you and perhaps pay you a finder fee of some sort (or nothing since you’d likely be leaving him with a busted flip).

If the deal goes as planned, you would split any profit from the sale after all of his costs were subtracted.

On the other hand, your partner could fund the purchase to you as a private loan using professionally prepared loan documents obtained from a lending attorney.  In this case, you would own the property 100% but with a first position lien from your lender.  He or she could include the rehab costs in the loan, you could pay for them yourself, or you could borrow those funds using a second mortgage/deed-of-trust from someone else.

You would make monthly payments to your lender(s) or pay everything back at closing, as negotiated into your loan docs.  Here, your lender would be entitled to his interest (and points if he’s sophisticated enough to require them) and you would keep the remaining profits.

Only about 1347 variations on this, but those are the basics of an equity interest and a debt interest in a flip.

Just so you know, it typically works out that a hard money lender will end up with about 25% to 33% of the profit in a flip, for relatively little risk.  In a 50/50 partnership, your partner will obviously get 50% but incurs all the risk.  That is, even at the confiscatory rates most HML’s charge, and we’re lenders, financially you’re almost always better off borrowing the money.

Last, if you asked someone to risk 100% of what could be a life-changing amount of money, and then added that instead of using a lawyer to protect them, you’ve chosen to obtain your documents off the web, how do you think they would feel?  As important, do you think this is a fair way to treat someone willing to help you?

Realistically, once you decide your involvement with one another, your partner or lender must hire an attorney to protect their interests.  You should sit in.

Chris Seveney · Answer

@Parker Shoaf

Do you want a partner who shares in the profit - then you setup a LLC and both be members and the operating agreement would state how the money flows

The other option is to have them loan you the money - with a note and mortgage and terms indicated so they get interest payments and you get all the upside (and downside)

Eliott Elias · Answer

Get a joint venture agreement on it. I have a sample

Chris Levarek · Answer

@Parker Shoaf Contact an attorney specialized in entity creations, LLC, JV, etc. The cost is well worth the years of partnerships.

Alex Breshears · Answer

Hi Parker!

This is a great question, and to give you some more specific answers, I'm going to come at this from a lender's perspective, so someone would be acting as a bank and providing the capital for the acquisition of the property and potentially the renovation of the property.  This is going to be different form an equity partner, which would potentially bring capital, but also experience or connections to the deal as partners (meaning you are both on title or you both own an LLC together and that LLC is on title).

Looking at this from the lender's perspective here is what I would recommend. In general, get an attorney familiar with lending in the state you are located in (if this is the same as the property and lender), and this may not be the attorney you closed your conventional loans with. Those real estate attorneys often have lending documents emailed to them, they are not routinely generating them. You will also want to make sure that the lender understands the deal, the process, and the numbers. This is to avoid the two parties have wildly different expectations of the actions each is responsible for, on what timeline certain events will happen, and when they are likely to be paid back. If this is all clearly written out, there isn't going to be any ambiguity about who said what. You will add them as the lender of record to your hazard insurance policy, often called mortgagee clause. I would also advocate you get lenders title insurance for them, because title problems could potentially wipe out their entire investment, and unless you are willing to repay every single dime you borrowed out of your own pocket, this is cheap insurance to make sure you have clear title and their loan will be the 1st lien if they are expecting to have that lien position. Now this above scenario keeps them squarely on the debt side of the equation. It would be very similar to getting a hard money loan. They will wire funds to closing, and then funds will be distributed to all the parties and vendors involved in the transaction according to the HUD-1. The lien instrument (deed of trust or mortgage depending on state) will be recorded, and the original promissory note and any other disclosures will be sent to the lender, and once the lien instrument is recorded the lender will also be sent the original. They need to keep these originals! You can set up the loan with a servicing company which will act an intermediary to accept payment from you as the borrower and disperse it to the lender. Depending on the services included, they can also arrange to make the required tax documents at the end of the year, a 1098 for the borrower and a 1099-int for the lender. Then everything is documented through a third party entity, and it makes is easier for a borrower to pay, as it can be as easy as logging into a portal to make a payment, similar to what you do for the conventional loans you have in place.

The book on BiggerPockets about private lending will walk through all  the steps for this situation as if you were the lender, but it is also a very powerful tool for active investors because you now can become the subject matter expert in your network and talk about all the ways you are going to protect them as the lender! https://store.biggerpockets.co...

And the article about doing gap funding can be found here:  https://www.biggerpockets.com/member-blogs/14589/98410-help-my-cousin-s-best-friend-needs-20k-as-gap-funding

Parker Shoaf · Answer

Yes for example if my friend decided to go in on half down with me on a property how would I set that up legally so we are both covered.  Essentially just splitting a deal with someone I know. I'm new so that's why I am unsure how you legally get things done and what paperwork is involved.

Parker Shoaf · Answer

I'm referring more to if I have someone who wants to invest their money into a deal of mine like a 50/50 split per say or however it would work out.

Parker Shoaf · Answer

That would be awesome to see thank you!

Parker Shoaf · Answer

Great advice! Thank you I will do that!

How do I go about structuring a deal with a partner?

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