Giving contractor a % of profit?

Question

I've always used contractors here and there and paid up front. But has anyone ever gave their contractor a % of profit after the property has sold? Like, paying for the material then once the house sells give your contractor a %?

I am meeting with my cousin to sorta partner up. I purchase and he renovates, but I"m thinking he wants me to purchase the material ?

If you have done this before please comment. I don't know really know where to start...

Is there a formula for this?

Barbara Long · Answer

@Chris Martin good point!  and @Guy Gimenez I see your point as well! Everything moves on GREEN!  I use this strategy with my other businesses as well. I feel it helps motivate the contractors to help you find buyers for your properties as well. Thanks Guys!

Chris Martin · Answer

?

The contractor doesn't control the market. If the property doesn't sell, you still are out a percentage of the equity. It is 12/10/14.  An if the property sells in... April... does the GC pay for the holding cost?

Contracts where a GC puts in % of sales price are a sure fire way to lose money, IMO, because the GC can't control the sale and isn't responsible for your at risk capital and potential loss. Their bonus (% of sale) should be based on a sale above listed price or other tangible, measurable benefit to the owner.

Guy Gimenez · Answer

Sounds like a good fit for a JV Agreement.

In fact, I just visited with a high end remodeler/builder here in Austin whose standard Gen. Contractor Agreement (not a JV agreement) does a version of this strategy in each of his projects. Pays out weekly draws but also pays 5% to 20% on the back end because this obviously keeps the contractor motivated to do quality work from beginning through the punch list.

Barbara Long · Answer

@Chris Martin

WOW! I went to a seminar not long ago and they actually suggested that. But I see your point!

Chris Martin · Answer

The formula is don't. Using this setup means your contractor has a de-facto partnership with you. If you are going to "partner" with a contractor, spell out ALL the details in a formal agreement.