What's a fair split in this type of partnership?

Question

I have an investor/agent that would like to partner up and utilize my good credit to purchase a flip.  Property would be around $500K, with ARV between $700K-$800K.  He is proposing to provide the down payment, rehab costs, and PITI for 6 months; I would be the one qualifying for the loan.  He's suggested I'd get maybe $25K for my involvement, but we haven't fleshed out the deal entirely.  Does this sound fair for a first-timer?  How should it be structured?  What sort of legal docs should I have setup for this type of deal? Any thing I should be concerned about?  Thanks for your assistance!

Jeff Tang · Answer

I don't have the full picture of the deal (he was throwing ideas out there over the phone), but it sounded like we'd split the profits after all other things paid off; he estimated it to be about $25K each.  I need to see what the proposal would look like on paper.

James Pearson · Answer

As someone who knows what it's like to be on the other side of this deal, there is probably a better way to arrange this.  I would start with finding an attorney that could draw up a contract.  500k home in Cali is much less than a 500k home in other areas.

As far as how to set up the deal, I would just ensure there are contingencies and you are protected.  A 50/50 split is reasonable, and you simply need to ensure that your money and credit are being put to good use.  Make sure this person has the skillset and knowledge to properly do the work.  Trade references are a good starting point.  I would think a smaller amount to start would be completely possible.  You want to find the worst home in a good neighborhood that needs to be updated.  Simple stuff like flooring, cabinets, paint, appliances.  You don't want to get into a project that needs things like walls moved, adding and removing plumbing and electrical.  Dont get an older home.  Something built in 1985 or after.   Try to stay away from things like drywall where matching texture would be involvled.  Anything past scraping popcorn off ceilings can be tricky, especially if this is your first venture with the person.  He needs to have connections with other trades in the area, vendors, etc.

Last piece of advice, make this person get all supplies, materials in his or her name, not yours.  That is where this person getting 50% of the profit takes risk away from you.  At the end of the day, if something goes wrong, you don't want to owe a bank, hardware store, subcontractors.  You're basically partnering with this person to be the general contractor for what your money can buy.  A few other things you will need are an established realtor that will list the house at the right time and sell it fast and check comps before you buy, a backup contractor in case this other person doesn't follow through or needs help finishing in a timely manner and possibly secondary financing in case you need more money just to finish and protect your initial loan.

Best of luck.  No risk, no reward!

Cal C. · Answer

At the very most $100k and only if it won't hurt you!

Cal C. · Answer

Because you are on the hook for half a million bucks with someone you probably haven't worked with extensively in the past.  Go in small, learn the ropes, gain some confidence with a builder/rehabber, then gradually invest more and more.  I have seen some very bright  and real estate savvy people get burned by seemingly trustworthy builders/rehabbers.

Jeff Tang · Answer

Sound advice...thanks!  Will keep in mind when I discuss it further with him.

Jeff Tang · Answer

Thx, but definitely not the same type of deal that I'm looking at.

Adam Stacey · Answer

I have a similar deal in memphis tn I'm looking at. I would do all the work if someone would provide funding. 50/50 split of est 300k net profit. Let me know if your intrested..

Jeff Tang · Answer

No worries, I knew what you were trying to say.  Thx!

Cal C. · Answer

Sorry, I should have said at most RISK at most $100k and only then if it won't hurt you.   By risk I mean everything you would be on the hook for including a loan.  I'd suggest looking around for someone with a great reputation who is looking for some private money and is willing to also walk you through the entire process from purchase to sell.

What's a fair split in this type of partnership?

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