How are you handling JV splits in your business?

[Dave Godfrey]

Hi BP-land!

Just looking for thoughts on how you might handle this scenario.

We are about to do a joint venture (JV) project with a contractor. It's a cash only property from the MLS. He can't put up the purchase price but he can handle all of the work to complete the project. Thus, we would purchase it, and the contractor would rehab it. How are you handling JV splits in your business?

 Here is some basic info:

$145k purchase price

$45k rehab costs

Total $190k all-in

Resale price:  $270k

There are transaction and holding costs to be considered but there is approximately $65k net profit in there.

What kind of dollar ($) or percentage (%) split should I, as the purchaser, ask for?  

Any other tips, ideas, or other considerations?       

This is a guy I know well and has experience in flipping.   If this goes well, this could set the precedent on how we do business again down the road.

Thanks in advance for any and all comments!

Dave

[Matt Stewart]

@Dave Godfrey I've been on the contractor side of several JV deals just like you are describing. I wouldn't do it for less than 50%, and depending on the scope of work I may ask for as much as 60% of the profits. As a seasoned contractor with experience flipping I hold most of the cards. You have the deal, but I have the knowledge and resources that you need to cash the check on a successful flip in the end. I could always get a HML or private money and pay much less than your cut of the deal. On the other hand you could always just ask him to bid the total job out and pay him as you would a general contractor.

If you can get a 50 50 deal with an experienced guy that you know and trust, I'd take it.  Just my opinion.

[Dave Godfrey]

@Matt Stewart  Thanks for taking the time to post your reply.

Can I assume you price out your part... of the SOW? So you bring a rehab price to the JV partner for the rehab (your labor and your material purchases)... then anything beyond that you split 50/50 or whatever?

My concern with doing an equity split is... how tough is it to reconcile?   Do your partners ask for receipts?   Or do you all agree to work off the SOW and calculate profit splits?   What happens if there is a variance?  

I haven't done an equity split because of this (and maybe it's just "head trash" that I should get over). Rather, I've been opting for debt (on the lending side to the JV partner (contractor). But I would like to do Equity...

[Patricia Steiner]

50/50 is the split in my market. The last thing you want is a disgruntled contractor who feels he's being taken advantage of.  I recommend making all the design and improvement decisions together rather than leave it to the contractor.  The biggest mistake I see over and over again is over-improving properties.  You're not going to live there so don't make it yours; do what you have to do to get quality tenants/buyers and nothing more.   My recommendations:

1.  Set a renovation budget that is not flexible.  Contractors like to bring in subs to do the work while they "manage" the project.  That's a fast way to kiss your profits goodbye. 

2.   Set a drop dead deadline.  I throw a tantrum that would put a 2-year old to shame if we exceed 6 weeks.  Keep the timeline short so the pressure is on and no one gets complacent.

3.  Visit the site; do some of the work yourself (demo, painting, etc.). Show your commitment and over-sight. A silent investor loses control quickly.

4.  Have your exit strategy ready to implement prior to completion.  You can start seeking tenants before it's completed - and/or have a brokers' open house (or even better - a Neighbor Open House) before the renovations are done.

Protect your split and keep everyone invested in the success of the project.  

[Eric Schultz]

Dave Godfrey

Just as you would with the profit split, make sure to draft up JV terms on how a loss will be handled if the unforeseen were to happen. If you put up all the cash on the deal, how will the contractor-partner share in the loss? You would be at much higher risk in this situation.

In a 50/50 split situation, with $45k rehab and $65k net profit the contractor-partner is essentially getting 72% markup on their work assuming they are doing the $45k rehab at cost of the work. Achieving a 15% - 20% markup on any job is solid for a contractor. If everything goes reasonably well, the contractor-partner is achieving 3.5x - 4.5x their normal profit margin on this deal. That’s pretty generous considering the limited risk they have compared to your risk of funding the cash purchase!

If you take on the deal yourself and bid out the rehab work to a couple qualified GCs, you would make 100% of the profits. The overall net profit would likely be lower than the net $65k projected, but there’s no reason it shouldn’t be more than $32.5k with all other variables the same.

I’d suggest a 70/30 split in your favor upfront on this first deal. That’s equivalent to a 43% markup on the work for the contractor-partner. That leaves some buffer room for them to still make a solid margin while you get a little more reward on the higher risk you are taking on. You can always set new terms on the next deal.

[Matt Stewart]

@Dave Godfrey  I can tell you how I do it.

I put together a line item rehab budget. labor and materials so any overages can be tracked. Once a week I reconcile all rehab expenses into a spreadsheet, which is sent to the JV partner along with any receipts, invoices, photos, and a general update of the project. Most of the JV partners I work with are from out of state, so they rely on me to keep them well updated. Any surprises in the rehab (there's always something unexpected that comes up) are discussed and adjustments to the budget are made.

It's important to have a JV agreement or some type of documentation that clarifies the responsibilities of each party and how profits are to be split. We calculate profits after all rehab expenses and soft costs are taken out.

There are benefits to doing a JV deal rather than just hiring a GC. As a JV partner I manage the entire rehab, maintain and secure the property, handle showings, inspections, appraisals, basically anything that needs to happen locally with the property. I also have a strong motivation to complete the project on budget and on time to maximize my profit. Just something to consider.