Would you have done this deal? Made 45K but need advice!

Question

Hi BP! I am currently wrapping up my first flip and I wanted to run it by the pros here to see if the way in which it was structured made sense and if any of you have any would have done it differently or advised on a different split with my partner.

My current partner and I are wrapping up our first fix and flip property. My partner got it from a wholesaler and brought it to me with the idea that we partner up on it for a fix and flip. His proposal was that I purchase the property and contribute the rehab funds and that he would manage the rehab process (He's a GC so my faith in his getting the work done well has never been in question). All proceeds from the sale would then be split 50/50

Given that I am still a newbie I was initially skeptical about buying the house as well as contributing the funding for the rehab while he contributed no actual money out of pocket on a 50/50 split but his justification was following.

• 1. He was "contributing" money by bringing me the deal at a discount and could've have assigned it to another buyer for more money (which I think is probable)
• 2. He was also introducing me to the Hard Money lender who we used to fund this deal
• 3. He was managing the rehab and bringing his subcontractors.

So here are my numbers

Acquisition Price: 100K

Rehab: 90K

Holding: 6K

Sale Price: 285K

Profit (Before taxes & commission): 90K

Profit (after split with partner): 45K

I knew the ARV on the house was approx 300K and my plan, between the hard money lender and some private lenders, was to put up approximately 65K of my own cash into this deal. To me this represents a 69% ROI over an 8 month period which I thought was a great deal even after a 50/50 split.

For you guys working with partners: Would you ever consider a 50/50 split where you buy and contribute all the funding but still give away 50% of the deal? Did I expose myself to too much risk while he essentially incurred none? Is this a business model you guys would have pursued? Basically I'm trying to benchmark this deal and review the structure of my partnership. Anyone's advice or experience on flipping/partnerships etc would be greatly appreciated!

Thanks!

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Scott Krone · Answer

@Jason Brown  My mentor when asked if he regretted a deal based upon how much the other party did his response was, "If I agree to a deal, and I got what was expected, I never second guess it or resent the other party."  That being said, is your structure common - certainly.  If you second guess your partner, you are in essence not appreciating the work or effort they put into it.  If you are happy, your partner is happy, then it is a WIN WIN

Tchaka Owen · Answer

@Jason Brown - when I started out, the general partnership deal was that I would find a deal and manage everything while the money partner would fund. We'd split 50/50. Based on that, you structured your deal fine. Several things to point out:

1. HMLs are readily available in FL - I probably have 5 in my phone right now. And can pull up that many more within 30 seconds. Not to diminish it, but that's not a great advantage.

2. How well do you know your partner? You mention that you trust him to do the work, but do you trust his numbers to be accurate? 90k of rehab in South Florida is a lot of work, you'll have a home in immaculate condition. We did a major rehab on a 1400sf home in Wilton Manors (excluding windows) for around $55k. We're talking new roof, new electrical (wiring too, not just box), new AC, new kitchen with granite, stainless, porcelain at a diagonal, serious landscaping. All work with permits. So for $90k, you should be taking this bad boy to the studs.

3. Let's address the numbers. "Profit before commission" is meaningless. Commissions are a cost and need to be factored in. Also, $90k of work will take some time and $6k holding seems light. If I were doing your numbers I'd subtract 7% from the sales price as well as another $5k for the purchase. That's $269.35k. So the net profit is $73.35k and your share is $36,675.

To answer your question: that's subjective and there are many on BP who would do that deal. I likely would not because it goes against one of my rules of investing. I have a risk/reward policy that profit must at least equal input (or be damned close). $90 to make $73 violates that. What I would do is a) try to knock down the purchase price, or b) get better rehab prices. Overall costs need to be reduced by $8k for me to do it. Again, that's me. Everyone has their own methods. Good luck!

Allan Smith · Answer

The real question is do you have enough cash to do 50 more of those this year! Sounds like he did a great job. And if you aren't sure 69% is a good enough return then bless you.

Jon Crosby · Answer

Sounds like a fair deal to me @Jason Brown but from a risk standpoint, my question would be, who was on the deed?  If it was you only then at least you had the property as collateral if the deal or relationship went south.

Like @Allan Smith said, perhaps you have struck gold in the partnership category and it's time to rinse and repeat!  ;)

Congrats!

Would you have done this deal? Made 45K but need advice!

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