How to structure a realtor/contractor partnership ?

Question

Hi all,

I am a New Jersey realtor and recently approached a contractor I know personally to see if they had an interest in partnering for some house flips. I have an LLC I would like to utilize for the purchase of the properties and he has an LLC for his construction business. The plan as discussed is we would use HML to fund the project. We will be splitting the cost 50/50 and splitting the profits 50/50 as well.

My question is: how to best manage the construction portion of the cost? Should the contractor make a profit off the construction as if it was any other job, or should he just bill labor/materials since the cost will affect the overall profit?

In addition, should I as the realtor waive my commission as that will also affect the overall profits?

Thanks in advance for any guidance.

Jonathan Greene · Answer

This will not work and almost always blows up on one side. The contractor work all of a sudden gets more expensive and then you will argue about your commission to list the property. I've done it before, it fails. I would just do the HML yourself and hire him to do the work and see how that goes. Also, contractors are used to doing the work, but sometimes think they know the design aspects, but are wrong when it comes to what sells and what is what buyers are looking for right now. I agree with @Steve Vaughan, you will regret this if you do it.

Steve Vaughan · Answer

Yes, definitely still sounds messy.

just pay him as a cotractor then. No need for partnership equity split.

Dennis Soto · Answer

@Steve Vaughan thanks for your feedback. My thought was to add him as a member of my LLC which would be used for the purchase and resale of the house. He would get paid for his work through the HML funding the rehab just like any other job. Upon completion and sale of the house, all debts are settled, a percentage stay in a business account for the next flip/ business expenses and the profits are divided in half.

Still sound messy?

Steve Vaughan · Answer

Sorry, but this sounds like a mess waiting to happen.

So I guess you would form a new LLC for the purchase to satisfy the HML and have your existing LLCs as members.

If he is waiting to get paid for his labor I would think you would need to put your net commission after taxes into the deal as well.  Share the costs of materials, then hope he doesn't feel shaded as it runs long and he puts more labor into it.

He will most likely feel he is pulling all the weight eventually.  Plus you both are used to getting paid as you go.  Tough to wait.

In the end you both pay a lot of closing costs and split the profits at high ordinary income tax rates.  All the while the HML is breathing down your neck. Lots of easier ways to build wealth in RE, IMO.