Fix & Flip Profit Split Advice

[Jason Merchey]

Question for ya. I'm trying to be the equity partner on a fix and flip joint venture with two guys. They are both, apparently, ****-hot at what they do. The first person is ostensibly great at finding and analyzing deals, sweat equity, and just general wisdom about properties. He would probably be getting the insurance set up, coordinating with Realtors, etc. The second is the best when it comes to inspecting houses and running subs. 

I am wondering, should I be going for 33% of the profit, 40% of the profit, or still 50% even though I am only providing money? 

I think the chances of going below $0 in profit is pretty slim. But my opportunity costs are lending in the Charleston SC area for about 14% annually (well, maybe including a 25% "stale" factor with the capital), but probably no more stale than the flip capitalization strategy. 

Advice please! 

[Jeff S.]

You are risking quite a bit of money for “ostensibly,” “probably,” and “seems to,” @Jason Merchey. There are many issues here.

First, your friend who thinks you should be partnering on flips rather than lending should run the numbers. He will make a lot more money as a borrower than splitting the profits 50/50, or whatever you can agree on. Perhaps they figured this out with your statement, “I think the guys would argue though that they can get money at 14% or maybe 12% of the total, so if my share equals like 20% of profit …”

Yes, for a properly structured, well run flip, lenders will make less than their borrowers, who also take most of the risk. If they can borrow money at 14% and make a fair profit, they should. Why else are they doing this? Please don’t say for the experience.

Nowhere did you say that either of these individuals have flipped a house. That would be the deal killer for me. Being able to find a property and construction experience are only one component. Have either of these individuals bought, purchased, rehabbed, and then sold a property? If no, then they might have related experience but they are newbies to flipping. Don’t think that because someone can run a crew, that they know how to flip a house.

We're occasionally approached with  opportunities like this and there’s another issue. Finding the property entitles you to a commission or finder’s fee, not a substantial split of the profits. Do agents or brokers ask for this? Usually not. Please don’t tell me that “… probably be getting the insurance set up, coordinating with Realtors, etc.” is worth an equity share. With due respect, you’re giving his position more credit than it’s worth. Offer him a commission or even a substantial finder’s fee, with thanks, and politely send him on his way. Or, pass on this deal. This is how every house flipper I know works with his or her agents or wholesalers.

We only loan locally to experienced rehabbers. This has been a strategy that’s worked for us. The one time (damn it) we violated our criteria was to loan to a very experienced commercial contractor and his wife, who is a residential realtor. Neither had any experience flipping houses. Big mistake. He was able to complete the project on time and within budget. It came out shiny and clean but looks terrible. All the rooms and kitchen are tiny, and it didn't have to be like that. There was no vision. She then thought they were sitting on the Taj Mahal and completely overpriced the property beyond everyone's initial ARV estimate.

You’ve been on this board a while, Jason. My strong advice is to find lending or investment criteria that work for you. Stick to these and repeat over and over, subject to small changes in the market. Don’t let your friends or associates try to convince you they know better or have a better deal. They are doing this for themselves.