Considering partnering on a new construction flip, need advice..

[Jonathan G.]

We are so excited by a potential opportunity we were just presented with but we are also new to this area need your advice and thoughts on things to watch out for!

We have a great relationship with the builder of our own personal home we built 4 years ago. The builder and his dad are partners in a local construction company that has a very good reputation in our area. In all our dealings with them and in what we hear, they are men that operate with high integrity. Their company has been growing and they are on track to build 40 homes this year. The builder also has 12 rental properties of his own.

I found 2 open lots in our 25 year old development that have a similar layout to the lot my wife and I purchased for our home. Lots and homes in our immediate area are flying off the shelves. We just purchased our first buy and hold property and are working on that. But when we found the lots I asked the builder to come look at it and give me his opinion on its viability to buy the lots and build 2 homes for flip or rent. He told me the lots looked great and he encouraged me to buy them. After more research, I was feeling a bit intimidated by doing this project all on my own as everything would be new.

The builder approached me and asked if it would be something I would be interested in doing together. The plan would be that I negotiate the purchase of the land (which I did) and then we would obtain a construction loan. He would handle the contraction side, build the home in about 5 months (he has a long proven track record with his spec homes) and then we would market the home and sell it ourselves (he also has a long proven track record with this aspect as well). We would split the profits on a percentage TBD after all the purchase related expenses are subtracted.

This is appealing because we KNOW the neighborhood, we KNOW the market and the demand. We feel great about being able to learn a LOT from the builder in the course of this project that would help us out on our rental and on future deals and rehabs. And of course, the realistic profit we are looking at would be a great deal for us. In a lot of ways this deal would be a comparatively low risk one.

We also have seen the ugly side of legal issues and relationships gone wrong through our day job. We are always working to mitigate and/or lower risk, think all scenarios through, etc. But, we also know that you can't succeed without taking some calculated risks. And we don't want to walk away from a great deal financially and to learn more of the business from someone who has had a lot of valuable experience and can and is more than willing to act as a kind of mentor in the process.

Wanted to throw this out to see what red flags if any you see that maybe we haven't considered! We know there are always potential issues with partners. Would you be scared off by this kind of partnership where our name is on contracts and his construction company is on the line?