Best way to invest with a flipper

[Ben Bakhshi]

Hi all,

I have been investing with a house flipper and wanted to get some advice on best practices on how to proceed.

The flipper collects funds from multiple individuals or LLCs. The flipper is supposed to buy, fix, and sell, on behalf of the investors in a single pool. Once a month multiple homes are purchased with investors' funds.

What are legal and financial options for this process?

Should one LLC be opened every month with investors owning the LLC and given equity, where the flipper is the manager? Then title would be under this LLC. This seems straightforward for me.

Should we have a partnership with all of the investors, and title goes under the partnership? Not sure how this is handled legally.

Last option is to have the flipper use my money to buy properties in separate title. In this case I wouldn't benefit from homerun deals in which I didn't have enough capital. Other options let be a minority investor.

[Doug Smith]

Great question. There are many good answers. We are different as we buy 1st mortgage notes, work through the issues to get the property back, and then sell the property for a profit, so we are going to be different from a flipper, but here is how our investors typically do it with us:

We open a segregated LLC for each investor, not one for each note. The principal is all owned by the investor or his/her entity. Several notes are then purchased, but our average turn time is about 120 days, so we leave the profits in the LLC until the end of the year when we, the manager, pull our portion. We do take $750 when an asset is purchased and $250 when the asset liquidates, but that covers costs and overhead for us as manager. When the investor decided it is time to liquidate, we work through the liquidation process as quickly as possible and cover costs first, principal second, and then split the proceeds in accordance with our agreement. The LLC does cover such items as legal fees for foreclosures, servicing costs, and other costs that arise from the process. That structure puts us on the same side as the investor, so our goals are always in line. It seems to work very well for all involved. We also are able to manage multiple notes in the sale LLC and then we can pour the proceeds from sales (along with profits) back in to compound yields.

I know there are many ways to do it, but I hope this helps you with at least how we manage things. The note management business is a bit different than real estate flipping, but the base principles are the same. Let me know if you need further help. I'm always happy to answer questions.