Structuring a fair deal

[Jerry Sexton]

Okay, I have a question that I want to put forth for debate. I am considering possibly teaming up with an investor (any investor down the road) and I want any deal structured to be fair to both sides. So here is my question:

I own my own small remodeling business here in Columbus, Ohio. I currently have some properties that I have purchased, remodeled, and renting out but I am thinking about getting into the flipping business. I don’t know how I would structure a deal that would be attractive enough to encourage an investor to come on board.

What I have to offer is the skills, manpower, and license to do the work that would be needed to turn around a property and have it ready for sale. The problem is, by being self-employed the banks see me as a risk even though I have been in business for several years and produce a decent living for myself. I can get a signature loan at a high interest rate but if I do that then I may as well look at using hard money, I don’t want to go the hard money route.

What I was thinking about doing was teaming up with a financial investor (100% of the funds) and I rehab the property using my company to do this. In other words, my company would get paid to rehab the property which I would make money on and take part in the split of the profits. Here is my dilemma: is it fair of me to ask someone to put forth the funds to acquire the property that I will rehab at a cost and expect a fair split on the flip? And, what would the split look like? 50/50, 60/40???

If I were the investor I am not sure if I would go for this kind of a deal because I would feel the other guy (me) doesn’t have any real skin in the game. On the other hand, should I be expected to provide the rehabbing at costs? As a business owner I could not do this since I have direct and indirect overhead costs. And, someone has to be paid to do the work and I am sure they would make a profit so why not me???

From an investor stand point I would be thinking: “Okay, you get paid to remodel and you want half the split on the sale? What if it doesn’t sale or sales for way less than projected? I put my money on the line and might not make anything but you make money on the remodel? I DON’T THINK SO SCOOTER!” I have kicked this around for a while and cannot come up with the answer that feels right for both sides. Obviously I’m trying to be fair but at the same time if I am going to put my staff on a project for 60-90 days I need to generate a profit so I can pay them and myself. What do I do?

I would like for anyone that has been in this type of situation to chime in and tell me how you structured your deal. Of course, I can keep doing the “buy one house at a time, rehab and rent it out” but it is too slow. Anyway, here is some additional information that will be important to know for your analysis:

• -I currently own 3 units with 2 of the 3 producing income. The third is going to get some minor rehab and be rented out within 60 days. I use the rents to pay off rehab costs (credit cards and such) which will be paid within 18-24 months. Rents total $1500-$2000 a month and the remaining unit should rent for around $750 when it is ready in a few months. Any money goes directly to paying off debt and building for next acquisition.
• -Bought my first property 3 years ago.
• -I do not have a mortgage on any of the properties but I do have a signature loan of 15k on my most recent acquisition that will be ready in 60 days.

Thanks to all of you that post to this and trying to assist me. I look forward to your constructive input 

[Jerry Sexton]

Thanks for your input Kathryn. The next time I have a thought I am going to reach out to you and let you write it for me!!! Obviously you can see my end of the argument and see why I might be a bit bias in my thoughts which is why I reached out to BP community. I can and would be willing to lower my markup to add to the deal but I cannot do it at cost. But on the other hand David Dachtera made a pretty simple argument as well. I'm begging to think I need to keep with my current plan of buy cheap, fix up, pay off in 2-3 years and do over again...