Question about partnerships on flips, and a mini rant...

[Edith TenBroek]

Hey all,

I have some questions about how you have structured partnerships on flips.  We have a friend who has the money to purchase the house.  We will fund the renovation through personal cash and renovation loans.  We (hubby and I) will do all the work.  Well, we will actually do a combination of work ourselves, and hiring contractors for the heavy jobs.  Friend is just a money partner.

What is a fair structure on this?  I don't think 50/50 is quite fair since we will be putting in similar money, but we will be doing the work.  We will all three own the house, so there is no risk for any one party on that front.

So now for my mini rant... before I posted this question I searched for other similar questions to see if it has already been answered.  What did I see over and over.... no real answers, but lots and lots of suggestions to seek a lawyer, be wary of partnerships, concern that friendships are broken up due to partnerships etc etc etc.  Lots of warnings, no answers.  To address this before the fact... yes we will see an attorney, a CPA, and have written partnership agreements and contracts before any house is actually purchased. 

So, anyone have an answer out there?  How would you structure this?  My thought so far are to offer straight up percentage on the money he puts in.  Alternatively, offer the friend a percentage of the final profits on the flip.

Our friend has already said he's interested and just need the details.  So what's fair in a deal like this?  Anything I'm not thinking of?

[J Scott]

The easiest way is to treat the investment from your partner as debt and just pay a pre-determined amount of interest.  But, it sounds like you'd prefer more of an equity partnership instead.

While it's natural to want a simple answer when it comes to how to divide equity/profits within a partnership, rarely is the answer simple...

You need to sit down with your partner, make a VERY detailed list of everything that each party is bringing to the table, and then assign either an hourly, fixed or equity value to each thing.

For example, the list may look like:

YOU:

- Finding the deal

- Renovation costs ($50,000)

- Creating the scope of work

- 50 hours of contractor work you'll do yourself

- Finding and interviewing contractors

- Managing contractors

- Making design decisions and handling materials

- Accounting for the project

- Staging the house

- Finding the real estate agent to list/sell the house and managing the sales process

YOUR PARTNER:

- House costs ($50,000)

Now, instead of assigning an equity split for the whole project, it seems more reasonable to assign some hourly costs for some things (the contractor work you'll do yourself, for example), and it seems reasonable to assign a fixed cost for some things (the staging work, for example) and then assign equity for the rest.

So, for example, you may negotiate and come to the following agreement:

-  You'll get $25/hour for any contractor work you do

-  You'll get $1500 for finding the deal

-  You'll get $2000 to stage the house

-  You'll value the monetary contributions as 70% of the total equity -- if you're each putting in equal amounts of cash, you'll each get 35% of the equity for your contribution

-  You'll value the rest of the management work as 30% of the total equity -- if you're to do all the management work, you'll get 30% equity for your contribution

In the end, that would give you $25/hour for the contractor work you do, $1500 for finding the deal, $2000 for staging work and 65% equity.  Your partner would get 35% equity for her monetary contribution.

That's just one example of how you guys could negotiate it.  There are literally an infinite number of ways you could break up the tasks and then divvy up the pie -- you need to sit down and negotiate until you come to an agreement. 

Btw, it might take hours, days or weeks to agree on all the details.  If you can't handle having these types of type negotiations upfront, you should probably reconsider working with this person at all.