What kind of agreement should a flipper get from their investor?

Question

Hi there!

I am hoping some more experienced flippers and/or investors can help me out on this.  My husband and I have an out of town investor who completely funds our flips.  We select the homes, attend the auctions, do much of the work ourselves and oversee the rest.  So far our compensation has been the sales commission at both ends of the deal ( we are real estate agents) and hourly pay for the work.  Since we have no capital of our own I feel like this is fair, and I know the investor is trusting us, but we have nothing in writing.  If she were to decide to use another agent OR simply not pay for the work, we would be SOL since there is no contract.  My husband is afraid to offend her by asking for an agreement in writing.  Please weigh in, I'm open to all advice!  We'd love to get to the point where we don't need investors, but until then I'd appreciate having some protection for the work we have put in!

Bill Gulley · Answer

If you are taking commissions on both ends, as agents you need listing and purchase agreements, not that may not want to ask, you must ask to create the agency relationship.

An exclusive agreement should do the trick over the period of time agreed. Good luck :)

Dina Fantegrossi · Answer

Thanks so much for all the input!

@Cal C.  I agree that the investor is definitely making out on the deal!  My husband agreed to the arrangement at first because he wanted to break into flipping without having to put in our own capital.  Now that we are moving forward with additional projects, I think we definitely need to revamp the terms!  I appreciate hearing from an investor that based on our commitment we deserve more.

@Derreck  Wells  I am going to force my husband to read your comments!  You have the experience we lack at this point and we can really learn from you!  I LOVE the idea of paying by the day and having his name on the deed to build flipping cred.  He will be the GC of all upcoming projects, so having him on the deed is a great idea!

@J  Scott Bill Gulley   The project we are currently working on together has the buyer agreement in place but my husband has not had her sign the seller agreement yet...I will be pushing HARD for this to happen ASAP!  In the future, I will make sure he gets the exclusive agreement signed up front!  J Scott, I agree that the investor should be the one pushing for a contract!  I know they have formed a good rapport but business is business and we all know things can get ugly quickly.

Dina Fantegrossi · Answer

@Stanley Okazaki

Thanks for the vote of confidence!  I am the worrier in the relationship, always thinking of the worst case scenario.  My husband is easy going to a fault!  I guess we balance each other out.  We had a discussion with our investor, and our upcoming project will have an exclusive agency agreement in place, as well as a contract of how and when we are to be paid.  In the future, we will set up a percentage split, but for now my husband prefers to be paid for the work as he goes the way a contractor would be.  Once we replenish our savings a little, we will go for the split.

@Derreck  Wells

Thanks again for the insight into managing and paying workers.  We have been lucky so far, but we also make sure one of us is present and supervising at all times!

Stanley Okazaki · Answer

Should definitely have something in writing. If they refuse then move on. Seems like you and your husband and MORE than capable enough to branch off on your own or with another investor.

Derreck Wells · Answer

@Dina Fantegrossi  , I say daily, but I pay at the end of the week. I had one guy working for me that I had to pay at the end of the job, not on Friday, or he'd be up drinking until all hours and wouldn't get up for work on Saturday. He was a good worker, so I kept him on for a while until his binge drinking got to the point that I wouldn't see him for 3 or 4 days after payday. Unfortunately, in the construction trades, we get a lot of those guys. Once you weed them out though, the daily salary works well and it's easier to track what days your guys were in rather then how many hours each day.

@Cal C. We should talk.

Cal C. · Answer

Wow that is a fantastic deal for the investor.  I'm an investor and I barely think that splitting half the profits is fair. Parts of me want to give the rehabber a 60/40 split but that increases my risk tolerance too much.

Derreck Wells · Answer

For the record, I pay my guys by the day, not hourly. If I pay them hourly, what's their motivation to get the job done quickly? They're not going to work harder for the same hourly pay. If they get $X daily and I tell them "We need to get this, this, and this done today and we can leave." They're busting their asses to get it done quick because it increases their hourly pay if they can leave earlier in the day. I've tried the hourly thing before and found guys just work slower and want to smoke more.

Let's say for example I pay them $12 an hour. That's $96 per 8 hour day. If I pay them $100 per day and they get to my stopping point after 6 hours, they'll be making $16 per hour. Its amazing how many fewer smoke breaks they take and how much shorter lunch breaks are when I pay them like this. It also makes the guys more loyal. They're willing to work 10-14 hour days if I need them to because they think they make out on the short days. Its my job to balance the long and the short days so that they think they're getting the better end of the deal. They think they're getting a bonus because they're getting out earlier, but the reality is they did more work in a shorter time then if they were stopping for a smoke once an hour and taking a half hour lunch.

The point here is that your investor should look at your percentage as a salary. It motivates you to get it done quicker, thus increasing everyone's profits.

Derreck Wells · Answer

First, your investor is making out on this deal and should be wiling to bend over backwards for you.

Second, getting the hourly work down in a contract is just smart business.  Your investor will probably trust your judgement a little more for showing intelligence. I'm assuming that you have a standard RE contract for the RE transactions at both ends. It's not personal, it's business.

Third. It sounds to me like you're GCing the project. Be aware that some states require a license for that. Usually there's a loophole where if you own the property you can GC without a license.

I would use the loophole and buy the properties in your investor's name and in your name. Now that you've worked with the investor in the past, they should trust you to do this. Instead of getting paid hourly, how about a percentage of the profit? This all serves 3 purposes; 1) You're legal to GC. 2) Your name is on the deed, investor can't just not pay you, you own a part of the house. 3) Your name is on the records as having successfully flipped "x" amount  of houses, buikding your credibility in the industry.

You can use 1 & 3 above as reasons to your investor for changing the terms of your previous deals to a percentage of profit with your name on the deed. It gets it into a contract without saying to them that you dont trust them. It also tells the investor that you'll be going for the largest profits you can squeeze out, since you get a percentage. It motivates you to get the properties done faster and cheaper.

Good luck,

Derreck

P.S.

I'm looking for an investor to do just this sort of deal. Got my eye on a property I'd love to flip before spring.

J Scott · Answer

Are you looking for protection for the current arrangement or are you looking for a new arrangement?

For the current arrangement, I see no reason not to ask the investor to sign an exclusive buyer brokerage agreement AND an exclusive listing agreement at the time you find a potential property.  That protects your commissions.

As for the work you do in rehab, I would think that the investor would be more interested in a contract than you.  If he doesn't pay, you can just lien the property (assuming you're doing the renovation work legally) -- so you are pretty well protected from that end.  Though, I'd think he'd like an independent contractor agreement in place to protect HIM from you liening the property inappropriately or doing damage to the property.

What kind of agreement should a flipper get from their investor?

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