What is STANDARD? Partnership Structure & Agreement for Fix & Flip

Question

I'm trying to source any articles, blog posts, etc that discuss the standard options for the formation of partnerships. While I'm generally familiar with the options, I am trying to share this information with friends of mine (a couple although they could just as easily be friends as it shouldn't effect the agreement) who are a bit hesitant. Basically, they are looking to structure a partnership between the two of them to fix and flip properties but are unclear what is generally considered "fair".

One individual is a GC without capital. The other is a RE agent with capital. There roles would be roughly the following:

Individual #1 (the Agent) - Identifies target properties, closes on chosen property, funds the acquisition, funds the rehab, sells the property.

Individual #2 (the GC) - Analyzes target properties, estimates rehab costs/time-frames, GC's the rehab.

Neither individual would not be paid for their respective services, i.e. GC's labor would not charge for his time and the agent would not charge her commission. The GC would need to charge for the time of his employees.

I see no reason this shouldn't be a 50/50 profit split. Does the community agree? If not, I'd love to hear why and what would be more fair.

Either way, as I mentioned at the top, I'm looking to find several resources to direct them toward so they can be comfortable with the agreement. Forum posts are insufficient...they would like to see articles/blog posts/documents.

Andrew Cordle · Answer

@Lucas PfaffI agree with JScott why does the agent need the GC as a partner?But if you want some documents on how we do basic house JVs shoot me a PM and I will send you over a editable Joint Venture Agreement. ThanksAC

Lucas Pfaff · Answer

Hey @Nino Alfano, thanks for weighing in. Option 2 is similar to what I've done in the past in JV's, although as "Partner 2" I've also put my credit/liability on the line and therefore funded the majority of the acquisition. Anyway, I'm curious why it seems you give better terms to a new investor than a seasoned investor...Is it that you feel the active involvement has value equal to the rehab costs? Or perhaps with a new investor there is less willingness to be the sole capital partner?

Nino Alfano · Answer

Our JV partnerships are structured like so. We being contractors makes this possible. Option 1- (usually new investor) Partner 1: funds acquisition, actively involved Partner 2 finds deal, closes deal, estimates rehab, funds rehab, sells home, 50/50Option 2- (seasoned investor) Partner 1: funds acquisition + rehab, silent partner Partner 2: finds deal, closes deal, estimates rehab, sells home 50/50

Rickey Luna · Answer

Looking to partner up with someone in Michigan. Could send me a editable Joint Venture Agreement.. thanks Andrew!!!

Lucas Pfaff · Answer

@J Scott Very true. I'm beginning to think that the best option may be for the two to create an entity for the capital partner to lend her capital to at a set rate. This way she gets a return on her funds while the entity would have capital to fix/flip and the two individuals could share equally in the proceeds/upside of their acquisitions. Additionally, as you've said, there's no reason the individuals shouldn't be paid for the work they are doing, be it RE purchase/sales or GC'ing.

J Scott · Answer

It really boils down to what THEY think is fair. There is no objectively right or wrong answer to the question what is fair...if they are both happy with the deal, that's all that matters...

Lucas Pfaff · Answer

@Andrew Cordle I appreciate the input. I will send you a PM now.

Lucas Pfaff · Answer

Also to clarify, as I mentioned above, these two individuals live together. While not married they have been together 10+ years but are unmarried and do not co-mingle funds.

Lucas Pfaff · Answer

@J Scott Thanks for the incredibly quick reply! I completely understand what you're saying and it makes sense. To add a bit of depth to the scenario...The two individuals have invested together before. They currently live in a property that was acquired and rehabbed exactly as you outlined. They have also invested in a small MFH where she has a 75% equity stake and he has a 25% stake based on the capital contributed (minimal rehab). They also both have multiple other investment properties of their own. There is a desire between both parties to be equal partners, but they are unsure how to structure it fairly so they both DESERVE to be equal equity partners.

J Scott · Answer

The agent should just hire the GC to do the rehab, just as if s/he would hire any other GC.A couple reasons for this:- The agent will make more money- The agent won't be tied to the GC if he doesn't do a good job- Partnerships between two inexperienced investors often go bad (either both of them want control or neither of them want control)I see little reason for someone to partner with a contractor unless the contractor is bringing more to the table than just the contracting.My $.02...