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Updated almost 6 years ago, 12/19/2018
50/50 partners...What?
I just emailed a remodeling company asking if they act as GCs on house rehab projects. They come highly recommended and are a Five Star Rated (by Home Services Review) company.
My email said, "I'm a RE investor in the area and I'm actively trying to form my rehab team for the winter season. I'm looking for a company to work with that will provide me with one point of contact for 100% of the cosmetic rehab of the properties I purchase. Since I don't have time to interview GCs, I'd like to know that SOWs will be managed and executed on time without me having to manage assorted sub-contractors at different properties. Would you be able to work with me in this way?"
Their response was, "Sure we can be single point of contact with hundreds of resources at our disposal to handle a large array projects on time. 50/50 partners is our acceptance."
What does that last sentence mean? I'm not sure if that's contracting lingo or not. Thanks!
Ashley Wolfe
Originally posted by @Blake F.:
@Ashley Wolfe
.
They get 2% acquisition fee of the purchase price, 15% rehab mgmt. fee (which maxes out at $5k.) On sale, I get a 12% annualized return first (called a preferred return), and then we split the remaining profit 50/50.
Thank you Blake. This helps me see some other options and a more detailed view of the breakdown before the 50/50 split. Who pays closing costs in the above scenario?
Originally posted by @Ashley Wolfe:
Originally posted by @Blake F.:
@Ashley Wolfe
.
They get 2% acquisition fee of the purchase price, 15% rehab mgmt. fee (which maxes out at $5k.) On sale, I get a 12% annualized return first (called a preferred return), and then we split the remaining profit 50/50.
Thank you Blake. This helps me see some other options and a more detailed view of the breakdown before the 50/50 split. Who pays closing costs in the above scenario?
I pay everything. The most important part of making this work is knowing all your costs - holding, buying, selling, commissions, etc. And of course accurately estimating ARV.
Just out of curiosity for the people that are advising against this...How do you do your deals? Are you the GC? Are you the PM? Who is there on a daily or hourly basis? How many change orders happen? Who deals with the subs? Gets the contracts, W9s, insurance, ect. Who hires and fires? Who does quality control not just what you see but every part of the job? Because if not I bet you are paying far greater then you ever imagined. In the 50/50 case the contractor does not charge overhead on labor or materials.A qualified contractor does not just swing a hammer. There is so much more and they are so more valuable then most posters wish you to see. I wish in this business contractors were looked upon more the just dumb raw laborers who should be happy to work for you. A relationship and a deal should benefit both. Taking advantage of contractors will work for you in the first couple of deals but as your reputation grows you will be hiring people who are not reliable, do not do quality work, can not pull permits, do not have insurance, do not care about their craft. The good ones and there are plenty know their worth and will reward those who choose them.
#4 All Forums Contributor
- Lender
- Lake Oswego OR Summerlin, NV
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#4 All Forums Contributor
- Lender
- Lake Oswego OR Summerlin, NV
@Blake F. pref return is standard in these scenerios.. as well as some up front money to the person marshaling it.
- Jay Hinrichs
- Podcast Guest on Show #222
@Ashley Wolfe This raises red flags to me. You pay the GC a premium for their services which INCLUDES properly managing subs. It's not fair for them to try and get you to agree to a split on the backend unless they are willing to split ALL costs with you including half of the outsourced rehab cost to the GC. Some people here say a good GC is worth the split. Sounds like bad business to me.
Hello all,
I'm new to BP. This is my first post and reply; wahoo!
Ok so all of you have valuable points. I'm an REI GC from Dallas. I do different deals with my investors. On most of my projects I'll do the rehab for whatever is in budget or write my bid to meet the budget. My profit is included in the line items. Generally I make 20% profit. That pays for my overhead, an assigned PM to that property, and company profit. It's not really much at the end of the day but I make my return in volume.
With close investors that I know and trust we do 50/50 split. They do their part and I do mine. I do the rehab at cost, which means the investor gets 20% more into the project or saves it. I don't use any of my capital, just time, knowledge, and resources. After all fees are paid, we split it. I have to wait longer but make a larger profit.
Hope this will help you have a different perspective on the situation or help you ask the right questions.
Originally posted by @Art Trejo:
Hello all,
I'm new to BP. This is my first post and reply; wahoo!
Ok so all of you have valuable points. I'm an REI GC from Dallas. I do different deals with my investors. On most of my projects I'll do the rehab for whatever is in budget or write my bid to meet the budget. My profit is included in the line items. Generally I make 20% profit. That pays for my overhead, an assigned PM to that property, and company profit. It's not really much at the end of the day but I make my return in volume.
With close investors that I know and trust we do 50/50 split. They do their part and I do mine. I do the rehab at cost, which means the investor gets 20% more into the project or saves it. I don't use any of my capital, just time, knowledge, and resources. After all fees are paid, we split it. I have to wait longer but make a larger profit.
Hope this will help you have a different perspective on the situation or help you ask the right questions.
Great comparisons. I like how you give me two different scenarios that you are comfortable working with as a GC.
I know there are a million ways to skin a cat. I also know that people come out of the woodwork to not only give their perspective but to also help shed light on the subject in a way that helps a situation be seen from different ways, with different details and potential. Thanks for making your first post within this thread.
Ashley Wolfe
I've been following this thread and while I can appreciate the abundance mentality my gut is warning me here as well.
If your partnering with people you have a relationship your in a good place. If this is something new you may want to approach it a bit more carefully. I'd hate to see a fellow investor walk into something and have it go upside-down. Vendor relationships can be tough under normal circumstances.
I'd rather see you team up with a local investor and leverage his relationship with a contractor. In time you will have a better idea of wants and don't wants in a contractor.
Originally posted by @David Dey:
John
I couldn't agree more regarding what you are saying about a good contractor is worth his/her weight in gold!!
However, for an equity participation into the deal, especially one of a 50/50 split, there is no substitute for "skin in the game."
A good quality contractor can still make a good bid on the rehab and still provide a quality service for that bid. I also do believe in rewarding my team, and work in bonuses for coming under budget and for better timeframes.
The contractor is already building a spread into his bid. The 50/50 split without additional benefit is just license to double dip.
@Ashley Wolfe especially at the beginning, if you don't want to be taken advantage of, you need to be OVERLY involved in the process. You need to study up on construction costs, you need to be a part of the buying process, you need to become an expert in pricing material, labor, timeframes, etc.
My true recommendation is that you do partner up with an experienced Rehabber on your first deal. It could be an investor contractor like @John Ellis or an experienced investor like @Jay Hinrichs who knows how to manage contractors. But either way, become an expert by leaning on their experience before you do it yourself. You'll save yourself a lot of heart ache!!
Hi David
Are you seeing any good deals in your area? My company is buying all over the state. If its a good deal they will buy it. Let me know.
Originally posted by @Account Closed:
@Ashley Wolfe This raises red flags to me. You pay the GC a premium for their services which INCLUDES properly managing subs. It's not fair for them to try and get you to agree to a split on the backend unless they are willing to split ALL costs with you including half of the outsourced rehab cost to the GC. Some people here say a good GC is worth the split. Sounds like bad business to me.
My company would never ever pay a contractor for his services then also pay him a percentage of the deal. Are you kidding me?? lol Funding partners will string you up for crazy things like this! Hows your market Larry? We thought about trying to find a rehab partner in Houston.
Originally posted by @Art Trejo:
Hello all,
I'm new to BP. This is my first post and reply; wahoo!
Ok so all of you have valuable points. I'm an REI GC from Dallas. I do different deals with my investors. On most of my projects I'll do the rehab for whatever is in budget or write my bid to meet the budget. My profit is included in the line items. Generally I make 20% profit. That pays for my overhead, an assigned PM to that property, and company profit. It's not really much at the end of the day but I make my return in volume.
With close investors that I know and trust we do 50/50 split. They do their part and I do mine. I do the rehab at cost, which means the investor gets 20% more into the project or saves it. I don't use any of my capital, just time, knowledge, and resources. After all fees are paid, we split it. I have to wait longer but make a larger profit.
Hope this will help you have a different perspective on the situation or help you ask the right questions.
Do you have access to deals in your market?
#2 Contractors Contributor
- Severna Park, MD
What if there is a loss? As a contractor , I wouldnt be very interested in the 50/50 split . Why ? The deals in my area are tight . I have seen rehabbed properties sit on the market for 9 to 12 months . And when it is all said and done the investor makes little to nothing . Doing a straight bid for the job , I make money regardless .
@ashley Wolf,
As your partners, are they also willing to share in the risks if there is a loss? What if you had to rent vs flip?
These are scenarios I would work out upfront.
My first deal was with a contractor who sourced the deal and paid for all the rehab. I paid cash for everything else. The plan was that once we sold, he would be paid for the rehab plus 50% of the profits.
Turns out he got cold feet in a few months after listing the property and wanted to exit at a substantially lower figure than what we had agreed to, so I bought him out and sold the place a month later.
My point is, this type of arrangement can work but make sure of the hurdles and what you will be giving up.
How much would a contractor charge for a regular rehab, with weekly draws? Do you have a GC who has been recommended to you by a local investor?
Most flippers and investors fall flat because they don't have a good understanding of the construction side.
I have no idea how good or bad this GC is, but you really should educate yourself as much as possible about the nitty grity of the business.
Executing the deal is just as important as finding and financing it, quite frankly its where most new people lose their shirt.
Originally posted by @John Ellis:
Just out of curiosity for the people that are advising against this...How do you do your deals? Are you the GC? Are you the PM? Who is there on a daily or hourly basis? How many change orders happen? Who deals with the subs? Gets the contracts, W9s, insurance, ect. Who hires and fires? Who does quality control not just what you see but every part of the job? Because if not I bet you are paying far greater then you ever imagined. In the 50/50 case the contractor does not charge overhead on labor or materials.A qualified contractor does not just swing a hammer. There is so much more and they are so more valuable then most posters wish you to see. I wish in this business contractors were looked upon more the just dumb raw laborers who should be happy to work for you. A relationship and a deal should benefit both. Taking advantage of contractors will work for you in the first couple of deals but as your reputation grows you will be hiring people who are not reliable, do not do quality work, can not pull permits, do not have insurance, do not care about their craft. The good ones and there are plenty know their worth and will reward those who choose them.
I act as my own GC, I find the deals, get them approved, finance them, and if they are rentals manage them afterwards. I don't believe real estate is a hands off business and strongly disagree with the hire out everything I don't want to be near the job site approach. Its your money, its your business manage it! Hiring and managing GOOD contractors is a big job as is finding and buyer from GOOD suppliers at the right price.
As a result I deal with quality control, its my money they have to make me happy to get the check. I also understand most of the jobs so they can't really BS me, I grew up doing most of them. A lot of my subs have worked with me or other people I know for years.
As a result my cost per SF is low in my area and my margins are healthy, and surprises while they do happen to not cost a ton. I see a number of new "flippers" at auctions overpaying and I know their costs are more than mine, probably a lot more. They find themselves a GC and do it hands off, well hands off is expensive.
My bankers have said flat out one of the reasons they are funding the larger deals now is because we are "hands on" investors. A lot of guys bring them all sorts of deals but have not the slightest clue on how to actually execute it. Hand them a print, $2m, and a piece of dirt and they are calling random GC's cruising towards expensive mistakes.
YMMV and their are many ways of doing things, but I have always preferred the hands on direct control approach. I still clean my job sites as much as possible because you see more lose ends or mistakes while cleaning. I still jump in the trench and shoot the grades because I want to know if the guy doing the site work is BS me about cost overruns. Rock what rock I shot that footing myself, etc.
@Ashley Wolfe - I'm coming in late to the conversation, but nobody yet has addressed the premise as you outlined it in the letter to the contractor. My advice is STOP RIGHT THERE. You don't have the time, money or experience to just go out and pick a GC off a shelf, simply going on ratings.
You admit not to having a clue about contracting, building etc etc, and you're leaving yourself wide open to the possibility of disaster. If you're serious about getting into RE, you've got to put time in on the front end to build a team, and that means meeting, interviewing, seeing their previous work yourself, deciding if that's right for YOU and your plans. Would you start a widget-selling business without touring, interviewing, and inspecting the product of a few widget-making factories before contracting with one?
As others have advised, (IMHO) you are much wiser to partner with an experienced investor who does have the time, contacts and relationships to find a GC like you want, and that partner gets the 50% of your profits. But you've got to put in time to interview and find that right partner for your goals too.
Ashley it sounds as if you're not ready for this flipping world. I would say it seems as everyone is going to get paid big money and you will walk away with the shorter end of the stick. I would say you want this game to be easy when it's not you need to be more hands on so you can learn in the process. My advice is keep looking for contractors, interview several, go shopping buy some material. I seen many post saying they don't shop at lowes but I bet the savings isn't passed down to you they up selling everything and charging you. Don't sit on this job be hands on or else you not going to make the money you don't have they experience to flip like the big boys so don't try. Take the necessary baby steps it's necessary for your future.
