Have you partnered with your contractor?

Question

Has anyone out there ever partnered with a contractor to do a rehab? In this situation, I'm thinking that you buy the property (using whatever means) and the contractor rehabs the property for a percentage of the profit.

A friend of mine was telling me that he knew someone who did this in Pennsylvania. Things went okay for a while, but the contractor ended up taking advantage of the investor. So I'm curious to find out who've done these kinds of deals with contractors and what the outcome has been.

Rob Beeman · Answer

As both an investor and contractor, the only problem I see with partnering up is that all parties have to be disclosed of the costs and profits. Often, the contractor who is not in the position to do the deal on their own thinks that the property owner has deep pockets and earns huge profits. Sometimes true, sometimes not. By doing a partnership deal with the contractor, you may never receive the same pricing from that contractor again on a property that you need repaired that the contractor is not a partner on. I have found that when the contractor begins to realize what can be earned from a deal (if it is a good deal), they have a tendency to increase their prices on future deals. When I have rehabbed with little cash in the past I have negotiated a "Pay you when I sell it, or refi it" payment system with the contractor, giving them a little more than their bid for the waiting period (sort of like interest), rather than taking them on as a partner. Of course you need to have a contractor than sustain the wait period and feel confident that you know what you are doing.

Timothy W. · Answer

By S quadrant I mean self employed.  We've got the same idea - the business cycle of remodeling ends when the remodeling is done, not later "when the deal closes".

Diane Menke · Answer

Tim if by S quadrant income you mean service vs business, I will say that some remodelers are about being service pros and some like me and my company, we operate a business selling remodeling services and product.

In either case, the business's money is made by selling remodeling services and product. Its not an RE investment company.

SOME remodelers only do spec remodels for flip and hold. In fact the owner of the remodel company may also be the owner of the flip realty company. But 2 separate businesses.

I do this. And my remodeling company does the B side of remodeling for either investors, other businesses or home owners. I hope this makes sense.

Diane

Timothy W. · Answer

Reiwalf,
            I've done this twice and both were people I knew.  I don't think it was by design so much as by default since a lot of my social network for the last 3-4 years has been other real estate investors.
            
            Diane's explanation is pretty right on.  It's key to understand that the remodeling business is not a business that can "wait for a deal to close" in order to get paid.  The industry's dependence on subcontractors operating on S quadrant income require swift payment to those subs to keep them laboring and keeping the business going.
            
            Tim

Jean T. · Answer

Diane,

Thanks for the info. I would be buying and holding the note. Part of my purpose for partnering is to have the contractor front the construction cash, if possible. Obviously, I would be open to negotiating that if needed.

Thanks again.

Jean T. · Answer

This investor who you partnered with, is this someone you know? Or was this person originally a stranger who you came to know and felt comfortable enough to do a partnership with?

Diane Menke · Answer

Understanding remodeling costs and mark ups - industry stagdards -

If I read Tim's post right he did a little painting work for the guy - a days worth lets say.

In our company we would do this under a "time and materials work order". We bill for time at a set rate $70 per hour. All costs are multiplied by our mark up. On a small 1 day project like Tim's, it could be 100% MU. On a larger work order taking several weeks we would reduce that.

The mark up coveres the cost of doing the job + overhead. If all I am supplying is some paint, I need to multiply that by %100 to cover the cost of overhead. If we are supplying many materials + subs + labor, I can mark up less to make a profit.

If you want to do a total gut job on a house, you are talking 8 weeks or more maybe plus a much more complicated project with permits and multiple subs etc, plus some design work.

In our company we have a fixed price for this type of project. We can do this because we have a system for estimating that is very complete. This estimate then becomes part of the contract along with the drawings. We build what is there on the paper.

We still like to see $70 per man hour.
We still like to see an overall MU on all costs at around 1.67.
This results in a profit on the project of between 8-10% IF WE RUN IT CAREFULLY with no slippage.

When you start talking to the remodelers in the peer groups I mentioned, expect to see numbers like these.

So you will have to shop for property with project costs in mind. These costs will include the remodeler costs to do the project at a profit level, plus a total profit on the property sale so you get paid and the contractor fronting the project gets paid.

What part of the project will you be engaged in Reiwalf? Buying? Holding the note? Fronting some construction cash?

Good luck and I hope the numbers help you out.

Diane

Jean T. · Answer

I completely agree. I would figure that the contractor would get  a majority percentage of the profit. From my standpoint, I'm okay with that, as long as I structure the deal such that I account for the contractor's profit and my profit

In these times, when getting loans seem to be getting more difficult, I was just thinking that this could be a way to get into a deal with little or no money down, depending how you buy. Obviously, there's still some risk, the least of which, is the relationship with the contractor, as Diane mentioned in her post. But I think not having to worry about securing funds for a rehab in this market should be pretty helpful.

Timothy W. · Answer

It does work.  Case in point was a new house I partnered with another investor on as the contractor/investor.  The walls were in such a shape that 90% of investors would have repainted - lots of smudges all over them.  They were a certain type of  flat white that I knew a trick about.  20 minute's drive time back and forth from the hardware store.  I bought 3 cans of a certain flat white spray paint and spent about another 20 minutes touching up the smudges.  They looked good as new.  Cut a $1,500 job down to about $9 in materials and 40 minutes labor.

Tim