How should I set-up a JV partnership with a Contractor?

Question

I have been approached by a great Construction Co. in reference to doing a JV on some flips in my area. He's seen what Ive been doing in my area and wants in. We briefly discussed it...nothing in depth. Im used to doing deals with HML's...paying them 15%.

So my question is whats the best way to set-up a JV deal with Me, The Contractor, and HML?? Thanks BP..

J Scott · Answer

Personally, I would hire them as the GC (and pay them however you'd pay them if they were a different GC) and then any additional value they bring to the table you can negotiate separately.I see no reason to give them equity in the deal simply because they are going to be your contractor. This has several drawbacks:1. It's typically more expensive2. It's harder to replace them if they don't do a good job3. You are then giving them decision-making authority over something you should have complete control ofJust my $.02...

Sean Cole · Answer

DON'T! NOT EVER!Now that I've had some time to take a few deep breaths and count to 10... There's a few common issues that come up with these types of proposals:1. The contractor never offers to do their portion of the work for free during the rehab. They want to charge their normal rate AND get a piece of the profit at the end.2. The contractor usually still wants regular payment throughout the job. You ever get paid as an investor during the rehab? Didn't think so!3. Contractors in my area generally have terrible design sense but don't realize it. Light beige walls are out of style!4. As others have said, what happens if he walks off or does a terrible job and you have to fire him?5. Related to #2, IF (big one) you can get your average contractor to agree to not take payments during the job, he's probably going to have a cashflow problem, leading him to take on other jobs during your rehab to pay his bills. This isn't good for your timeline.Of course, there are exceptions to every rule. The ONLY way that I'd consider this kind of arrangement would be if the contractor was also contributing significant hard cash to the deal, just like any other equity partner would be expected to do.

Doug W. · Answer

Why not just pay him as you have been and then at the end, if the numbers are what you need them to be, throw him a bonus payment? That way you retain complete control of the project and he still gets that extra pay that you seem determined to give him through a JV agreement. Account Closed

Julie O. · Answer

I agree with Doug and Scott, it doesn't really sound like you need a partner. Keep him as your GC and add in the bonus if earned. Though it sounds like he's wanting to do what you do… You could wholesale him a deal and introduce him to your hard money lender, let him try one on his own. Offer to mentor him through the process if needed. He gets to try flipping and you don't have to take on his risk.I would never take on a partner I didn't absolutely NEED, someone I couldn't do a deal without.

Nnabuenyi Anigbogu · Answer

I would agree with Jscott. I have a 50/50 partnership with my contractor because i was brand new to the business and knew nothing about the construction side of the business. Partnering with him enabled me to do the first 4 deals and even though it was more expensive i still made money. As i get better i will switch to just hiring a GC. If you are experienced just hire him as a GC.

J Scott · Answer

If the goal is just for him to make more money, why not just pay him more? My concern for you is that you're giving up control of the project when you give someone else equity. As a new business owner, that's the most dangerous thing you can do. But, it's your business...

J Scott · Answer

Nope, you can't. What happens if he does a bad job at the rehab or walks off the job? Unlike any other contractor, you can't just fire him if he has equity, as he has say in the deal.

Account Closed · Answer

Im always going into deals with the thought of never coming out of pocket...except for down payments on bids. But mostly I feel more secure using OPM and then the person deserves equity but never control. So here's my idea...Im going to of course use HML or PML they are going to want "Skin"...the skin that I'm going to have will be the contractors CASH. At sale...Pay My Lender is share....Pay The Contractor his share (whatever we agree on...not much)...Then pay myself. Its one of those so good deals I can add a Money Partner and still make my bottom $25,000. Sounds Good? @J Scott

Account Closed · Answer

Ive used this guy before on 2 other jobs, he actually did way more than expected for a good Labor Price. I just think he interested now in making the kind of money im making or close to it. I think I figured out how to structure it though. @J Scottbut I hear what your saying/thinking..

Account Closed · Answer

Im thinking...if he comes in with half the skin...I can treated as a normal JV 50/50 or 60/40 @Nnabuenyi Anigbogu@J Scott