How would you structure the profits?

Question

Hey guys, I'm curious to see what type of structure you think makes the most sense when it comes to sharing the profits on a flip in this scenario - One party is funding 100% of the purchsase price of the home, another party is funding 100% of the rehab, and the third party is the realtor who is finding the project and will obviously be making a commission off of the purchase and selling of the property. So I'm curious on everyones thoughts...should it be 50/50 for the 2 parties funding the purchase and the rehab?? Should it be 60% for the party funding the largest portion, being the purchase, 35% for the party funding the rehab, and 5% plus the commissions to the realtor??

I'm sure there's several ways to structure this, so I'm really looking forward to hearing everyones thoughts, especially from the veteran flippers out there who may have done projects with this type of team. :)

Andrew Ware · Answer

This is hard to answer because there is a more important set of questions you need to answer first. Who does what? Who has control of the project? And what happens when things happen? I'd brainstorm a bunch of different scenarios of things going wrong and decide how they will be handled. What happens when you disagree about how to handle a big expense? What if you can't decide on a color of tile? What happens if one party dies or gets sick during the project? Does the person funding the rehab have more risk if there is an overrun? I could write a hundred questions like this.If this sounds like you are setting up a company, you are (even if only semi-formally). A boxer isn't good because they can throw a punch, it's being able to take a punch. Business is easy when things are going well. But it can save a lot of money, time, hurt feelings, and lawsuits if all parties understand their roles and responsibilities.When you have sorted all that out you can decide what kind of split there will be. Is the realtor part of the team or paid out of the profit? Many would prefer to be paid as an expense so they have no liability, but that is up to all of you to decide. Is one of the investors also running the project and deserving to be compensated for their labor? There are no right or wrong answers here. But don't make the mistake of believing everyone thinks like you.

Glenn Tracy · Answer

@Brandon Battle Thank you for your input, you're right on track with how one of my realtor friends thought things should be structured as well, that just seemed fair to everyone involved.Simon L. Great response! Thank you for pointing out there's obviously more questions to be answered before deciding on a structure. All of the things you pointed out will help me come up with a more complete breakdown and understanding when presenting to everyone involved. I want to make sure all bases are covered and everyone feels the structure is fair, so thank you again for the tips!

Glenn Tracy · Answer

@Manolo D. Thank you for your input as well. I think it's really going to come down to all parties involved sitting down and coming to an agreement that everyone is happy with. And with the feedback I've received from yourself and everyone above, that's going to help me a great deal when it comes down to having that meeting. Thanks again!

Manolo D. · Answer

Glenn Tracy Realtor will be based on full commission on both sides, 6% per transaction, if you want to be generous since he found the deal, go 8%. Figure out how much money is needed on the deal, then you can do whatever contribution will be equal, say PP guy puts up 300k, and Rehab puts up 100k, then split is 75/25 respectively. if you put management on the process vs decision making, then it gets complicated easy. On the simple agreement, the PP guy can buy out the rehab guy, second option to do the reverse, third if that doesn't work, sell the deal and split by contribution. Simon Lowrie Why do you think it is worth the formation and $1500 minimum spend and possible double taxation on an LLC vs a simple agreement?

Simon L. · Answer

I would suggest creating an LLC that owns the property. Then, within the LLC you spell out ownership interest of parties. In my mind the realtor just gets the commission only. Or maybe you do something like give him 5% membership in LLC but no voting rights (something like that). I always think 50/50 is best on partnerships whenever possible. It just keeps it simple (as long as you both do your part). Where is house? I'm in San Luis Obispo County, Ca.

Brandon Battle · Answer

which party will be the project manager and do the actual work of getting the property designed and rebuilt for sale.Who will hire and monitor the contractors on a regular basis to make sure the work gets done? if you are depending on the realtor to do everything for you while you just go to work and do nothing to the property yourself,give the realtor 6 to 7% of the sales price for doing two jobs.give the rehab cost only guy 20% and the rest to the big cash investor for taking the biggest risk.