50-50 partner for flips? Is this worth it?

Question

I recently came across an opportunity to flip homes with a partner and I wanted to run this through the BP experts to get some feedback.  Here is how it works:

• Find a deal (through whatever preferred method) that fits within their criteria
• Contract the property using and or assigns and sell the contract to the partner
• Participate in the management of the flip project (They have a GC that has guidelines to follow, has done tens of flips already with these guys and they use the same process each time, so personal involvement in the flip would be minimal)
• Split the profits after it sells

Some quick numbers to keep in mind for their deals:

• They need to see a 15% - 20% profit margin in the deal to take it on
• All costs of the deal are subtracted from the proceeds, THEN the 50-50 split happens.  They borrow private equity to fund the deals @ 15% no points, no doc fees, straight 15%
• I am allowed to wholesale the deal for more, as long as the profits fit within the aforementioned margin
• I am allowed to keep the listing for myself (I have my license) and sell it at 2.5% commission

My dilema is this: I have enough cash for 1 flip at a time currently.  If I do the flip on my own, I risk my own cash, have no extra guidance and can only take on one project at a time.  On the flip side (no pun intended), if I give up 50% + holding costs, I have 0 risk of loss, still get to keep a wholesale fee (if I get a good enough deal) and have lots of experience behind me from the partnership.

Anyone see any red flags, offer some tips or guidance here?  Would love to see what you think.  Thank you in advance!

Denice S. · Answer

I keep reading and rereading your post and I still don't see where you have any of your own money in the deal. If that is the case and all you're doing is finding the property and then (possibly) listing the property at 2.5% plus enjoying 50% of the profit...that's as passive as it gets.  It's really hard to realize passive income on a flip without being the lender and you should jump at the chance a million times.  Your an agent and by default these deals will come your way several times per year without you having to spend time and money looking for motivated sellers.

You could have 5 of these deals going, making more money and working far less than if you flipped one house on your own.

Unless I've missed something?

Michael Woodward · Answer

@P.J. Bremner,  If you're convinced that they are legit then this could be a good way to get your investing education with little risk to yourself.  Just be careful that they really are on the up and up.  If they're charging any kind of fees up front I would really question their intentions.  Targeting newbies is the preferred method of shysters that want to collect their fee and then put ridiculous criteria on their projects so you never find anything.  That doesn't sound like the case here but....just a word of warning.  Assuming they're all good and you complete a couple projects with them, you'll learn a ton with little risk....and hopefully make some money.  After that, you'll be more confident on your own.

I don't mean to poke anyone in the eye but I have to strongly disagree with Sebastian and Steven that the rehab is a "piece of cake" and it's all down hill after you find a good deal.  I've seen great deals completely annihilated by someone that didn't understand the how/what/where/etc with the renovations and how to get it done right.  That's a HUGE thing that can't be underestimated.  I hope that company is a good one because they will keep you on the right path if they are.  Good luck!

Greg Horn · Answer

Aloha @P.J. Bremner! You said yourself that it seems these guys target RE newbies with their marketing to have them do the hard work. Any company that is targeting folks with little knowledge/experience nor capital raises a red flag for me. I'm not saying you shouldn't go through with it. What I suggest is that you ask this company to put you in touch with three folks who have done what you're thinking of doing and you talk to them directly about their experience. Hear it from the horse's mouth.

Sebastian Taylor · Answer

@Michael Woodward, rehab is not an art, it is just a hard work. J Scott wrote 2 books - all you need to know and a little more. The rest is a common sense. When you have a "partner" who supposedly is going to "help you", you do yourself a disservice, you condition your mind to rely on somebody else instead of solving the issues. I don't believe in good companies when money is involved. Speaking from experience - I did my first rehab with somebody - it turned out to be a disaster. I will never forget how stupid I was to rely on somebody's help or guidance.

"Targeting newbies is the preferred method of shysters that want to collect their fee" - this is exactly what is going to happen. In the meantime, they will sell you some other service in between; to solve the problem they themselves have put you in. I won't be surprised if their lender is a separate LLC they themselves own, and their contractors charge twice as market. At the end, when there is "no profit and nothing to split", in best-case scenario, they will be way ahead of you. Besides, how would you learn something if they already have everything in place?  They have a lender, they have a GC, they have a crew. On your next project when you are on your own, how would you build your team?

P.J. Bremner · Answer

@Greg Horn

That's a good point and they actually had several people at the REIA meeting that they had done deals with or were currently in deals with.  They are legit.  My concern was more about the structure and if it was worth giving up that kind of profit for their experience and access to capital.

Rich Baer · Answer

@P.J. Bremner

Always best to do it yourself. Most partnerships like this quickly fade. It's just human nature for one partner to begin thinking "What do I need him for". Plus the accounting and filing of K-1 forms will ultimately drive you crazy. I give it a 20% chance of lasting more than 2 years. I have experienced similar scenarios first hand.

Bill Hinshaw · Answer

They are going to potentially pay you a wholesaling fee AND give you 50% of the profits with zero capital required and zero involvement in the rehab, and you get to make commissions on the sell side? You feel like they are legit.

You're wondering if you should do this or do your own rehabs. Do both! You have absolutely zero risk by partnering with them. Leverage what you learn from their rehab processes - budgets, contractors, etc.

I'm with @Denice S. - I feel like I'm missing something. Maybe @Sebastian Taylor is right and they will come to you for money once the process has been initiated and a "problem" has arisen. In that case you need to seek feedback from other people who have already partnered with them. Keep checking for the red flags. Until you find some, I would definitely consider this as a great way to build your business.

Steven Mitchell · Answer

agreed with @Sebastian Taylor.  Sourcing is the hardest part.  If you have that skill everything else falls into place.

Sebastian Taylor · Answer

@P.J. Bremner, if you are able to find a deal as you described in your firs post, you don't need any partner whatsoever. Finding a deal is the hardest part. The rehab is piece of cake, just be careful and get at least 5 quotes. You'll find tons of contractors at your local reia, and I would suggest for your first flip do not give all work to one contractor, roof to roofer, hvac to hvac, flooring to flooring etc. Finish that one project one at a time, don't get anything else in parallel, thank me later.

Andrew Boccia · Answer

It sounds like a good structure. Interests here are aligned a lot better than when you hire a third party contractor. Comes down to the numbers but if they are doing the contracting at cost then I think it can work out well for you.

50-50 partner for flips? Is this worth it?

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