What is a fair profit split for this scenario?

[Patrick Boutin]

First of all thanks for reading this as I realize it is a bit lengthy. I just think this info is important in order to give proper context to my question.

What would be a fair profit split on a deal where i bring all the down payment funds, good credit and stable job?

My potential partner will not put any money but will put in his time as he is self employed (he is a RE agent), has a more flexible schedule and obviously RE experience although I suspect not with RE investors. In my case, I will expect to spend as much time as I possible (around my 8h FT job shift) so I can be on site the majority of the time while the deal is taking place. I don’t want to just be a “silent partner” that only helps with the funds and then just collects a check. Instead I expect to deal with contractors, materials purchasing, planning and anything else needed throughout the deal in order to make it a successful one. So I also expect to work on the deal. I just know there will be a mostly consistent 9 hour time slot where I may not be available on. I have even considered moving my regular work hours from 9am - 5pm to something along the lines of 12pm - 8pm during the duration of the project (I think the morning time may be more productive time for project related work).

I have very little experience in Real Estate other than some small properties I purchased out of state, the reading and studying I have been putting on BP since August of last year (studying J Scott's books and using the houseflippingspreadsheet to learn how to analyze deals). My potential partner on the other side has more experience with RE transactions given that he is a RE agent. As far as I know and like myself, he doesn’t have experience rehabbing or flipping properties and has only dealt with contractors whenever some of the properties he has tried to sell or purchase (for his clients) needed work in order for the deal to go through. His time flexibility in addition with his RE experience would prove very valuable for the times when I will not be able to be onsite as well as being able to view many properties, making many offers that could take time and maybe frustrate another agent.. I even thought as part of the partnership, he could be the listing agent once we are ready to sell the house back and have him not charge his part of the commission which we may offer in part or fully to buyer’s agents in order to help the house sell faster.

The reason why I ask this question is because I have seen numerous times in posts and heard in podcasts how partners would split the profits 50/50. But of course in most those cases someone always did all the time and work without putting any money while the other put all the money but didn’t put any time nor get involved with the property.

In our case that wouldn’t be the same because as I explained previously I EXPECT spend time in addition to my money. I want to participate in the decision making, planning, materials purchasing, dealing with contractors, etc… as I intend this to be a learning experience where I can do this around my job and not just "collect a check". I can’t quit my job and I won’t at this time (it’s a good job) but I do want to create and grow the capital I’ve saved over the last few years.

So going back to my original question: would it be reasonable to offer something like a 65/35 or 60/40 to start instead of 50/50? I hope I don’t sound greedy as I mostly want to be fair. My thinking was that this way could work until he has some capital saved up and maybe then is able to assist with the down payment on a later deal and then at that time then do it 50/50.

What are your thoughts on this?

[Wes Blackwell]

@Patrick Boutin -- Here's my 2 cents:

First and foremost, it sounds like you are doing at least half of the work, and since it's your money you're taking ALL the risk. This is not a 50/50 partnership.

Second, the thing to understand about friends who are agents is that just because they are your friend DOES NOT mean that they are good at their job as an agent. 

I don't know your friend and their skills as an agent... they could be the best Realtor on the planet for all I know. But you should know that any regular joe shmoe can get their real estate license by taking an online course for $99 and they only have to get a 70% on the state exam to pass.

Further, half of all licensed real estate agents conduct ZERO transactions each year. And 50% of the other half conduct 4 transactions or less. So hopefully your friend is not what we professional Realtors refer to as a "part-timer."

It's evident you know this to be true since you said "making many offers that could take time and maybe frustrate another agent.." and "other agents many not want to do all of that at first" 

0_o wut? What kind of lame agent gets frustrated submitting offers?!?!  But still... you know that some amateur agents do, and that's why they're still amateurs, and that's just sad.

Because you're doing more than half the work involved, don't bring the Realtor in on the deal. Hire him. Split it 97/3. He'll get commission when you buy and commission when you sell.

And if you're hiring a Realtor, you want someone with a proven, professional track record and business model for getting you a fast sale at the highest price.

Here's some questions to ask your friend (or yourself if that's too uncomfortable):

• How long have you been a real estate agent? Is this your only job?
• How many homes did you sell last year?
• How many of them sold in 30 days or less? What was the average DOM?
• How many sold for asking price or above?
• What was the average % of listing price the properties sold for?
• What do you do to market the home besides MLS, Facebook, Zillow etc., "email blasts," Google Adwords, print media or open houses? (if they don't have an answer, they suck)
• What's the most important to consider in calculating ARV? How do you calculate it?
• What other kind of knowledge or expertise can you bring to this deal besides your skills and services as a Realtor? (like investing experience)

Market knowledge (calculating what to pay for a property and what to sell it for) and Selling the home are the two skills a Realtor brings to your transaction. If they screw either one of those up, you could have some serious problems.

Miscalculate the ARV too high and have to sell it for $20k less? Big problem. Do a crappy job of marketing it and sell it for an additional $20k less? Bigger problem.

Your friend simply isn't bringing enough value to the table to justify being paid more than his 3% share. And the worst part about hiring friends is that they're a whole lot harder to fire if they do a bad job. Plus, it puts your entire 17 year friendship at risk. Money changes people. Big time.

If you feel confident that he's the right agent for the job, hire him as your agent. If not, find someone who is. But no matter what don't cut him in on the deal. As soon as you get a few deals under your belt you'll quickly see how little he's bringing to the table.

Best of luck!