So how do you do a JV with a contractor for a flip?

Question

Hi, everyone. I'm on my 2nd flip house...first house reno's should be done by end of the month, and closed last month on a second house. Both houses bought cash.

I've seen posts from people who have done JV deals with a contractor. So how does that work? Let's say I bought a house for 200, and contractor estimates reno to cost 100, and we expect to sell the house for 450, expected profit of 150. Does the contractor pay for the reno himself, and we split the profit 2/3 to me and 1/3 to him?

Will Barnard · Answer

First off, let me say that I am not a big fan of partnering with contractors with the exception of some special circumstances. The reason being, contractors are typically not investor's or designers and do not have real estate backgrounds. Secondly, contractors can easily spend money on materials and then take some to other job sites claiming they were all for your project. Lastly, if you were to do this, then the contractor should be doing labor and materials at cost and not make a penny on the construction portion, only the profit share.That said, I also disagree with the exact split based on who funds what. Reason being there are more moving parts to a deal than just the money. The deal itself is of the greatest value in my book, then you have the rehab management, the design choices, the sale (which includes getting the right agent, the right photos, the right staging, and doing the best negotiating), and then the funding.Keep this all in mind before deciding on profit splits.

Will Barnard · Answer

In the example above, that is exactly what would happen. Having a multi layered waterfall is another option over a straight profit split which is also more typical of a syndicated deal. That said, having a prefered return to the money partner is appropriate as their funds are at risk, the working partner only has time at risk.On top of all that, and as I pointed out in my post above (5 years ago), who sourced the deal, did the design features and who was in charge of selling the deal should be factored into the equation somehow. There are many ways to skin this cat, so finding a happy medium between all parties should be the target.

Jeff Wallenius · Answer

Our typical setup is a 50-50 split with a 15% preferential return to the investor. Investor puts all the money in for purchase and rehab and the profit is split 50-50. The preferential return provides a minimum for the investor with the upside of participating in a large equity position with the 50-50 split. An example below to clarify.Investor funds $100K which includes purchase and rehab. Home takes 6 months to sell. Investment-$100KTerm- 6 monthsPreferential return- $7,500 (15% held for 6 months)Total profit-$30,000Investor return-$15,000 (since this is the higher of the two numbers)If the total profit came to be $10,000 then the investor would take the $7,500 preferential return and the operator on the ground would only make $2,500. Clear as mud?

Brian Pulaski · Answer

When the GC says, renovations will be $100k, is that simply his materials, labor and overhead, or has he built in his profit to this as well. If it was $80,000 and he anticipated $20,000 in profit, he would be getting that back plus his split you agree on. I would just make sure you are fully aware of what his costs include, and make certain both of you agree on costs plus timelines.

Matt Stricklen · Answer

Well said. I would add the perspective that where the deal itself is the greatest value to the investor, but not necessarily to the contractor.

Sooraj Maharjan · Answer

This is a nice setup, but it's preferring the investor vs the working partner. What if for whatever reason the proft came out to less than 7,500? Does that mean the partner who did the work gets nothing?

Mike Weaver · Answer

good point, Brian.

Ben Kuppi · Answer

I am thinking of doing something similar to this as well. If I put up all the money for the property and the contractor covers all rehab cost and manages all repairs, is a 60/40 a fair split?

Chris T. · Answer

I think that is realistic, you just need to make sure your contractor has enough funds for that $100K worth of materials and sub-labor. Whatever you agree on, make sure it's on your JV agreement. As detailed as possible with a timeline. And also a clause to buy the other party out if the party is not performing.

Mike Weaver · Answer

I was thinking of doing the profit split based on what each party has put in, after all closing expenses. So in my example above, I'd keep 67% (I put in 200) and GC would keep 33% (he put in 100). Wondering if this is realistic.