Flip Partnership w/Contractor & Agent?

Question

Just recently I began my investing career and started off with 6 doors. I was able to purchase a 5 unit through a land contract when I only thought I would be able to get a duplex. Then I purchased an SFR in the same month. As of now I’m cash strapped for rental purchases as I’m going to let those brew a bit. So I need more capital.

I have or will have shortly, access to funds that I will only use for a flip situation. Which in turn will create more money for my long term goals of pouring every last cent I have into monthly income properties. As of now, this will be my families and mine retirement long term. But dang this RE living is addictive. My word!

So now I am actively using the same agent (who is seriously awesome!) to find flip opportunities. I have a slew of properties which show potential, that I could pull the plug on right now from him. I’m working with a contractor who is also a long term friend, knows the city and area extremely well and wants to partner on some level. He’s very good at what he does and has scaled his own business very effectively. We plan on splitting the profits most likely based on percentage invested. I will handle financing. He will handle labor and materials. Split will most likely go down that same percentage of financial input into the property. I live out of state. Realtor and Contractor live in the area where properties and work will be completed.

I’m curious as to the BP community’s perspective on this. What to look out for? What to avoid? Suggestions? Cautions? Encouragements? Comments on strategy. The real stuff. Thoughts?

Asad Shaikh · Answer

@Jeff Nobert my advice, and I am no expert:

-Three way call with your partners, discuss these details and iron out the skeleton of a profit sharing arrangement.

-Jot down major points (responsibilities, profit sharing, worst case scenarios etc.)

-Pay a real estate attorney for advice on what legal entity these partnerships should be done in and have them help you draw up an operating agreement.

-No matter how much you respect and trust these guys, make sure you have something in writing.

-Besides that I like your strategy, I would pencil in your goals in terms of gross profit on each deal, profit per partner on each deal, and how many flips you want to do in 2019. Then tackle those goals. Make them measurable.

Eric Johnson · Answer

@Jeff Nobert I second all of the replies here, make sure you have EVERYTHING IN AN AGREEMENT AND THIS AGREEMENT IS REVIEWED BY A REAL ESTATE/BUSINESS ATTORNEY.

I have personal experience with shit hitting the fan with partners and as such I take extra extra extra caution when dealing with other people now.

Scott Smith · Answer

And I always encourage anyone looking into real estate investing to find professionals who you can work with that also have real estate investing experience. Because of the insane amount of niche knowledge they have, it is basically like gaining super powers. If you hustle hard and can keep up with their advice, a lot of the time they can help you skip years of mistakes - so you have the right idea by bringing people on-board. The only thing I would recommend is establishing the correct safety measures to protect both yourself and those people partnering with you - helps people know you are serious as well as offering peace of mind to all involved.

Scott Smith · Answer

The best thing you can do is work out the details between the group of people planning to invest together. @Joshua Dorkin wrote a great article a few years back that is really simply, but a great way to just break down the agreement you intend to go in on together - give it a read here. As for establishing an entity to ensure there are protective measure in place - it would depend on how you are operating, since there are a few options.

You could go with something like a venture specific LLC, which is outlined in this article. If someone in the group owns a Series LLC, you can also establish this investments as a "series" within that entity. There would be other ways, but I would say these are two that come to mind for people just getting things started. The important thing is that after you agree on how to lay things out with your partners, you would want to tie in an experienced attorney to help you write out a good operating agreement. This is something I see lots of people DIY. If they mess anything up (which does happen quite often,) then the protective measures are undermined and all individuals can be at risk. On your first run, don't mess with trying DIY.

This is not legal advice, simply my opinion as a real estate investor.

Jeff Nobert · Answer

@Asad Shaikh

Everything you said makes perfect sense. And what’s great is this is something that all parties want to do. I find it interesting your a realtor as well if I’m reading your profile correctly. I’ve wondered if it makes sense to bring the realtor into this as well.

The realtor has a knack for finding these types of properties and is very good. He flips and invests when he cans. Keep in mind as we start, we are limited to my financing amounts. Which right now will most likely sit at around the $30-$60k for all purchase, closing and loan costs/payments while flip is being done. As a realtor yourself, do you feel there would be more motivation for a realtor, to join in the profit sharing aspect of something like this? Or would you rather just make your commission instead?

My philosophy is this. If I can get a team of both a realtor/contractor to move forward with this and share profits appropriately, would that not help in completing significant deals?

Flip Partnership w/Contractor & Agent?

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