General Contractor - 50/50 split?

Question

Had a meeting today with a broker/attorney and a general contractor for a house flip. The idea is for a 50/50 split on the net profits between myself(capital investor) and general contractor. I would pay acquisition and materials cost upfront, the broker/attorney finds and analyzes the deal (makes6-8%), contractor estimates all rehab costs & takes on labor risk but makes 50%. This setup is very hands off for me, but I take a majority financial risk and lose a large profit margin due to the contracting partner’s share. I agree with a win-win scenario for all parties.

Can anyone provide me with insights into the following: 1. Is a legal structure required and if so which is the best for this partnership? 2. Is this generally a good arrangement considering I have zero real estate investing experience (been educating myself through BiggerPockets materials)? 3. Any pitfalls or major concerns you can share would be extremely valuable.

Lastly, the broker is recommending a minimum cash on hand amount of $150,000.

Thoughts?

Frank Wong · Answer

Hi Eric,

This deal does not sound great for you.  The broker and contractor have zero risks. You also said you don't know them that well.  What if the contractor doesn't complete the job? Now you gotta go find the people to finish it.  What if the quality sucks?  I am sure he is not going to do all the work himself and will need to hire subs which you will have to pay for.

Just because a broker teaches at a school doesn't mean he can find deals that are ready to be flipped.  The reality is if he really knew what he was doing he would be doing it or have done it.  Does he have deals he completed?  What proof of concept does he have?

For all the risk you are taking and sharing the profits with others you be better off finding an experienced team and being the money guy for that.

Diana Muresan · Answer

@Eric Clement I would do a renovation loan with FannieMae HomeStyle which allows investment properties, 1 unit; its only 15% downpayment and this way you don’t split anything with the GC, you just hire a GC. Example you find a $150k that needs $75k in repairs, purchase price becomes $225k, it needs $33k in downpayment, build 3% in seller credits to cover closings costs and money are disbursed directly to the GC, 50% of the material costs at closing and the rest in 3-4 draws. Best part is that you don’t need to make mortgage payments during reno, you can roll up to 6 months into the loan. You can sell or refi after reno

Chris K. · Answer

@Eric Clement

If you were to do something like this, you absolutely need an agreement between all the parties. But a few thoughts:

• I don't know whether you are using this attorney as your own lawyer, but I would never have considered this kind of arrangement as a lawyer during my practicing days. It's a crazy path to go down for an attorney due to the ethical rules.

• You also have to be very careful about the contractor claiming that they will cover "labor" costs. Many smaller contractors are often barely floating by. It's already difficult when your contractor fails to pay their employees or their subs. Adding this 50/50 split to it can make it worse.

• There could be some interesting tax and legal consequences as a well depending on how exactly this is set up. But that's a more complex topic.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Marcin Nurek · Answer

The REIA run by Adrien or the other group out of Merrillville?

Marcin Nurek · Answer

@Eric Clement so what did you end up doing afterall?

Daniel Kong · Answer

Like others have pointing out, there are HUGE risks involved. It all comes down to how well you trust the broker and contractor. You probably want to ask what kind of track record they have and actually call previous people they have worked with or done deals with. My advice would be to hold off on this for now - you can always circle back with them later. I've known people who have done this type of deal successfully, but it was always among friends who already had a long established relationship.

Jason Mathews · Answer

@Eric Clement

I would say if you trust the contractor and know his quality of work VERY well, then it could be a great partnership for both parties. I’ve known a couple of different people who have participated in this exact situation and it worked out flawlessly...

That being said, there’s a lot of terrible contractors out there who do very poor quality of work and just don’t know what the heck they are doing. You have the most to lose here and there’s no guarantee he will even finish the projects, which leaves your assets vulnerable. If you don’t 100% trust this guy and know his quality of work is 100% quality, I would say no.

Rachel Imhof · Answer

@Eric Clement My husband and I are experienced flippers. Have done 15 flips and 3 new construction homes. I live in NWI and Chicago. I just completed a new construction in Portage, Indiana. PM me and I will have my husband reach out to you to offer you some assistance.

Eric Clement · Answer

Thank you everyone for the solid advice!

General Contractor - 50/50 split?

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