How should I structure this deal?

Question

I'm in the middle of my first flip in Texas and I've decided to wait until it was done before I jump to the next one.  It's about a $100k rehab and so far is going well.  I have been analyzing deals that have been sent to me from the contacts I've made and although some are good, none have been incredible.  I just got one that looks great and I don't think I want to pass on it.  The asking price is $170k, but I'm told it will probably go for at least $200k.  Based on photos and the rehab costs on the flip I'd doing, I'm estimating the repair costs at $150k and a conservative ARV will be $468k.  I will confirm rehab costs with my contractor before I make an offer.   I've been telling some friends about the flip I'd doing and a few people have expressed interest in partnering with me.  One of the people I'd like to partner with has money, but not a lot of time. My question is  what would be a fair split? I'd like to possibly have this a 50/50 deal, but  I would do the leg work as far as working with the contractor, getting insurance, taking care of utilities, and dealing with the both the purchase and sale of the property and whatever day to day tasks come up.  Is there a standard split where I put less than 50% into the deal but have a 50% interest?  The person I want to work with is very smart and any input on how to structure present this offer would be appreciated.

Stacee Evans · Answer

That makes sense. I'm still trying to figure out how to structure this and I'm also looking into just using hard money. Even if I don't get a partner for this one your reply gives me great information for the next one.  I would like to eventually find a partner and by then I'll have more experience.

Wes Johnson · Answer

@Stacee Evans there's really no standard split in partnerships just like there's no standard split between real estate brokers and agents. Coldwell Banker charges 50/50 while Keller Williams is 70/30. What's fair is determined by your negotiations with your partner. Are you putting no money into the deal and only contributing your time and intellect? Or are you doing that and providing equity to the deal as well?

Other things to consider are, even if you're only providing time and expertise is that expertise especially necessary to the success of the venture? For examine if you're a previous arson investigator or fire chief and the property is a burnout I would expect your value to the venture to be more essential to it's success and therefore would command a higher share of the deal's proceeds.

It's all predicated on what each party brings to the table and the value of that particular trait to the success of the venture considered.

Stacee Evans · Answer

@Sue Hough Thank you.  I'm realizing there is not an exact formula for this. I'm also exploring the option of using a hard money lender for this and I'm working on improving all 3 components you mentioned.

Sue Hough · Answer

Stacey,

Great advise here!  I have partnered on many deals with various investors and no two were the same. I have arranged a partnership where the split was 50/50 and I did not bring money into the deal but the leg work was mine.  And I have partnered 60/40 with 60% being my share under similar terms.

You have to be confident your knowledge to create a profitable investment is extremely worthy.  Most financial investors are looking for individuals like yourself.  Keep in mind there are three necessary and valuable (meaning worth money) components to every investment; Time/sweat equity, knowledge and finances.  It sounds as if you possess two of the three and are in a good position to negotiate confidently.

Good Luck

Sue Hough

Stacee Evans · Answer

@Whitney Hutten Thank you.  That is great advice.  I've purchased rental houses, but have never used a partner. I'm starting to realize that it will be easier to scale up with other investors working with me.

Whitney Hutten · Answer

I echo, Steve's advice AND 50/50 is not a horrible split either.  I'm currently partnered on a flip where one party is doing the "legwork" and I'm bringing capital and personally guaranteeing the loan.  We've split all out of pocket costs 50/50 so we are both aligned to A get it done and B get it sold.  As you negotiate the split, also talk about who is bringing any construction overages, timelines, and contingency plans should the property not sell as expected (ie. how / when will you exit).  AND get a good JV document in place.  Can't stress that enough ;)

Steve Hall · Answer

@Stacee Evans If the person you want to partner with is "very smart", then you should just ask him/her how he/she wants to structure it. Don't go to them with an idea of how you want it to work, because they will tell you. If they are not yet interested, just ask them for their opinion on the deal.

Stacee Evans · Answer

@Steve Hall Thank you.  That is a perfect way to approach it and I hadn't thought of that.  I appreciate you taking the time to suggest that.