Contract for working with investors?

Question

Hi new to the forum here. We just started flipping some homes recently and very happy with it.

We are hoping to start looking for some investors to work with us, so that we can afford to purchase larger homes. I have the money to do smaller homes but nothing major yet.

My main concern is having a good contract set up with the investor so that both of us are very clear on our agreement and that neither gets hosed. Can anyone point me in the right direction, or maybe even someone has a template to work from?

Ideally I'm looking for a silent investor, somone to put up the cash but let me do all the work and split profit 50/50. I could even live in the house while it's being flipped to save some money. Just concerned that the investor could decide not to sell, not agree with me on final sales price, not give me half of the profit since the house is in their name, etc. Any advice would be great

Thanks!

Bill Gulley · Answer

I understand what Chris is getting at, but IMO, it's not something for investor consumption in a forum. We, or some of us, are rather protective of the majority of readers starting out and picking up the ball to only run in the wrong direction. I'm not disagreeing with Chris only pointing out that care is required in drafting such documents, it's not a beginner topic. Having a note with your company or partner is fine, interest is irrelevant except as to tax issues. But acting from the outside as a lender, having a collateral interest and then requiring equities is violation of usury laws in Missouri and other states with such laws as well as APR issues if such applies. You can also be viewed as a captured business lender, preditory practices. You can certainly have an agreement with note terms, put take care in using the Heading on that document saying Promissory Note, when it should say Partnership Agreement. Lenders may not take equity positions, an issue from the S&L days with agriculture interests. Public or private lenders, the issues are the same. See an attorney.... :)

Account Closed · Answer

I'm not a lawyer but this court case seems to pretty clearly say that a loan from one joint venture partner to the joint venture is NOT a loan, and since it is not a loan it is not subject to usury. By extension, if it is not a loan how could it be subject to lending regulations and SEC restrictions. http://www.corporatesecuritieslawblog.com/compliance-joint-venture-exception-to-the-usury-laws.html

Chris Winterhalter · Answer

The note would be a loan and would have the legal elements of a loan. The payment of interest would be based on the profits of the property and would be less based on monthly interest payments. Once again I am not a lawyer. This is not much different than borrowing private funds with deferring the interest due at closing.

Bill Gulley · Answer

From a legal aspect, you can not take an equity position and a collateral position at the same time through a promissory note, you can have an equity sharing agreement with capital being due to be repaid first to a principal and then split profits, but it is not filed as a mortgage lien. The "loan" is a capital contribution in the venture and is administered through the partnersip agreement. A loan can be made to the company as well. Accounting for contributions and payments to partners can be agreed to as a liability of the other partners but a note is note necessary, it's an accounting function based on the agreements. Before you leap, I suggest you see an attorney and address general business law aspects. Can't possibly start at that level in a forum with general business practices and the options available, you need to define what relationship you want. Saying be a lender with an equity position can lead to trouble. Gotta choose what hat you wear.

Account Closed · Answer

Chris Winterhalter, does this equity agreement carry with it the nature of a loan or a partnership? If it is viewed as a partnership arrangement it would seem to avoid the lending regulations and SEC restrictions Bill Gulley speaks of.

Chris Winterhalter · Answer

Creating an LLC would be worth while if you knew that you were going to continue doing deals with the investor or if the property size warranted setting up the LLC. On smaller properties I've set up a promissory note with performance terms....i.e. if the property is sold for over a 50k profit the split would be 50/50 and if the profit is under 50k the split is 60/40. You can notate that no interest is due on the loan for X period of time making this debt structure have characteristics of an equity agreement. Obviously you are on the hook for the loan however it gives you more flexibility with holding costs and funds needed. If you start to set up a strong relationship with an investor then switch to an LLC down the line. Obviously have a good attorney and accountant review all of your agreements.

Bill Gulley · Answer

Make it simple, find buyers/investors and you contract labor, if you're a contractor then be a contractor, base plus to the sale of the property. You have little risk and are in a better position to secure your interests as a contractor than as a partner.

Ryan B. · Answer

Hey thanks for the info. Although would it really be considered "borrowing" if the house is in the investors name and he's the one paying......but I'm basically just doing the work for him and splitting the profit? Which also brings up another question: Would I be better off if we put the house in the investors name, my name, or both? I can see pros/cons to all of those!

Bill Gulley · Answer

Welcome RB! I'd suggest you do this as members in an LLC and cover the terms in an operating agreement. Using a note can accomplish a lot, but borrowing from outside folks comes with lending regulaions and SEC restrictions. In an LLC, capital can be injected by partners with less trouble, let Accounting be your friend, see a good accountant and attorney. :)