How to structure a flipping partnership with a contractor?

[Jake Moran]

I met a contractor who did some work on my personal house, and when found out he does a flip from time to time, we agreed to work together. The roles would be:

• I would put in some cash and do all the work aside from the rehab
• He would put in some cash and manage the rehab

I really like this setup because it gives me a contractor who is incentivized to get this thing done quickly and done well. But my big question is, how should the profits be split? He mentioned he usually does 75/25 in his favor, which might make sense since he's doing the heavy lifting in managing the rehab. But it would only makes sense if we had an equivalent amount invested, right? So if I put in $100k cash, and he put in $20k cash plus $80k in materials and labor (excluding any profit margin), then I think I'd be okay with giving him 75% of the net profit. But should I be? What else am I not thinking about here?

My other question is on the legal side: what is the best way to do this? He already has an LLC specifically for flipping, separate from his contracting business. Would it be better to buy the house directly through that LLC? Or buy the house under both my name and his LLC? Or create a new LLC where we are the two owners, and buy the house under that entity?

[Will Barnard]

There are 3 main portions to any flip project and they are not all equal.

1. Sourcing / negotiating the deal

2. Managing the deal

3 Funding the deal

You and any potential partner need to agree on which section is worth what %. I would rank 1&3 higher than 2. With that said, the contractor doing #2 is not worth much more than had you simply hired him on a fee basis rather than partnership.

Who finds your next deal? The division of the funding is the easiest part to figure out. If you both believe that the funding is worth say 40% of the total 100% and you each fund equal amounts, then that section would earn each of you a 20% share. Then add up your other two sections and see where you come out. 

I personally believe it is not worth partnering with a GC unless he/she is bringing deals and funding to the table.