Promising Partnership turned Profit sucker!

[Kristel Daugherty]

Investment Info:

Single-family residence fix & flip investment.

Purchase price: $200,000
Cash invested: $70,000
Sale price: $425,000

First joint venture / partnership and basically a lesson-churning machine! The partner found the deal and funded the purchase. Our contribution was getting the work done and splitting the profit. Some of the lessons learned:

1 - Get it in writing. This saved us at the closing table when the partner tried to not pay us our profit portion. It was also helpful later in being able to show experience for funding later projects. This is now our standard, and also covers details for all kinds of circumstances (if a partner dies, needs to leave the project, etc).

2 - Know the terms. I made the mistake of assuming the partner structured the money deal and terms in a similar way to what we'd done and were familiar with. Instead there was equity pulled out up front (theoretically to fund the rehab, but those funds weren't shared) and an interest rate that was almost double what we'd paid previously. Compounded over the life of the project, these two factors made a huge impact on the amount of profit - the same profit we were splitting equally.

3 - Find an expense tracking method that works easily. I started off trying to scan every single receipt and save them with a naming convention for easier tracking. It was overwhelming. We now use a spreadsheet that does the heavy lifting and all the receipts go in a physical folder. It gets the job done, keeps the records updated easily, and hopefully we don't ever have to go back through those receipts - but we'll have them!

4 - Lathe and plaster is not something we want to tackle again. The walls were cracking and generally poorly maintained, and once the demo started it was so messy and so much hard work. Opening the walls always results in surprises - and we had our share! Not only that, but drywalling an entire house is really a massive task. Then add in the angled ceilings - I would not choose this project over again.

5 - Communication and trust. I started to get creditor calls from lenders for other projects our JV partner was involved with and it became clear there were liquidity issues on his side. On the job site, my partner and I were stressed and arguing constantly because the deal was going sour in so many unexpected ways. The profits we thought we'd have went from $100K each to ultimately about $30K each. Not enough for what was going to be a 6 month project (that we actually worked on site for ~9 months).

6 - Do quality work you can put your name behind. Through all of it, I knew I would be the listing agent and would need to disclose everything we knew. Reputation matters, and I'm ultimately proud of the transformation. We know the home is ready for another long life as a much safer, healthier home.

What was the outcome?

Purchase price: $205,000
Rehab costs: $70,000
Holding costs: $45,000

Sale price: $425,000
Commissions, Buyer's Closing Costs, our Closing Costs: $45,000

Profit to split: $60,000