Help needed before I sign a contract

[Sheila Villacampa]

I have a fixer upper house which I bought for 4,000 in an upcoming area. I have contacted a contractor who suggested that we would partner together. The discussion was that if I buy the materials, he'll take care of the labor. We also agreed that we establish a contract and that his name is also added to the deed. It sounds fair to me. My questions are: 1. He quoted about 50-60k cost in rehabbing the place that includes materials and labor, how do I know that that is fair and legit? 2. What should I include or exclude in the contract in a 50/50 business partnership? Is it best to hire my own lawyer to review the contract? 3. This is a single family house which I intend to live for 1-2 years, how can we structure the contract in a way that is fair to my partner. 4. If all is well and I sign the contract, I plan on financing the half of the project with 10K loan with 6% interest, 8k on credit card with 22% interest, these I already have. But I still have to look for funds for the remaining, minus the value of the house. Is this too much risk? My personal finances now are not great, but I'm willing to work hard and hang in here but is this project worth it? How do I know my numbers are correct and know that I'm not running into a trap. This single family house needs extensive work but does have Hvac in place, water and electricity are working although I don't know the condition of those. Also, the roof is just 3-4 years old. It is situated in a 3000+ sq ft lot which is typical of Chicago city lot. If I don't act now, I figure the house is not able to survive the winter. Please help!!! I'm in a rock and a hard place, or am I? Thanks so much.

[J Scott]

Don't do it.  

Multiple reasons:

-  What happens if this contractor doesn't do good work, works too slowly or turns out to be a jerk?  You can't fire him...which means you will either have to deal with the consequences of a bad contractor or you'll have to pay someone else to do the work.

-  For a $60K rehab, it sounds like a big job.  Is this guy going to work by himself?  If so, it will likely take many months more than hiring a larger crew.

-  For a $60K rehab, it sounds like you'll need to pull permits.  Is this guy licensed to pull permits?  Does he plan to?

-  For a $60K rehab, it sounds like you'll need some specialty contractors -- electrician, plumber, HVAC, etc. I don't imagine this guy is licensed in all these trades, so he won't be able to pull those permits.  So, you'll be giving this guy equity and still paying labor costs to the other trades.  Unless he is planning to pay those trades out of HIS pocket...is he?

-  If you're inexperienced, how do you know if what you're paying in equity is comparable to what you'd be paying in labor if you just hired a contractor(s)?  You don't, so you may be getting ripped off by going this route.

-  He quoted material costs in his $50-60K.  But, unless he's an experienced investor, how does he know what materials should be used?  Has he looked at the comps and the competition in the area?  Have you talked about the level of finishes that you want?  If not, he's just guessing on the types of materials, and that's not something that should be guessed at.

I'm very much against investors partnering with contractors, and this is especially true for brand new investors.  Most contractor relationships don't work out (especially for new investors), and all you're doing is locking yourself into a situation that you may quickly want to get yourself out of.