Joint Venture

[Bill C.]

Hi Everyone, just wanted to see what people think of the terms of this deal I am working on.  If you think there is a better way to structure it, please suggest.  I am partnering with a broker, who will also manage the flip.

Purchase Price inclusive of commissions and closing costs: 54K

Repair Estimate: 15K

Total Cost: 69K

The broker is putting in his commission of 5K from the purchase (large commission because he is also representing the current owner)  and I am putting in the rest, 64K.

Sales Price Target: 95K

Sales costs and commissions: 9K

Total Proceeds:  86K

Total Profit: 86-69 = 17

The broker gets his 5k commission back and I get my 64K back.

The first 10K of profit goes to me.  The next 10K of profit goes to the broker.   Then it's a 50/50 split after that.  Since there is only 17k total of profit, 10K goes to me and 7K goes to the broker.

In addition, the broker has collected his commission 3% (6% if he also finds the buyer) on the sale price of 95K.

If there is a loss, they are shared 50/50.  The broker max loss is his 5K contribution.

I am thinking of switching to a hard money loan.  I am not comfortable that he gets two turns on the commissions.

[Kevin Yoo]

@Bill C.

The way this deal is structured, it is very much in your favor which for putting up all the cash is warranted. I would not worry about the "two turns in commission." You want such motivating factors in place. In Fix and Flips speed is the name of the game and you want to increase your odds of getting property sold as quickly as possible. If your agent gets both commissions and gets paid very well from this deal, one he deserves it and two he will work that much harder next time. 

Your relationship with this agent and his past performance is extremely important. It sounds like that is all positive. So, the chance of you succeeding with this deal is so much higher by this fact. You want to keep him happy and rich. But if this is the first fix and flip that your agent is doing this may not be the deal you want to do with him. This is because I am very worried for you on only the $17K profit. This can be eaten up very quickly with something unexpected. And something unexpected always happens with fix and flips. You want $25K to $50K profit to make a fix and flip a solid good deal. 

Even with such good margin in place, be prepared to lose money on this deal. It has happened to me and should happen to everyone if you do enough fix and flips. Chalk it up to experience, don't punish your agent and move onto the next good deal. 

Lastly, using HM is a good idea but there are problems with HM I am sure you are aware of including paying points, fund hold back, and monthly payments. If you can deal with those things, using HM will increase your returns sometimes dramatically. 

Good luck.