Partenering agreement for fix and flip

[Alexander Chavez]

Hello,

I am based out of Chicago.  Was hoping to get a few thoughts on what would be a fair agreement for a possible deal with a partner.  We'e already began discussing and seems like it will be happening soon.  The plan would be to do a fix and flip within 6 months (hopefuly less but worst case 8months).  The following would be what each person brings to the table.  The deal will be based off the assumption that we would have the following figures

Purchase price $175K

Rehab Costs $60K

Sell Price $300K

Estimated Total Profit (after all expenses including selling costs) $25K-30K

The goal of this partnership would be to allow partner 1 to build capital for future flip and flips and start their LLC after this deal. For partner 2, they want to buy a home soon, but do not have money for the down payment, this deal will help them earn $ to use for a down payment on a home after this deal is complete.

Partner 1: 

• Will utilize a HELOC loan to cover down payment, holding costs(utilities), rehab costs(estimating $60K-rehab) (estimated total HELOC of $80K-100K, but will have access to about $125K)
• Will manage the overall project and obtain and manage the contractors and RE agents
• If necessary will also cover mortgage and escrow payments- also holding costs

Partner 2:

• Will obtain loan from bank to purchase home- (can obtain a low down payment 5%, no PMI,)
• Will pay bank mortgage loan monthly payments (estimated $7K total)

Hope this is enough info to get the basic idea, otherwise please ask to help fill in the blanks of anything I may be missing.  

What would you think would be a good/fair way to split the profits?

[Logan Hicks]

I want you to look at this really carefully.

Initial Cost: 175k

Estimated Renovation Cost: 60k

ARV: 300k

REA Fee: 10% (30k)

Estimated Net Cash flow: 25-30k (6 month time frame, ideal)

So we begin.

Off the start, you expect a 235k cost, just to get the project done. What you dont project for is the usual 10-15% additional unexpected costs, or another 30-45k in additional costs. (which is more than your expected profits)

You seem to have a 10% fee or something, which is out of this world, missing from the fray, stated under "expenses and selling costs"?.

You are selling above the average american median home value.

Source:

http://www.huffingtonpost.com/2014/03/13/median-ho...

You have it priced above what the average american can afford.

Source:

http://www.fool.com/investing/general/2015/03/23/h...

You are selling in a buyers market at the moment.

Source: pretty much any financial RE site on the planet. 

Your breakdown of your profits are this:

30k (Ideal) / 6 months (Ideal) / 2 (current situation) = 2500/ month. Minus the mortgage for the one guy, cause hes forking out 7k, or in other words, 8000 / 6, which is roughly 1335/ month.

Divide your values by 160, for standard work hours, and you get 15.63 and 8.35 respectively.

In other words, less per hour than your drywall hanger or painter are making.

And thats all assuming you have ABSOLUTELY NO unpredicted costs. 

Take that 235k, and put it into an MFU with an already established portfolio, or a portfolio of preestablished SFRs.

Trust me, youll thank me later.