Is this deal a good idea? Partnering with a contractor

[Alexandra Gomez]

Hello,

If you were an investor and you got a proposal from a contractor for the deal below. Would you accept it? if so, under what conditions? what questions would you ask the contractor? what aspects would you consider? if the deal does not make sense a lot, how would you modify it to make sense for both of you? 

I know this information is very vague but my goal is to learn to judge a good proposal from a bad proposal with little initial information and developing the judgement required to modify a proposal so that it makes sense for both parties in case the other party has too much advantage over me. 

Here is the deal: Contractor proposed to buy a lot and build a duplex. The ownership would be 50/50. The contractor won't participate in cash investment. His equity is his work (according to online estimations, the contractor's fee for this type of construction is $80000). The idea is to buy, hold for 3 to 5 years and maybe sell afterwards. The investor has $40000 available for cash investment and the rest would come from a hard money or construction loan with an interest rate from 9% to 11%.

City: Sacramento, Oak Park

Cost of the lot: $60000 

Lot size 4000sqf

Cost of construction: $250000 (according to contractor's estimation)

Total amount: $310000

Time of construction: 6 months

Property would rent for $3000 Mo

Partner 1: Contractor. He would make no initial downpayment. His equity would be his work. According to online estimations, the contractor's fee to build a property like this would be $80000

Partner 2: Has $40000 for initial cash investment available. The rest of the money would come from a hard money/construction loan at a rate from 9 to 11%

Please help!

Thanks,

[Charlie MacPherson]

@Alexandra Gomez I did my first flip with a contractor.  A couple of things I learned from that:

1. Will the contractor have to do other jobs simultaneously in order to keep food on his table? If so, that effects your timeline and thus your carry costs (HML, RE taxes, insurance, utilities).

It might be smarter to pay him something during the project if it lets him concentrate on your project alone.

2. Be sure your on the same page regarding the level of finishes.  In our duplex project, my partner assumed it would be sold to an investor (it wasn't), so he went with cheap finishes - Formica counters, linoleum kitchen floors, cleaned up the old appliances.  

I'm not saying we should have gone with Sub Zero, Thermador, Silestone, etc, but in the end the project wasn't something I was proud of.  On a scale of 1 to 10, it was a 5.  I was hoping we'd come out with a 7.

3. Finally, understand what each partner brings to the table.  In my case, I found the property, brought the lender and the real estate representation.  It wasn't clear to me what your contribution was.