Forming a Flip Partnership

[Zim]

I am seeking some advice from an experienced flipper on a partnership I am trying to form.

We both have something to offer to each other which is a key factor in doing this.

Here's the situation: I have 20 years experience as a builder, mostly new homes. I want to get out of this. Securing lots in my area has gotten too difficult and costly, and I hate dealing with customers and their emotions. I have 7 years experience running my own home inspection business. I am just tired of both and want a change. I am also going through a divorce and my credit was ruined. My cash is very low until I sell off 4 lots I am developing. I have one carpenter I've known for 15 years who is willing to use his excellent credit and do some flipping with me, but he does not want to put up any cash.

However, recently I've done some work for another party who would like to make some kind of arrangement with me to flip full time in partnership. We've talked a lot and this person is a straight forward businessman I like. I've screened him very well over the last month. What he brings to the table is this: He has about $75,000 cash to start with and enough credit to flip 3 houses at a time. He has a window replacement company employing 18 carpenters. He has previosuly flipped 7 HUD homes, for as much as $30,000 profit.

He would like to flip more but has his hands full with his window company, thus he approached me because he knows of my construction and inspection experience, and willingness to supervise our jobsites fulltime. He has the employees who could do any demolition and labor at our projects at my instruction. I really like this as we could get things done quickly and I would not have to deal with labor subs or employees if I flipped on my own. He has a realtor uncle who bird dogged the deals for his previous 7 flips. I really like the idea he has done these flips and feel good about getting some guidance in this. He likes I am an inspector and can evaluate renovation costs easily (I am good at it). I also am a skilled carpenter and can contribute in that way to fill in if I need to.

What I need the advice on is what you guys think would be a good way to set up this thing and fairly split the proceeds.

He's mostly just going to finance and make the emloyees available at a cost we will determine based on his expenses.

I will be inspecting potential properties suggested by his uncle, crunching the numbers and making the recommendation to my partner. I'd completely supervise each project, subcontract, & do skilled carpentry tasks if time permitted.

Now I just need to figure out a good way to set this up. One option would be for me to get paid either a fixed fee or hourly to do the supervision, then get some cut of the profits. The other option would be for me to simply contribute my time to do the supervision (since I'm not contributing cash) and take a higher percentage of the proceeds. Does anyone have a suggestion what they think would be fair? I have absolutely no idea what percentage of profits would be a fair split given either of these scenarios. Thanks for any advice.

[Dan Auito]

Zim, make it easy, depending if it is 1 or 2 partners including yourself, let's say it's a threesome then agree that it will be a 33 1/3 split of profit, expenses, and tax advantaged deductions.

I personally would try to distance myself from the hourly wage position and go with leveraged profits instead based on the investments return upon sale, this gives everyone the incentive to find good deals, work them hard and to share equally in the profits that result.

I'm sure others will answer up here so hang tight.

P.S. I also copied your question to the Illinois forum!

[Zim]

Dan,

Thanks for the reply. My sister who has some experience in partnerships thinks I should get an agreed to fixed sum for supervision. I tend to agree with you though. A split of the profits only should assure my partner I have incentive to work efficiently.

I think I'd leave the third partner out of this agreement as it might complicate things. Perhaps he could be incorporated to carry a 4th home and share in that only.

I didn't know there were state forums. I'll have to check it out. I'm a newbie here.

[TommyOH]

Hi Zim, welcome to the fambly!

I was reading your post and here are a few observations. You are a builder of 20 years and you want to get out. I hear that, so you don't want to set yourself up for doing "skilled carpentry tasks". If you have employees, use them. Your time will be spent more wisely by checking out deals, running numbers, and supervising.

As far as being paid, look at what your parnter wants. You will use his employees for labor and pay an agreed upon fee based on the work that needs to be done. Ok, no problem, but if you are going to be putting in hours, you should be paid an agreed upon amount for that as well. If you split 50/50 on profits but he takes 4k for labor off the top, then your percentage of the deal as a whole drops. So either you both get paid for time and expenses, or you just split profits.

As far as the profit split percentage, Dan is right. It should be an even split. If your parnter was just a money man, then I'd change that, but given he is the one with flipping experience and has the labor force, I'd lean towards an even split.

Now for the legaleze. I'm not an attorney, so keep that in mind. But there are things that need to be put out in front of this partnership. You need to decide on a business structure. Within that structure, make sure everyone's rights and responsibilities are spelled out in black and white. Also make sure the profits and losses are evenly shared. I'm just throwing this in because it once cost me 70k and the closing of a successful business because I didn't set it up right.

Good luck, and I hope to hear some success stories :)

[stallingsorg]

here are some of my thinkings, my ideas, and in my own words.

your parties wish to solicit a project management to delegate these responsibilities. normally a project manager approach is that the lines of communication between the redevelopment firm and project management. the individual project manager who has to make everything happen on a job site from start to finish. compensation for manage a project must agreed in advance how much or when the money was to be paid.

i would use a joint ventures agreement….the purpose of this agreement is a road map for a parties between the parties venture toward a redevelopment project, not how to elaborate each other during the project.

important issues confronting drafters of these agreements. knowing your partner’s cash resource and verify what you are told, knowing your partner's goals of venture until completion, define the purpose of the venture's, loan guarantees and defaults, management of the venture’s, duration and termination of a joint venture’s, and custody of bookkeeping and of venture records.

:praise:

[Zim]

Thanks for the input. I know my time would be better spent evaluating properties, crunching numbers & supervising, but the carpentry thing would just be out there for me to participate in if my other work was thin. I'm thinking hanging cabinets as they'd be on the critical path. Maybe some specialty trimwork. Things like that. Otherwise I could just sub it all out. This allows for some flexibility while feeling out this arrangement.

Both my hours as well as my partner's employee's hours are simple expenses.

Hafta look into this joint venture arrangement. Should I talk to an attorney? Most investors around here just set up an LLC for each property.

[Debbie]

Where there's partnership involved, always, always have an attorney involved!

Whenever there's partnership involved, you can not afford NOT to have an involved attorney!

Whenever there's partnership involved, totally disregard any foolish investors who do DIY.

Of course, disregard my advice if you happen to be married to your partner!