Partnership breakdown of profits from a house flip

[iverchnk]

Hi,

I have recently been approached to partner up on flipping a house.
Here is the situation:

- One partner will be getting the mortgage and title under their name
- One partner will be financing all renovation costs
- One partner will be doing and over seeing all renovations
- One partner will be in charge of finding the deal

I am interested in the idea, but I am not sure how to fairly break up the profit to all the parties involved.

What is the "norm" in profit splits usually in these situations?

Any input would be appreciated

Thanks!

 

[Thomas Beyer]

There is no norm here as this is not normal. It’s hard enough with two people, but 4?

You missed the guy with 20-35% down. Or is it the $ guy, guy no 2?

Try 25% each.

Or try: 8% on the money until sold, then 50% of profit for money guy.

Finders fee of 2% plus 10% to 15% of profit for finder.

Reno guy gets a fixed fee plus actual cost of labour plus material plus 10% to 15% of profit.

Mortgage guy gets 20-30% of profit.

Huge risk if cost overrun or warranty work or long timelines.

 

[iverchnk]

Thanks Thomas for your reply.

The person forking out 20 - 35% down would be partner number 1 (getting the mortgage)
Technically Partner 1 & 2 (Renovation money) could be considered the same partner (its a couple), but I figured if I broke it down more specifically it would make more sense who should get what and who is contributing what.

Just to clarify, Finders fee of 2%, I assume it is 2% of property purchase price?

 

[YESMAN]

My exp

I find the deal and PM the project - source the contractors - make sure the vision is delivered with profit

Money partner - provides cash to close and cash for budget on Reno’s

Split profits 50/50

Sounds like too many partners in your deal

Keep it simple


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[YESMAN]

A realtor should be able to find you a deal for free (they get paid on the transaction)


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[Thomas Beyer]

Thanks Thomas for your reply.

The person forking out 20 - 35% down would be partner number 1 (getting the mortgage)
Technically Partner 1 & 2 (Renovation money) could be considered the same partner (its a couple), but I figured if I broke it down more specifically it would make more sense who should get what and who is contributing what.

Just to clarify, Finders fee of 2%, I assume it is 2% of property purchase price?

Yes 2% of purchase price

Some other links

50/50 JV - How is this fair ? http://myreinspace.com/threads/50-50-is-this-fair.1983/

Red, green and blue money - what are the three crucial elements of real estate and JVs: http://myreinspace.com/threads/blue...expert-deserves-to-make-some-money-too.29091/

Or here on JVing http://blog.reincanada.com/ask-an-expert-with-thomas-beyer

So 65-70% for money partner that also qualifies for mortgage

50% if only money but mortgage someone else say 20-25% for that guy. Reno guy takes a few plus profits to be split with deal finder / deal lead


Thomas Beyer, Asset Manager, Investor, Community Improver, Author, Father, Mentor www.prestprop.com

 

[iverchnk]

Thanks Yesman and Thomas again.
I will definitely read those articles you pasted

 

[Cory Sperle]

This is a recipe for disaster and hard feelings for years to come don't do it. Chose either:

A. Be the expert yourself and do everything and have one money partner and split the profits 50/50. Or..

B. Invest with a flipper with a solid track record of repeated sales and tax consequences that go with it.

For a deal such as this it's black and white.

 

[Matt Crowley]

Way too many people on this tiny deal. What a mess!

As noted by @CorySperle above, one real estate expert.
- up front acquisition fee
- the % split to equity is way to low especially for tiny deals

Realistic economics:
- Equity gets 14% preferred return + ROC (return of capital)
- 70% to equity to 20% IRR (GP / "expert" gets 30%)
- 50% to equity above 20% IRR

The alignment on this forum is totally whacked. No smart money would ever sign up for a 50/50 deal. Not even worth consideration unless the "expert" has minimum of 40% equity in the deal.

 

[iverchnk]

Thanks Cory & Matt, I do appreciate your feedback.

 

[bb2]

Here is what I would do. Find a deal yourself, and pay 9% to a private lender or your money partner and be the general contractor yourself. To make money in a flip you need to know your numbers or you can easily lose money. For flips you cannot get a mortgage. Message me at (780) 446-3814 if you need some help with this. I have done a lot of flips.



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[iverchnk]

Hi bb2, thanks for your feedback.
When you say "for flips you cannot get a mortgage" Did you mean I shouldn't get a mortgage? Or you mean banks won't give me a mortgage for the flip?
Thanks

Here is what I would do. Find a deal yourself, and pay 9% to a private lender or your money partner and be the general contractor yourself. To make money in a flip you need to know your numbers or you can easily lose money. For flips you cannot get a mortgage. Message me at (780) 446-3814 if you need some help with this. I have done a lot of flips.



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[bb2]

Hi bb2, thanks for your feedback.
When you say "for flips you cannot get a mortgage" Did you mean I shouldn't get a mortgage? Or you mean banks won't give me a mortgage for the flip?
Thanks

Here is what I would do. Find a deal yourself, and pay 9% to a private lender or your money partner and be the general contractor yourself. To make money in a flip you need to know your numbers or you can easily lose money. For flips you cannot get a mortgage. Message me at (780) 446-3814 if you need some help with this. I have done a lot of flips.



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Banks will not finance flips. It’s too short term. You need private money or a big line of credit.


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[ChristinaCatana]

Banks will finance flips if the banks make money. Getting a variable rate mortgage and paying 3 months interest penalty often keeps the mortgage broker and the bank happy. If you already own a home or rentals, then banks will probably analyze the deal as if the flip will be a rental property... but if you choose to rent it or sell it after renovations, that's up to you.