Contractor as equitable partner

Rehabbing, Fix and Flip, Rental Properties
1

Hey guys, a quick question for the experienced rehabbers. I have a scenario where the contractor is also an equitable partner.

I’m concerned that this is a conflict of interest.

Obviously there’s a sense of bias and the partner will get paid either way by doing the work. What’s to ensure that the savings (ie/ the repairs are less than expected), get passed onto the partnership and not into the pocket of the contractor. What’s to keep them honest with the amount of billable work hours etc.?

Any info you guys can share would be appreciated.

thanks!

2

Local RE agent does this. RE agent fronts the money to buy the place and sells it. Contractor puts in labor. They split expenses and split the profit at the end. Seems to work for them.

An equitable partner wouldn’t want to be paid by the hour. He wants to make more money than he can working hourly or he wouldn’t be interested. You want to leverage your time more than you can without him or you won’t be interested.

3

Does the contractor have money invested or just his contractor expertise?

4

the contractor has money invested as well. however the partnerships will be split 3 or 4 ways. it’s easy to see how this can get corrupted. getting paid as a contractor and splitting with no partners or paid as a partner and splitting with the others…

5

Sounds like a mess to me.

6

thats what im thinking but if there’s a way to structure this properly, i’m all for it.

7

Make sure the managing partner is not the contractor. The managing partner treats the contractor partner when he is contracting just like any other contractor. Take bids and go with the best bid. You contractor partner may not get the business and don’t be afraid to fire him if he does not perform.

My key is always that you don’t do business with anyone you can’t sue and this is the same premise. Let him know that he will be sued if he does not perform adequately as a contractor. These words (The partnership will sue you) have to come out of the managing partner’s mouth.

8

Too many “partners” here.

9

This is my specific complaint. I should have gone into more detail.

To me, the only reason to use a partner is to leverage something. Time, money, equity, experience, etc. There’s a few people in the deal without anything to offer. Unless that person is you I’d try to get out of it.

10

well said. for sake of argument, let’s say there was only two partners. the other partner being the contractor AND your equity partner. can you structure it so that it’s truly fair or will there always be the underlying bias?

11

Partnerships are exactly like marriages. They require explicit understandings between the parties. These understanding are developed through the dating process.

The written part is like a prenuptial contract. It outlines what’s gonna happen when the parties part company, on good, bad, or ugly terms, or not.

Just like marriages, adding extra people into the partnership does not work.

So, only those who contribute something other than their hilarious-sounding laugh, and their emotional support, get to be partners. Everyone else gets the boot.

Furthermore, those that fail to contribute as agreed in the ‘prenup’ lose the kids and the house, or just get the boot.

There’s always only ONE managing partner; not two; and no 'co-managers. One Chief, OK. Two Chiefs, divorce.

This does not mean that all the parties can’t contribute, or express their opinions, but there’s only one vote that counts; and that’s the managing partner’s vote. It’s a beneficent dictatorship.

The managing partner, may, or may not, have majority ownership on paper, but he MUST have decision control.

Bottom line, you must have a written agreement that spells out what happens in the worst case scenario, so that you don’t have a worst case scenario.

I outline what to look for in partnerships in a blog post I called, “Row, Row, Row Our Boat.”

FWIW

12

javipa, thank you for your reply. i must say, you contribute an abundance of knowledge to this forum. my hats off to you! :beer

13

You’re welcome… :biggrin