I have a contractor with no money and no credit wanting to work with me on several profitable deals in which I would provide the monies to purchase and rehab the properties, and he would provide the work. I do not live in the state in which the properties are located however I do own several homes in the city in which he is rehabbing and they are great deals. I am looking form a long term relationship with this contractor and I would like the agreement between him and I to reflect that. Any suggestions on what would be the best way to go about this? How should the return on my investment be handled? Should I charge interest on the monies I put up to be paid back at time of sale with me getting the initial investment with interest back first and the remaining funds to split 50/50?
A Contractor with no money and no credit is like a Doctor with no license and no education. Do you want him doing surgery on you?
Because that’s what this guy is going to do to your bank account, surgically remove all your money.
Why bother??? If you have the money and the properties to rehab just hire a guy with a good rep. and pay him. The way you’re thinking is a barrel of problems waiting to happen. If you run numbers I’ll bet it will cost you MORE to do some type of split with this guy than just paying a pro contractor who just wants to finish the job and move on. How do you break this thing up if he turns out to be a turd? If he’s just a contractor you fire him that’s how, if he’s a partner, WHOLE OTHER BALL GAME.
agreed 100%. You must also wonder why is has no money to invest. If he where a good contractor, he would have cash on hand for this investment.
Bottom line, its not a good deal. You are better off doing the deal yourself and working with another contractor. I know building good relationships with contractors is important, but there are better ways of doing this. Like setting a deadline and if the contractor finishes before hand you will give him a bonus or talking to different contractors first and explain what you do.
thanks for the input, some very good points. This contractor is actually bringing me deals that I would not be able to get my hands on, impart to the fact that I am in California and they are in another state. This contractor actually has a lot of verifiable experience,just ran into some hard times. I have checked this guy out he has good crew and does good work, they have worked on projects for some of my contacts. The contractor has provided me with a deal that in which I could pick a house up at 10% LTV and rehab for 15k leaving a nice profit. I have ran this deal by my appraiser and I have checked the house this is a steal of a deal! He has similar deal lined up,the catch is he wants to form a partnership in which he would supply the labor, and I would provide the capital. Ultimately I am trying to create a win win situation without hanging myself. Any more suggestions
What kind of hard times did he run into? California just went through a building boom not seen since WWII. If he didn’t make money during those times flipping houses in the crumbling California real estate market ain’t gonna fly.
Here’s the potential problems I see, YOU have to figure out IF you can overcome them.
- Your not there…BIG PROBLEM…Contractor calls you says termites, house is loaded with termites, got to rip out some walls. You say OK whatever, no walls ever get ripped out because there were no termites and unless your flying out to inspect you just got screwed.
- He gets hurt… BAD…now your dealing with his wife, brother, mother you name it, and they think you’re trying to take advantage of this guy because all you do is write a check and he got hurt doing the heavy lifting.
- How’s the money handled??? Are the bills for materials coming to you for payment or are you giving him a certain amount of money in an account. Either way, pain in the *ss for him, or scary for you. (remember, lumber yard has YOUR info, you don’t pay or he hides some stuff that turns up later, the lumber yard puts a lien on the home. (they do it all the time)
Here’s the bottom line… Forget the partnership, if this guy is bringing all these great deals to you PAY him a finders fee. Make it worth his while, then hire him as a regular contractor, give him a deadline to meet that you can both live with and a budget. If the project comes in on time and/or under budget he gets a bonus (pre-determined.) That way if he turns out to be a loser your not married to him. The bonus amount is up to you. If this guy IS really good then give him a chunk of the profit at closing. This way he’s not a partner, but gets the financial benefts if he produces. Your taking all the risk here, remember that, if he takes off the bank isn’t going after him, YOUR credit gets ruined, he’s out a few weeks labor. AND…remember this, as soon as he has enough money to leave and do this without you, he’s gone. No doubt about it.
One last thought…Finding great deals in California will get easier and easier in the coming years. That market overheated to a point, that in my opinion, will take years to unwind.
The o/p is in CA, house is somewhere else (he didn’t say where).
I think contract partners can be great. I have done this in the past. Yes I had one contractor that screwed me alittle, but I got him in the end for 50K of his time and money and nothing he could do about it legally. Otherwise I completed over 20 rehab deals with other contractor partners.
There are a few ways… Tell him you will pay for all material by check to the supplier and he covers the labor cost. One the home is sold, you will give me 35-50% of the NET PROFITS as a form of payment so it becomes tax deductible on your rehab deal.
Also you can form a LLC with the 2 of you and place the home in the LLC but this will give contractor more protection then you. However for tax reasons you can have a balance there.
He is bring you some great deals, so jump on them. Just do your due diligence before buying. Maybe you have a local friend that can check things out as they progress that he can report to so you do not have to worry and you can always pay that person about $500 once the home sells for their time.
Out of state investing is popular especially when you live in a high prices market. Many investors on these boards come from midwestern states where the REI market is cheap and affordable. Then you have the 10% that live in markets were it is impossible to cashflow a rental w/o 40% downpayment and using an option arm loan. Rehabs can tough because you drive thru the neigborhoods and say are these guys crazy for asking that price…But to many inexperienced investors are grabbing the deals other investors are wholesaling as rehabs for crazy dollars with little profits.
Thanks for the input do you have a standard contract that you could share with me for this type of real estate scenario?
hello,
I just posted a similar question on the beginners board. I have a similar situation. This person is a friend of mine, who has alot of experince as a general contractor. He has no money to put into it and bad credit.
This is our first rehab together and Im not sure how pay him. Do you give a percentage or a salary?
I would be very, very careful. I was screwed over big time by somebody in a very similar deal.
Star
yrush2000 can you please elaborate on a few items?
Why are you giving the contractor 35-50% of the profits when you’re already paying him a fee to be the general contractor. The invoices he provides you will most likely have some cushion built in for him anyway. How about 10-15%? Is there a reason to share that much with them?
Do you have an independent contractor agreement in addition to a venture agreement? How does the contractor agreement indicate 35% of the net profits will be withheld until the property is sold? I’m seeing the contractor agreement written like any other GC is doing the work and then the venture agreement stating the profit split to be 65/35.
How do you have line-item veto on materials the GC purchases? Example: he installs a kitchen cabinet and sink. He also buys saw blades saying it’s necessary to cut the countertop. Fine, but 10 blades aren’t needed. What keeps the GC from making an unknown profit from his estimate, buying extra materials for other projects, and still making a profit when it’s sold?
Thanks.
Petemfa seems to have hit it right on the head…And you also said he had a good crew…He’s going to need to get them paid every week and that has to come from you…That’s just one more place for more money to come from you than he actually expends…
Pay the finder’s fee…Maybe $10k up front (or whatever’s reasonable for the deal) and a little something at the end after the property’s sold so he has something in it to be sold cleanly…