Looking for advice: When two unrelated parties go in together on a flip project, what is the best way to go about formalizing the partnership? 1) Partnership, 2) LLC, 3) Other, 4) do nothing but write down on paper the expectations and everyone sign it. This is a limited partnership that may or may not perpetuate after the flip is complete and sold. Both parties are going in 50/50 on the financing. What have you done in the past and what has worked or not worked for you?

Want to learn to hate your best friend-- or family member-- go into partnership--- that'll just about do it.

You are about to get a very expensive education.

Nicole "legal advise" -- hope you can take this OK?

YEA bring in an attorney -- really muddy the waters with that?

In my opinion- bringing in a partner is to bring in someone to blame when it goes belly up.

I do flips and totally agree with myob(GA).

A flip partnership is a great way to lose a friend or make dinner next Thanksgiving really awkward.

The only scenario that could possibly work is if one of the participants is brought in as a SILENT partner. You both will need to come to a common definition of what SILENT means.

On my last flip type partnership with 7 partners, we had a general written contract between ourselves where as "one person" could make the final decisions. That person was me! Licensed contractor and investor for 40 years now.

But we hit a snag. Some of the partners wanted to spend money only on things that showed and on the behind the walls stuff, they wanted to skimp. I tried to explain that for a "few more bucks" we could provide quality work that was with a permit and inspected by the City.

To clarify- this is not a close friend or relative. We are both realtors who have done multiple flips. We have also partnered in our RE business previously and now.

As others have said unless one of the partners is only a source of funds / credit these thing rarely work out the way anyone intended.

I actually had two good experiences with a joint venture after hearing Jim Ingersol speak at the convention a few years ago, but it may be because it was set up the way Steve mentioned: my friend/co-worker was the money half of the equation and I was the logistics half. He purchased the properties and paid for everything involved in getting them to market. I arranged all of the work mainly because of knowing who could be trusted to do the work (which my friend had witnessed over the last number of years).

He didn't want another job but had money to invest and I already had a decent system and team for making all the improvements. At the end we split the profits and both walked away pretty happy. I would do it again but ONLY because this is a person I trust. Also the risks were not huge for either of us. If he sold it and completely cut me out of the deal all I would lose is my time. His risk was minimal as well - he owned the properties. To be honest we didn't even have a handshake to seal the deal, let alone a piece of paper. I get that many would say that that is completely foolish.

Keep everything separate. If their duties are to find the houses, then hire him as wholesaler. If he/she is going to loan the money, take out a loan with them. If they're selling it once finished, hire them if they're licensed.

Ok, here's my true story:

DH decided to partner with a guy on a flip. He would bring the money and the other guy (let's call him CJ) would handle the rehab. CJ had all the right stuff. He'd done 30 RE deals already, his wife was a real estate agent so he could save on commission, and he had a guy, Mr. GC, who'd done a couple of rehabs for him before. Mr. GC had a day job but could take long lunches to oversee his stable of contractors. CJ had bought the house cheap, it was in a good neighborhood, and with Mr. GC's rehab estimate he figured he could make 90K on the flip easily. What could possibly go wrong?

It started when they opened up the walls and found aluminum wiring. Mr. GC knew a lot, but not enough to check the breaker box before he wrote the estimate. And CJ had gotten an estimate from him, not a quote. It rained nonstop for three weeks, which delayed pouring concrete for the new garage which meant no garage to store supplies in which meant a lot of time shuffling materials around. When the garage was built, they realized that it would have a non-matching roof and the entire roof needed to be redone. When the water was turned on, they found leaks everywhere and ended up replacing all the plumbing. Material costs were higher than anticipated. Mr. GC was paying his guys by the hour, and as they started to take advantage of him the work went slower and slower. Mr. GC finally fired a couple of guys and started working nights and weekends to get the work done himself. The project went so far over budget that DH finally cut off funds. CJ started working nights and weekends on it too.

When the house was finally done, it was 40K over the original rehab budget of 60K and had taken 8 months to finish instead of the estimated 3. The profits were much, much smaller than anticipated. Fortunately, they had a CONTRACT that stated that DH would either get a share of the profits OR X% interest on his money, whichever was greater. So we were protected. After DH was paid for the use of his money, CJ didn't get nearly what he'd anticipated.

Then the drama started. He came whining back to DH about how he'd sacrificed so much family time to get the project done, and he thought this was supposed to be a partnership deal so they should split the profits evenly, and he'd acted in good faith the whole time, and it was all due to factors beyond his control, blah blah blah.

Robin your post was like an old episode of this old house. Estimate is 150K and they spend 370K.

Yenecka,

Robin's tale is "normal". Happens all the time.I admire her clause about minimum share from the partnership.

Unless you AND the proposed partner are experienced business people with a strong background of making decisions and getting things done DO NOT enter into ANY kind of partnership.

For some reason people have this romantic idea of how a partner will fulfill their dream. It's the exact opposite - you have to manage a new relationship on top of the business problems that will pop up. And you are really in partnership with the guy AND his wife. No spouse sits silent.

Deals and flips are easy enough for one person to handle. 2 makes someone redundant.

WHY do you feel the need for a partner?

Know that legally, if the partner's kid has a bad vehicle accident and kills someone YOU and your personal assets can be drawn into the law suit. Attys LOVE to sue people who own real estate!

My Grandmother taught me "Only be the 51% or more partner." 50/50 means when you disagree you are deadlocked. It WILL happen.

Why do people ASSUME they should share the profits 50/50? If one person provides all the knowledge, finds the deal, provides the money, handles the sale, carries all the risk, they should share equally with the guy who paints and trims the bushes (no risk).

How do you know this acquaintance is for real? Have you run a background check, credit report, tax returns proving the ability to make money?? Lotsa people look good and tell a great story. Few get the job done profitably.

My suggestion: if you are the one needing money, borrow it from this person, pay him/her interest and do the deal yourself. If you need a worker, hire it and stay in control.

BRAD