28 Aug Should an Experienced Flipper Partner With a Novice Investor?
You’re an experienced house flipper. People see your success. Many want to flip houses like you do, yet they don’t do any deals on their own. Maybe they don’t feel they have the knowledge or the knack for finding deals. Perhaps they don’t have the credit or the money. It could be that they don’t know any reliable contractors. Maybe they are afraid to take risks. Perhaps it’s all of the above.
If you’re a successful real estate investor, particularly a flipper, sooner or later you will be approached by others who want to partner with you. They may be co-workers, family members, neighbors, or even people you just met. Much of the time it’ll be novices, not experienced investors, who want to come along for the ride. So what do you do?
Does the prospective partner bring something to the table that you don’t have? Maybe lots of money, reliable contractors, or hot deals? Do they have a proven track record of success, if not in flipping, then in other areas of life? Are you interested in teaching somebody how to do what you do? Are you willing to introduce them to your network of Realtors, contractors, inspectors, attorneys, lenders, developers, and others? Or will your new partner slow you down, make costly decisions, and create drama for you?
If the potential partner has money that you don’t have, you could engage in a partnership (they get some ownership) or you can simply borrow from money from them (they are a private mortgage lender). If you do need their money, ensure that it is easily accessible. I know a flipper who brought a friend along (a mortgage broker, in fact) as a 50-50 partner on a flip. The mortgage broker was supposed to be the funding partner. The flipper found the deal, negotiated it, did the paperwork, obtained estimates, selected the contractors, managed the renovation, listed the property for sale, and attended the closing. The mortgage broker was simply there to contribute half of the money. However, the mortgage broker consistently took 45 days or more to supply their share. The flipper had to borrow money to continue the project while waiting for their partner to provide their half. The flipper, who did all the work, could have simply borrowed the money for the entire project and not given away a whopping 50% of the profit. Alternatively, the flipper could have still partnered with the mortgage broker but only given up a smaller percentage of the profits.
In my younger days, I did several partnerships in which the funding partner supplied 100% of the money for a 50-50 split on the profit. I did all the work, and they wrote the checks. Those were straightforward projects because each party knew exactly what their role was. Each party stayed in their lane.
What if you have plenty of capital? Then you don’t necessarily need their money.
What if you have all the skills and all the connections? Then why would you give up 50% of the profits? When many novices approach an experienced investor, the novice asks for a 50-50 share. Perhaps they ask to be on the deed along with the investor. Even if you allow them to be on the deed while negotiating a payoff of less than 50% profit to them, the problem is that you need their consent to sell the property. That consent essentially makes them a 50-50 partner when it comes to decision-making. If they don’t agree with you, then they wield a tremendous amount of control.
Many years ago I partnered with a contractor. I found the deal, negotiated it, and bought it with my own money. He was supposed to supply the materials and renovate the property himself. Once completed, I was going to work with a Realtor to sell the house. However, the contractor focused on his existing customers since he was receiving money right away from them. He only went to our flip project on rare occasions when he wasn’t busy. He bought substandard materials and even brought used items like a dented kitchen sink salvaged from a demolition job. He and I had never discussed having old items installed. After many months, I paid him $5,000 to remove his name from the deed. I also had to pay the transfer tax and deed filing fees. I should have hired a different contractor to do the work and kept 100% of the profit for myself.
If they are on the deed, what if they die or are incapacitated before the property is sold? What if they have creditors? Each state is different in terms of creditors and their capacity to lien your joint property.
Before you partner with someone, do a background check. Landlords and professional property managers do a thorough background check for prospective renters; you should do as thorough a check on prospective partners. A partner could affect your money a lot more than a renter.
When partnering, have a plan for how the proceeds are divided up in the event that you lose money on the flip. Many investors, including experienced ones, go into flip projects thinking that profit is guaranteed. Not all flips turn a profit!
If you want to partner with or borrow money from someone because you want them to get involved, that’s your choice. Many people feel good when they help a loved one or colleague get involved as an investor (although you can help someone by mentoring them and not by partnering with them). Giving up control and/or a large percentage of profits should happen because your partner is bringing valuable things to the project that you don’t have. Bringing your family or friends along for the ride on a flip is a nice gesture, although it may not always work out as planned. Don’t be quick to offer 50% or a name on the deed just because you want to be nice. Give it some thought and be willing to say “No.”
If you do partner with a novice, don’t just do a handshake agreement. Put things in writing, such as how money is distributed and when. Include a provision for what happens if you discover additional issues that put you over budget. Have a provision for what happens if the flip doesn’t sell or if it sells for a loss.
I don’t recommend partnering with someone on a flip just because they asked. If you’re experienced, they need to earn the right to work with you. Perhaps you can mentor them on their first few projects.
Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania. He became a full-time real estate investor in 2004 after serving in the U.S. Navy. Tai made colossal mistakes in investing (and learned some things along the way). Tai has coached hundreds of entrepreneurs, real estate investors, and real estate agents on how to increase their income and net worth. He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Amazon.com. Tai may be available for coaching and speaking engagements on a variety of real estate topics. Send an email to tai@investandtransform.com.
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