I'll keep this short and simple. 3 Friends and I are starting a home building company in the central NC area. I'm the builder, one friend is a realtor, other friend is the business guy. Business friend has a buddy who is looking to invest in our company, which is what started the whole thing. He's got a little less than a million to lend, and would effectively be our "bank", so we dont have to deal with lenders.

Our original scenario was the construction company split with me being 34% partner, other 2 being 33%. We would handle the land acquisition, construction, and transfer of the house to him. Basically we would build him the house for a set cost, leaving him room to make money on top of us. Example, we build the house for $275K and have $25K in profit, he sells the house for $330K and makes his profit. 3 partners split the profit from the construction, investor gets profit from selling the house.

We came up with another scenario where instead of having us 3, we bring him in and do 25% shares of the company. This way he is the bank, and the bank cant leave unless bought out. Also instead of splitting profit 3 ways, then having him make profit on top of it, we all just split the profit of the house. Example, we build the house for $275K and sell it for $330K, but we all split the profit 4 ways. He gets less per house, we get more.

I see a fewPro's and Con's of both situations.

Scenario #1:

Pro's : When we build the house for investor to sell we are done and get paid. We have more equity. Should we want to build a house without him as the investor, we keep 100% of the profit.

Con's :We have to give him a set cost for the house which is almost impossible. He makes more money than us without doing any of the work. The realtor friend makes money twice since he sells the house for the investor at the very end.

Scenario #2:

Pro's : Our "bank" is tied to us. We make more money initially. We can have tighter profit margins since we dont have to leave room for him to make money on top of us. We dont have to put any of our money in, ever. We shouldnt have to deal with banks for a while.

Con's : Obviously 25% shares instead of 34%. We take on the liability of waiting for the house to sell. If we want to build a pre-sale in the future, he gets part of the profits. Concern of him "pushing" the money, and rushing us to finish houses.



What does everyone think? I like scenario #2, its less risk for us and we dont have to give a set cost, however 9% to give up isnt chump change. My wife likes scenario #1, she says why bring in another mouth to feed if you dont have to.



And for anyone wondering why I can't just go build houses on my own and keep 100%. I made that a 5yr plan for myself, but its a huge investment in the licenses, funding, and financial risk on my part. With my friends, I get my license paid for, turnkey website and SEO, turnkey office, dont have to deal with banks etc, not having to "pay" a realtor since we have one on the team etc. I think this is a pretty low risk way for me to get into the game, even if I have to give up 66 or 75% of profits.

I dont get it.

What is his purpose?

A bank? Banks lend on real estate easily.

A real estate agent? You already have one.

In my opinion you are bringing in a guy with limited backing and giving him the juice. A million isnt much in construction. You could easily use a bank.

And about your risk comment. To me, it would be risky to build a bunch of houses and give away the margin to a guy who contributes nothing.

Maybe im missing something.

Just me, but no way would I give up the profits and control to folks who aren't doing an equal share of the work.

I'd imagine borrowing the money would be way cheaper than forking over the lion's share of the profits.

I think our logic was to bring him in and split all profits, not letting him make the majority of the profit for doing the least amount of work.

In one house pricing scenario, he was making about $70K in profits himself and the company was splitting about $55K 3 ways. Seemed dumb to us.

We can use banks obviously, however it is a MAJOR hassle. I had to do it when I built my own house and construction funding is slow and incredibly frustrating.

I agree, borrowing the money would be cheaper. Its one of my initial concerns of our arrangement.

The whole reason we are entertaining the idea of an investor is the ease and convenience of which we get money. Banks need draws and progress reports (mostly visits on their time schedule) before they give you a check for a stage of the house, and you are always paying behind and paying vendors late. With the investor, we get a check when we want, right now. It allows us to build faster, and keep vendors happier since we can pay them exactly on time.

Ditch those other guys, get your own REL, finance yourself and be the GC.

Contracts ? I assume you will have one that exactly describes obligations ? You can bet he will. You may have easier access to money but you are still going to be bound by some sort of legal document.
From your side the legal stuff needs to describe him as only an investor and as such is due ? Whatever is agreed upon under whatever condations you also agree upon. You need Construction/Contract Attorney to get you straight.

I'd just give the investor a set return percentage on the amount borrowed.

Money is the easy part, in my opinion.

Partners in business don't always work out. I wouldn't team up with anyone unless they bring something very substantial to the table. The fewer partners usually the better.  I probably wouldn't risk my company on a partner.  I wouldn't partner with a RE broker because that's a cost of doing business and their commissions are negotiable. A Real Estate broker would also have a conflict of interest and conflict of duty if he/she partnered in a business with you a builder. A RE broker has a fiduciary duty to their client the buyer. Your RE friend should know that. You should have access to business loans yourself while building one, two houses at a time those are not large numbers.

I would drop the realtor and pay him his fee when ready to sell.

Money man outside partnership you are responsible for making payments to him only. Money man inside partnership he is responsible for your spending budgets

Sounds like a mess waiting to be stepped in.   Do you have any other contacts who invest in this, my guess is you do.  I would not partner but use one for each location.  You can find any realestate agent so heck no on that.  I would use the money from one for each house try and keep them separate.  Most who do this will go bankrupt at some point but I guess you know that. If you have to partner it would only be the money man and split when it sells.

Use outside realtor.
Pay "investor" 7-8% interest for the time his money is at risk + a premium (5-10K) per home built and sold.
3 homes per year will net him appx. 15-18% per annum. He can`t touch that return anywhere that I know of.

Cut EVERYONE out, do a private loan with the money guy at a fixed interest rate. Your "business guy" and real estate agent sound like dead weight to me. You can get those services absolutely anywhere, and probably for less money than a 34% share of the business.

And we have a winner.  Distribute money at the sell don't try and make payments during.

Hell no he can't. (ETA- I mean he can't touch that anywhere I agree. Edited for clarity)

I do 10% return on anything anyone invests in me for real estate. That is it.

Here his my take. If only has a million to invest he can only fund three houses if you are doing the 300k range. That isn't a lot. And while your one scenario you get your money now he doesn't get his back until he sells so if the house doesn't sell right away his capital is tied up leaving him unable to fund more.

I would not make him a partner. No way. Think long term not today. Eventually you are going to get the point where you can fund your own houses maybe not now but eventually and you will stuck paying this guy a percentage when he contributes nothing other than money which you won't need.

I would just offer him a straight percentage like 10% on his money for funding a house and don't make it complicated.

I can deal with a lot of hassle for 70k.