Remodel & Renovate in Denver>Question Details

Jimmymac, Real Estate Pro in Denver, CO

Son's a contractor in Denver. Set up w/ a realtor &d investor who want him to = a contract re fixnflips & guarantee a returned % over

Asked by Jimmymac, Denver, CO Wed Nov 17, 2010

the sale. OKay? They want him to pay for labor and materials up front, too?????????

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I am a contractor in Louisiana as well as an RE investor....one question...as a contractor, does your son front everything on a job, and then get paid full amount upon completion months down the road....or does he ask for a deposit for materials...or even good faith?? Then on larger jobs (full house remodels...like a flip), does he get paid on a draw schedule or upon completion?? Most contractors will say that they need something up front, money in escrow account, or atleast get paid on a draw schedule. When I started out flipping houses, I fronted labor but never materials...and before I touched a hammer, I signed a legally binding contract stating that I owned "X" percentage of property or I was entitled to a percentage of the profits after the note on house was paid. Bottom line: If the investor can afford a house, they can afford materials...if they can't, they shouldn't be investing and your son shouldn't be working with them.
1 vote Thank Flag Link Thu Nov 18, 2010
You have received good advice from my fellow professionals and I would add one consideration to share with your son. If he chooses to move forward after discussing "win-win" solutions regarding shared ownership and shared expenses I would encourage him to ask the realtor to add into their agency agreement the summary of the understanding in the additional provisions paragraph as well as a cancellation agreement should these terms not be met. Feel free to have your son email me to discuss details anytime; StewartSuccess@comcast.net. All the best to both of you!
1 vote Thank Flag Link Thu Nov 18, 2010
As the former real estate director (as of 4 months ago) all I'm comfortable saying without knowing more is be careful. There are some scammers out there. Erin Toll (Glover)
1 vote Thank Flag Link Thu Nov 18, 2010
Either the realtor & investor need to put some skin in the game for labor & materials, or they give him a percentage of ownership of the properties up front. Your son may want to check on some past deals they've done, trace them to the title company that closed them and ask them some questions on the integrity of past fix-n-flips. Just my opinion.
1 vote Thank Flag Link Wed Nov 17, 2010
Hi, Jimmymac,

As are most of the other brokers on this site, I'm of the opinion that your son would be taking all the risk for getting paid anything on a deal like this. There is no guarantee in the fix/flip business. And the investor cannot expect a contractor to give a guarantee like that. If he is fronting any money for this bunch, he should have an ownership percentage, then his risk is tied to his investor's risk, and he doesn't take 100% of the risk.

During my real estate career, I've seen many types of scams by investors trying to reduce or nullify their risk, by transferring it to the broker, the contractor, the man in the moon.

It's been said by others on this forum -- get a real estate attorney before signing anything on a deal like this.

Best luck to your son,
Tracy Howard
Broker/Owner, Distressed Homeowner Headquarters
Denver, CO
0 votes Thank Flag Link Mon Apr 18, 2011
Jimmymac-
Victoria Quintero gave you some great advice. If ti isn't too late have your son ask the investor and realtor for references. Ask how many properties they have completed and sold under this scenario and ask for the names and contact info for the contractors they worked with on previous deals. The % guarantee should not be part of your sons contract... if the Realtor did his work correctly he should have determined the current market value of the property and the potential market value after fix-up. He should also have disclosed estimated days on market after completion to sell the property. the investor should have taken that information, disclosed it to your son and together they should have put together a budget and timeline for completion. The investor will have to calculate interest based on the timeline and total cost of the project and from there they can estimate what percentage of return they might expect. Everyone of the players can impact the return- not just your son- so it is unreasonable for him to be expected to guarantee an outcome when there are factor over which he has absolutely no control.

If he were my son I would probably counsel him to run screaming the other direction. I work with an investor who partners with contractors but it is a much fairer process and the entire project is a team effort- everyone is involved in acquisition, renovation and determination of a final sales price. The investor pays for materials and subs so the only out of pocket expense for the contractor is his labor. I work for the entire team when we do a project. If your son is interested I would be happy to facilitate an introduction. And whatever he does counsel him to be careful and if you or he need a sounding board please feel free to call us-
Cheers and I hope he does well this is an exciting time for real estate investors!
Carole & Greg
0 votes Thank Flag Link Thu Dec 16, 2010
He should make sure this is in writing and that he is not at risk.
Brian
0 votes Thank Flag Link Mon Nov 22, 2010
Jimmymac,

Thank You for posting this question. The answers are very helpful. About 30% of my Teams business is with Investors, some of which are Fix and Flip Investors. I have never had anyone with the situation requested of your son. The ones I see most are either the Investor buys the property and does the work himself or contracts it out and has all the money risk or the same as Tim Diberardinos below. The set up your Son is being offered may be just fine, but he should definitely find out what all his risk are. As always a 30 minute meeting with a Rea Estate Attorney may be of Great Value to him. Let me know if you need contact info for a Real Estate Attornyey.

Your Son is lucky to have you watching out for him!

Sandy Kinslow
The Kinslow Team LLC
Coldwell Banker Residential Brokerage
0 votes Thank Flag Link Thu Nov 18, 2010
Tell your son to be careful. The true formula to any fix and flip success is a formula that provides Low Risk with High Reward. It sounds to me like your son could be entering into a situation with High Risk and Questionable Reward. A standard practice for commercial contractors is to sign operating agreements with all sub contractors that include completion dates of their work, and if they don't complete their work in time they pay the contractor until it is completed. I don't know the motivations of the Realtor and Investor other than what they requested, however if your son feels this is something he qualified to accomplish tell him to offer a contract with his partners like that instead. Also he needs to make sure there is a separate corporate agreement between them that is attorney drawn and outlines the definitions of their relationship with one another. Best of luck to him and feel free to contact me directly if you would like a list of references of reputable companies that perform in this manner. He can email me at mcarnes@infinitygrouprealty.com
0 votes Thank Flag Link Thu Nov 18, 2010
I'm a contractor and Realtor here in Denver. I have heard of many set-ups for Investors and Contractors working on Fix an Flips. A common one is where the Investor pays for everything and the Contractor provided the labor. They then split profits after the sale. The arrangement you are speaking of with your Son sounds crazy to me. I would never front materials to any customer. It's just a bad business idea for any small contractor. Feel free to call and ask me any other questions 720-206-4608
0 votes Thank Flag Link Thu Nov 18, 2010
You have received good advice from my fellow professionals and I would add one consideration to share with your son. If he chooses to move forward after discussing "win-win" solutions regarding shared ownership and shared expenses I would encourage him to ask the realtor to add into their agency agreement the summary of the understanding in the additional provisions paragraph as well as a cancellation agreement should these terms not be met. Feel free to have your son email me to discuss details anytime; StewartSuccess@comcast.net. All the best to both of you!
0 votes Thank Flag Link Thu Nov 18, 2010
I focused more on the guarantee of return. In a speculative business? It seems to me in speculating there are no guarantees of rate of return.
0 votes Thank Flag Link Thu Nov 18, 2010
If the Realtor and Investor are purchasing the home, and are expecting your son to do the work out of his own pocket, then the home should be titled as Tenants In Common, with each of the 3 parties owning 33.3% of the home. That way, when the home is sold, each gets 1/3 of the return of the profits. Additionally, there should be a company set up with all three as the principals of that company.

I do agree that he should ask for some of the previous house information to be sure that they're making some money, first. Ask where they're getting the homes, and ask to see the appraisals of the homes, if they have them. It might also help him to ask a different Realtor for advice, as that Realtor would have no bias in the deal and would be able to give him an honest response.

Best of luck to him - there's a lot of money to be made, but everyone needs to be very careful.
0 votes Thank Flag Link Thu Nov 18, 2010
They need to financially participate. Its a great business but anyone will tell you there is a learning curve and moderate margins. I'd hate to see him take all the risk.
Pete
0 votes Thank Flag Link Thu Nov 18, 2010
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