As the joints start to creak with age, and experience in a number of careers has led to some expertise in design, I’m moving away from bending nails by the hour towards investing/reselling. So I pose a question regarding who gets what return on an investment …
Two parties buy a house to renovate and resell, hopefully at a profit. Cash down and payments for purchase of said house are split 50/50.
One party has hands-on expertise, 25 years in the trades, and some pretty fair design skills. Other party has basic grunt work skills, probably not much beyond laborer, but real good work ethic, is mature, and can learn and follow directions.
I see three tiers of compensation involved, in terms of tracking which partner contributes what to the project … grunt work gets compensated at one rate, skilled trade work at a higher rate, and design work at yet another higher rate. Hours worked at any rate get credited to that person.
At time of resale, how do you deal with the fact that two parties split the input 50/50, but the credit given for hours worked, percentage-wise, may differ radically between the parties?
How do both parties go away happy?
BTW, I’m already taking the position that this is a potential rat’s nest from hell, unless someone can point out a clean way to sort this out, leading to an on-paper agreement prior to initial purchase.
Edited 9/28/2005 9:58 pm ET by Bruce
Edited 9/28/2005 9:58 pm ET by Bruce
Replies
Sounds similar to how I got started. Bought a house with a friend/business partner. We just had to keep track of everything. It involves trust from both of you. not only are the hours acurate but were those hours spent working, or did he sign in and then "have to go home because the girfriend blah blah blah".
In case you cant tell from my tone this situation worked out terribly for me.
It started out questionable and went down hill from there. No point in going into the details but the bottom line is we havent spoken in alomst a year.
Just make sure EVERYTHING is understood agreed upon and on paper before you begin.
Good Luck.
It will work fine if you treat every job just like you always have. Charge a fair price for each job, then deduct it from the total. If someone has something better to do thrn they cant get credit for that particular job until its finished.
This has worked for me in the past.
Define the tasks and the wage rates.
Define each of your responsibilities. Be accurate. Concider logistics. Be sure to incorporate checks and balances to keep BOTH of you honest and responsible.
Define the minimum hour each must work per week, regardless of task or wage rates.
Maintain a daily log. This log should be defined in your original agreement and include hours worked, work performed, site conditions, materials used, purchases, deliveries, tool conditions, and weather.
This log is reviewed and agreed to and accepted by both parties on a weekly basis. Once a week's hours and wages are agreed to they are entered into an account, payable from the net gain at sale time.
If wages are greater than added value/ income at sale time, return is determined by %. Wages of each investor equals 100% of net gain after fixed cost are determined.
This must all be defined and agreed to in writing if you want even the slightest chance of remaining friends.
The more you define up front, the clearer your mission will be and the greater freedom you will have in acheiving success. if you cannot survive defining your roles and method of execution you certainly will not survive the project.
Hope this helps.
Frankie
There he goes—one of God's own prototypes—a high powered mutant of some kind never even considered for mass production. Too weird to live and too rare to die.
—Hunter S. Thompson
from Fear And Loathing In Las Vegas
I have done this type of deal before and do a similar type in contracting when working with other contractors. Each party bills the job for hours worked at an agreed rate. After the house is sold the hourly wages are deducted and then the profit split. Simple. The trust and record keeping are the difficult issue. But then again if you don't trust the party that much you shouldn't be partnering with them anyway.
IMO though I do want to say that I have always billed the job at the same rate. In my mind it is all work. It all has to be done and it isn't going to get done if one of you doesn't do it. In other words if you as the "skilled" partner doesn't have someone to do the grunt labor guess who is going to do it. That being the case there are times when you are doing skilled work and need a hand, does the non skilled partner get paid more then? Do you get paid less when you are carrying out trash? I vote pay both the same but it is your deal so do as you wish. But I think your partnership will last longer if you take my suggestion. DanT
All good suggestions and viewpoints; thanks to everyone. Yeah, I don't object to being on the laborer end of the spectrum; I did it all on my last (our own house) project. In the end, it's not gonna get done unless everyone has that as the common, timely goal.
Bruce and DanT -I understand what you are saying but here is the rub:If you each are paid the same wages, isn't there an inequity for work done which required experience - sometimes years? While the skilled worker was out learning a trade the other guy may have been learning the stock market. But now the stock broker gets to benefit equally from the tradespersons knowledge.This does not mean that if you are wearing your electrician's hat and it is time to clean up you continue to get paid a skilled wage. Maybe the solution is to incorporate 1hr/ shift that is at a laborer's rate for that sort of thing.If you need help pulling wires or toning a house the helper is just that - a helper. therefore they get a laborer's/ helper's wage.Resentment is the bane of any partnership. If one party is not being appreciated ($$) they will resent the other for taking advantage. if the other party doesn't feel they are aren't equal, they should bring something more to the table.I have been in a few projects as mentioned and the ones that are successful are the ones where - FROM THE BEGINING - each person's role, responsibilities and expertise is acknowledged. At the start this sort of arrangement, in the difining discussions, it will become obvious if the intended partner is looking for cheap labor and does not appreciate a skilled tradesperson's value to the project or if the two parties understand and apprciate each others assets.Having stated the above, and thinking in terms of team effort, the laboer's rate doesn't mean $8/ hr while the skilled workers rate is $45/ hr. But any time one is leading, they get paid more. Maybe another solution is only 1/2 your time is at a skilled rate since pulling wires does not have to be done by a mechanic. However, when you are the plumber and are sweating pipes - that's all skilled rate. Just be careful that you don't give away too much. It is about appreciation AND compensation.FrankieThere he goes—one of God's own prototypes—a high powered mutant of some kind never even considered for mass production. Too weird to live and too rare to die.—Hunter S. Thompson
from Fear And Loathing In Las Vegas
Most of the rehabs I have been involved with are pretty rough stuff. I have never tracked it to the final dollar or hour but I would be really surprised if the total hours on a house wasn't 2/3 grunt-1/3 skilled. Most of the time I hire a kid looking to pick up some cash or a friend doing the same and put them to work. And even with good help I end up doing hours of BS stuff. Simply because there is so much of it involved.
That said in my mind there is enough money to go around if it is a good deal and a solid project to begin with. Having a partner make an extra grand during the process because I didn't cut his wages $5 an hour doesn't mean much to me. I am into the making money end of it not the "feel good cause I worked all my life at this" part of it.
You are right that if the wrong personalities get involved hard feelings will occur. I am very careful who I work with or involve because of this. But have never had a situation where my partner wouldn't work with me again because they always felt the achieved the goal at hand. Making money. And again I never felt bad because I did too. Maybe a little less than I could have but I am ok with it. Your milage may vary. DanT
Interesting perspective and analysis. Big Picture thinking. I like it.Also, to your credit, you have chosen the right partner(s). Sometimes we choose the project rather than the partner.Thank you for the insight.FrankieThere he goes—one of God's own prototypes—a high powered mutant of some kind never even considered for mass production. Too weird to live and too rare to die.—Hunter S. Thompson
from Fear And Loathing In Las Vegas
I was thinking of this discussion while grouting tile today (what else do you do when grouting tile I guess) and another thought came to me. I am in the middle of a rehab to sell right now.
The guy I hired was an out of work handy guy. I got him cheap and he was glad for the work. Normally we use these project as an overflow to keep everyone busy when we get a blip in the schedule but we have been really busy lately. So this guy is doing the work with some support from me and occasionally one of the other guys that work for me. He is a good worker and bright but needs instruction occasionaly on how or how to do something faster or better.
Anyway I told this guy if he sees this project through and I sell it I will give him 5% of the net. That will probably add up to 8-1400 dollars. He is thrilled and happy to work everyday. I get a reliable trustworthy temporary guy. Probably would have had it anyway but making it a little sweeter makes for good attitudes in my mind.
The other day he approaches me and say if I want to keep doing these at our current rate ($10 an hour as a sub) that would be great and he really appreciated me making him a "partner". I did it just because I thought it would be good motivation and I believe in spreading it around a little. But look what I will get out of it if we do another house together. DanT
Yeah, that's the way to do it. He isn't a "partner", he is an employee with an incentive at the end.
jt8
"If you have only one smile in you, give it to the people you love. Don't be surly at home, then go out in the street and start grinning 'Good morning' at total strangers." -- Maya Angelou
Nice deal Dan.
The Planet could use a few more like you.
It's the value of money...........I know guys that would scream about how much it's costing, blah , blah in reference to hired labor.
You have turned the whole equation around, and used it to benefit more than one person.
Whats a grand anyway? You'll get a lot out of it.It's Never Too Late To Become
What You Might Have Been
[email protected]
Well thanks for the compliment. As I said earlier I really don't view myself as a person who is in it to benefit the masses or for that matter I am not very philisophical about anything. I really view money as a tool and believe in using it as a lever where neccesary.
I also think you get what you give and all to often people get a shot at making something extra but screw it up by wanting to make it all right now. In my financial relm I simply want to push my own picture forward each month. As long as that happens I am content. I don't count by how much just so we go forward. Taking someone else along is usually very beneficial. DanT
I am involved in two partnerships now and am happy with both. I have often thought about what makes a successful partnership especially when I hear about all the partnerships gone bad.
I don't think that it has anything to do with carefully outlining responsibilities and compensation or drawing up legal documents that try to anticipate every thing that could go wrong.
There are two important factors. The first and most important is trust. If you have any reservations about your partner, it is time to get out, especially if you haven't started yet. You need to trust your partner(s) to put your interest ahead of their own.
The second factor is what you expect to put into the partnership and what you expect to get out of it. A successful partner expects to put more into the partnership than the other guys. He doesn't want to be seen as the weak link. He wants to make sure that he is pulling his weight plus a little extra. Put two or three of those guys together and you really have a great thing. And you will make money to boot.
If the partner isn't up to speed, I wonder if he wouldn't be better off dropping the partner and just hiring a grunt. If things don't work out, he can always unload the grunt, whereas with a partner it can be messy.
I've seen jobs where there was a financial partner and a worker partner (one to pay the bills and one to do the work) and they typically split the profits at the end (after paying the bills, not the partner's labor).
I've also seen 50-50 jobs where they split the bills, work, profits right down the middle. But you REALLY have to have two people who work well together and both are willing to work.
I could tolerate the billing the hours gig, but I'd balk at paying the other guy 2 or 3 times as much as I was making, even if I was the less experienced one. You're both putting your time in. I'd be willing to give him additional $$ for experience only if he was pumping out more work than me per hour.
All too often, I've seen the 'experienced' helpers leaning while the 'non-experienced' ones were working their butts off.
jt8
"If you have only one smile in you, give it to the people you love. Don't be surly at home, then go out in the street and start grinning 'Good morning' at total strangers." -- Maya Angelou
There are hundreds of ways to structure a partnership. How it is set up should be based on the comfort of the participants and the risk they are willing to endure. Mine are generally losely structured but I am careful to pick people who think like I do about work, business and ethics.
Have I every been burned. You bet. Did I learn from it. Yep! But making money is like fishing. You have to throw the line in to get a bite or to experience success. I don't complain about the loss of money when it goes sour nor do I brag when I score big. And I have had both. DanT
Can't help you decide how to handle the labor and pricing divisions. But I have something that I think you must do.
Once you've decided how to divy up all the money that you're gonna make, make sure that you also have a written plan that details how you're gonna split all the money that you're gonna lose.
If you don't, your non-experienced partner will (correctly) assume that 100% of the losses are yours, since you are the one with the experience in this business.
Not saying that you WILL lose money, just that you might, and you need to have that covered.
Unless you're the lead dog, the view just never changes.
One party has hands-on expertise, 25 years in the trades, and some pretty fair design skills. Other party has basic grunt work skills, probably not much beyond laborer, but real good work ethic, is mature, and can learn and follow directions.
So does the other person agree with that statement?
If you think your "expertise" is worth $50/hr, but the grunt is only worth $12/hr, I think it becomes difficult to track time. Then at what point does the "grunt" say "hey I have been on this project for 4 weeks I want a raise"? You both have equal financial risk involved so a split seems fair. Then again if you show up everyday and work 8hrs for 3 months and the grunt only puts in half the time you feel ripped.
I guess one way to look at it is if you weren't doing this remodel what would you be doing and at what compensation? Same for your partner. There are a ton of thoughts on this hopefully you have someone you can trust and is hardworking, with the same goal in mind.
Good luck, oh are you the expert or the grunt?
Jeff
I am still the grunt on every job I do and, despite the fact that I have been in the trades too long (not that it's not satisfying ... my body is saying "enough"), I don't feel that I'm an "expert" in much of anything. I'm more of a professional dabbler ... picked up some of everything along the way... some I'm fairly proficient in, some I'm dangerous.
Since you say the input was 50/50 why not a variation for the profit? Take the profit and split it into two equal "pots". Take the first pot and split it equally to reflect your up front risk. Take the second pot and split it up as others have suggested to fairly divide it based on hours spent and skill, all agreed to up front of course.... may you only have profits ... BUIC
It could work as others have said, but . . . . I'd say if you value your friendship with this partner then the best thing you could do is not get entangled in this venture.
It's very difficult unless your heads are in the same place, and, in my opinion that happens rarely.
Bruce, you pose an interesting question. You've already received a ton of good food for thought, but I'll weigh in anyways, since I've been involved with many different partners on a fairly wide variety of tasks.
The first thing I looked for was the money. You've both agreed to ante up equally. That makes this entire thing much easier to digest. A solution should be easy.
Whenever I formulate a proposal to a partner, or a potential partner, I strive to create an offer that I would be willing to take no matter which side of the parnership I'm on. It's kinda like two kids splitting a piece of cake: you let one kid cut it and the other kid gets first pick. You won't have any arguments there, but the first kid will very carefully make the cut. When you're the one making the proposal, you have to very carefully weigh all the pertinent facts, then make an offer that neither of you could refuse.
Occasionally, the deal won't make sense for the other, but they can always counter -offer.
One of the things that I most try to avoid when I'm doing a deal, is to avoid the responsibilty of accurately keeping my hours, or working by the hour, or agreeing to work "x" number of hours per day, week or month. I don't like being pinned down and I like to keep my maximum freedom. I have a serious need to be able to drop everything and go do something else on a whim without hurting anyone's feelings. I also like the ability to replace myself with another similarly skilled person, if the situation warrants it. I don't want a partner crying because he thought I'd be the one nailing a wall together, or whatever.
For what you're proposing, I'd have a detailed budget that put a cost on the demo, haulaway, and all the rebuilding/repairs. Each phase would have a material/supplies and labor section. It would also have a timeframe attributed to each phase.
After developing the budget, I would attempt to award each section to either myself or the partner. Some of the things might be awarded equally. For instance, we might agree to go in and tear out everything as a team. It might take one day. The budget for that might be $500. Each would get "paid" $250 for that or maybe each would take nothing, since all things are equal. There might be tax reasons to not pay it.
If we were doing the roofing, we might just set a fixed amount per square...may the best man make the most. The same might go for siding, painting, etc. For instance, if the total dollars for siding was $1000, it might break down like this: $200 for each side. $250 for the rear. $350 for the front.
Basically, I would want a fixed price for whatever could be fixed. For those things that were still not known, an allotment would be made and in the process of doing the actual work, decisions would be made on how to allocate it as the complexity revealed itself. For instance, if you had a $1500 contingency budget and when you opened the wall up, you realized that it would only take $1000, then you would split that workload, and it's associated dollars right then and there.
Your complicating factor is the widely varying skill level, but a lot of the anxiety can be taken out of it by utilizing unit pricing on the stuff that it will work on. That way, if you are locked into getting three rooms painted by the weekend, you can configure your workload anyway you want it, or you could even sub it out if you decided to go hunting!
Currently I have a full time partner. We have salaried ourselves at a fixed amount each week. We never check each other schedule and we don't brow beat each other about who's doing more. We each contribute in many different ways, and sometimes he puts in a lot more hours than me, but sometimes I'm carrying a different load. It all comes out in the wash.
Probably the best partnerships work when the two contributors bring different skills. You guys sound a lot alike, so there are some complications possible.
One thing that I would want to get a handle on very quickly is to find out who's running the ship. Who's making the financial decisions? Who's making the design desicions. I worked my way through a 50/50 deal with a guy who lacked common sense regarding design and finances and I'd be wary about that. We survived the deal, but only because I was smart enough to pick my battles. In the future, I wouldn't give up ANY design or financial rights, unless I was 100% sure that the other guy was smarter than me. When I know the other guy is better, I don't even want to add my input. I'm happy to ride his coat-tails.
Be prepared to compromise and don't let a few minor annoyances ruin your venture.
Now, the big question: what type of entity will you be using? This is a critical decision. Don't enter into it lightly.
blue
Well, I just got here . Been a little busy in the Fest threads.
What you just said in post one will work if its agreed to up front. If not , it wont work.
However you dont really mention money that well. I guess its 50/50 down the line and if the house doesnt sell its still 50/50 down the line . That needs to be accepted .
If you are the guy with 25 years , you dont need the other guy. If you are the other guy , youve got a good set up.
Ive got 35 and I would not consider the other guy.
Why? Different methods . I do it all and spread my tools around switching jobs . Tools stay out ready to use them. Sometimes it looks like a mess , but I work alone . I turn on the jamb box and get in a zone . Somthing is always drying , somthing is in waiting for more materials , tear out is going on and clean up while paint is drying or mud is going off. Then theres the material list getting built . I envision it like a woman cooking for 12 and while somthing is cooking off she runs to the store.
If I took a partner he would need to be a banker with money so I wouldnt have to worry about it . Only the work. If I did that Id get a lot bigger or buy more. Then he would earn half the profit less my labor.
Another person on a rehab job to me would be a hinderence.
Tim