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Contractors for the Long Haul
THE LONG-TERM CONTRACTOR PARTNERSHIP THAT WORKS FOR FIX-AND-FLIP.
by Abhi Golhar
R
eal estate investors who decide to take the fix-and-flip route have some decisions to make when it comes to the rehab work, from minor repairs to extensive renovations. The fix-and-flip real estate investment niche can be the most profitable because you can mark up the rehab work from wholesale to retail value. You make money like the wholesaler by buying at a deep discount and flipping at a higher price. With fix-and-flip, you add another profit center to the deal. You make money on the rehab work. One recent study shows that average successful fix-and- flip deals can yield profits of $30,000 to $70,000. This is usually in a two- to six-month period of time. The most common new fix-and-flip investor's meth- od is to work with contractors on a bid basis. They invite them to help with the initial valuation process and then use them in the rehab process with bids for their work. If the job goes over in time or material costs, often the contractor isn't at fault or hasn't bid for the contingency, so they get paid more while the investor's profit shrinks. There is another way, and generally, it is going to be after a few projects when the investor is happy with the contractor’s quality of work and wants to craft a better deal that is a win-win for both. It is a profit-sharing ap- proach. Instead of taking a fixed bid for rehab work, the contractor provides a stated amount or better estimate. The investor does a complete project breakdown, spread-sheeting the costs of the project and antici- pated profit. The contractor can be compensated in two ways, both of which work in the best interest of the contractor and the investor. The investor can offer a fixed bonus to the contractor if their final job cost comes in under the estimate, or the investor can make the contractor a partner in the profits. This is a lot like a legal business partnership, though
it doesn't necessarily need to be structured that for- mally. The contractor becomes a partner in the project with the investor. The job is lined out on paper with the projected rehab costs, and the contractor receives a negotiated share of the profits. This incentivizes the contractor to work to complete the job as far under budget as possible to maximize their income. Over time, a successful shared profit relationship with a contractor can become a long-term business relationship for successful fix-and-flip projects and excellent profits for both the investor and the contrac- tor. As the relationship develops, and if both want it to continue, a true partnership for these projects may be the best approach. For tax and liability reasons, it is important to have a strong legal business structure. If fix-and-flip investing is something you're con- sidering, don't rush into long-term agreements. Instead, work with different contractors to see which do the best work and at the lowest costs. Then consider a shared profit relationship. •
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Abhi Golhar is a full-time real estate investor, Think Realty coach and host of Think Realty Podcast. Connect with Abhi at BookWithAbhi.com.
LEE ROGERS Real Protect
MARCO SANTARELLI Norada Real Estate Investments
64 | think realty magazine :: january / february 2020
thinkrealty . com | 65
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