I remember when I got the bug to flip houses.
It was like getting a crush on a girl and she’s the only thing you think about until you get her. The crush is just lust though. You don’t really know anything about the girl, you just like the idea of getting her or how she looks. You’re not thinking about her personality, habits, and if she’s really right for you. You just want her and want her now and that’s all that matters!
If you’re looking to get into flipping houses and haven’t yet done one, you probably know exactly what I’m talking about.
You might be looking for the easy way in and oftentimes, that’s by finding someone that is already doing it and joining up with them. Partnering and learning from a mentor is great and definitely will shorten your learning curve.
But, you also must be very careful with who you partner with because just like that girl, the partner could make your life a nightmare once you get what you want!
I started out flipping by getting in bed with the wrong partner and learned a hard lesson on choosing a partner wisely and why it’s important to take your time. Instead of flipping on my own, I decided to go out and seek a partner to help me scale.
At the time, I had the cash but not the time.
I had 2 other businesses doing well, but wanted to transition into real estate and learn the ropes from someone else more experienced. I was networking and looking for a “partner” to join in their deals by providing equity and credit for the loans. I decided to lend some money as a passive investor, while also partnering as an active investor on other properties by investing the down payment and securing the loan.
The partner, let’s call him ‘Joe’, was to bring the deals, contractors, and experience to help make us both money on the “deals”.
The mistakes I made led to many sleepless nights, heartache, and a big financial hit!
My company, LVN Real Estate, now flips 50+ properties a year in the competitive Denver, Colorado real estate market and I want to go over a few lessons I learned the hard way when I first got into the business and partnered with the wrong person.
Take Action – But Not TOO Fast
Lesson 1 – take action, but don’t be reckless.
Slow down, don’t rush things, and do your homework!
You’re probably super excited to flip your first house. You watched HGTV, you went to the local REIA and met some local flipper who knows it all, and you’re seeing dollar signs in every house you look at.
Your first step to success before jumping in is to do your homework. I was so motivated to leave my other businesses and be a full-time real estate investor, that I wasn’t doing the proper due diligence. I was looking for deals to get into, and instead of relying on the numbers, i.e. the ARV and repair amounts, I was easily persuaded and pressured by my partner and wholesalers to buy bad deals that were way over my head.
Hone in on the area you want to invest in. Consider the type of house, the price point, and the scale of rehab you want to do. For example, my company, LVN Real Estate, invests in Denver Metro single-family homes that are 1950 or newer. Our ARV (after repair value) is typically 400K and under and our rehabs are more on the cosmetic side of things and usually under $50K. This is my sweet spot and what I stick with for the most part. This is what I find works best for me in my market. You need to clearly define what you are looking to do and understand that particular market and home type. Some people get even more specific than what I just mentioned and operate strictly in one niche or area in their market.
By doing this you will know what a deal looks like for you and can say NO to everything else. Being able to say “no” is very important or else you will find yourself in a deal that’s way outside of your comfort zone. I highly recommended starting with a basic remodel and working your way up to the more involved flips.
Vetting Your Partner
Once you define what type of flip you’re looking for, you can start hunting for it. Consider what you’re bringing to the table in a partnership. Typically you’re bringing the capital or you’re bringing the hustle.
Just make sure that you don’t take this partnership lightly. There is a lot on the line. It’s very important to vet out your partner.
- What is their background?
- Who have they worked with in the past?
- How much cash reserves do they have?
- Do they have contractors?
- Are they putting cash in the deal?
- How’s their credit?
- Do they have references?
- Do they have previous or current projects to show you?
- How is their communication?
- How long have they been in the business?
- How many flips have they done?
- What are their core values?
This list can go on and on…
You are mixing your money together and splitting a deal. You want to make sure you know a lot about this person and that you are 100% comfortable with your hard-earned cash going into the deal that they are part of. It’s also important to remember that they should be qualifying you as well.
Rule of thumb, if you have a bad gut feeling about someone, then you’re probably right. Turn and run! Patience is important. It’s better to do no deal than to do a bad deal and regret it later. There are always more deals. Taking action is important but patience and thinking things through is also equally important. Have a plan and understand who you are working with before you commit.
How To Vet a Potential Partner
- Do not rush into a partnership. A partnership is sort of like a marriage. You wouldn’t get married after your first meeting and tie your finances together. Putting up a substantial chunk of cash for a flip with someone you don’t know is the same thing.
- Make sure they have a good reputation in your market. Ask for references and network with others who have worked with your potential partner. Ask market leaders if they have heard of your potential partner and do not be afraid to dig deep and get details of their relationship, including the length of time, experience with your potential partner, and any stories good or bad they may have heard. Ask A LOT of questions!
- Look at their past deals and their current projects. Go by the job sites. Look at public records for purchase date and sold date of past properties to see how long it’s taking them to finish. Look up their company to see how many they are holding and current partners on record. Talk to contractors they work with to see how long they have been working together and how things are going.
- Ask for lender referrals. Ask their lenders if they’ve been a good borrower, how long they’ve been borrowing, if they’ve ever missed a payment, and if there is anything you should watch out for.
- Ask to look at their current P & L’s or books. If they won’t show their property financials, chances are they are completely unorganized and not keeping track. Run fast if this is a big secret and your partner won’t share financials. You should look for a proven track record of success on their past properties, and any good flipper will have those numbers available to show you.
Clearly Defined Roles
If you decide to partner with someone, there should be a logical reason for doing so. What are you both bringing to the table? I’d recommended money be split 50/50 or close. Maybe you are the deal finder and the partner has the rehab crew and knows how to manage a construction project. Whatever your roll may be, make sure that you complement each other’s skillset and understand what each brings to the table. This should all be on paper in a JV (joint Venture) Agreement. Spell everything out in extreme detail so there is no confusion when an issue arises down the road. Make sure financial contributions and how the profits will be split is written out. The more detail the better.
This will only protect both partners and keep everyone honest. A handshake agreement just isn’t good enough. Even if it’s your best friend, get everything on paper!
I’ve personally have had partnership experiences where I put my trust in the partner and then when things went wrong the verbal agreement went completely out of the window. When I look back I wish I had done far more paperwork to secure myself. In addition, if you need an attorney help and to look it over, spend the money, it’s worth it!
Partnerships can be a great way to get yourself into the flipping business if you have something to bring to the table and you find someone you really mesh with. They aren’t the only way though! If you really want to get in and make it happen, you can do it on your own. Do your homework, have a plan, and get the resources you need.
You can pay a mentor to walk you through A to Z and not learn these lessons the hard way. This is likely much cheaper than giving away 50% of the deal and you are the decision maker on everything!
Make sure you start on a lighter flip. You’re much better off doing a lipstick rehab and making less profit than going for a home run and doing an expensive home that needs a huge rehab. Leave those for the seasoned experts and work your way up. There are a ton of trap doors in those types of deals that you will overlook without realizing it. With a larger rehab, it’s easier for your profit to quickly disappear if you miss any large rehab expenses.
Like running a marathon, you start building your way up 1 mile at a time. If you go for the whole thing right away, you are likely to get injured and take yourself out of the race completely! Good luck on your flipping journey. Stick with it through the failures and you will have many more successes to come!