What is the fairest way to split profits?

[marvadur]

Hi everyone. Could you help us in figuring out what would be fair when splitting the profits in our particular situation? My husband and I want to buy properties in Lisbon, renovate and then sell them for a profit. Since we don't know the local real estate market very well, we are partnering with a Portuguese architect. We would enter with the money and he would provide his expertise (contractors, building materials, city permits, appraisals, etc). How should we split the profits for each property sold? Thank you for your help! :)

[Harold Mansfield]

Hi everyone. Could you help us in figuring out what would be fair when splitting the profits in our particular situation? My husband and I want to buy properties in Lisbon, renovate and then sell them for a profit. Since we don't know the local real estate market very well, we are partnering with a Portuguese architect. We would enter with the money and he would provide his expertise (contractors, building materials, city permits, appraisals, etc). How should we split the profits for each property sold? Thank you for your help! :)

What we think is fair may not be what he or you think is "fair". This is really a decision that all parties involved need to discuss and agree on. Off the top of my head, if I was investing money (including labor, and materials..because that all cost money), I'd want my money back plus a percentage. Time invested is assumed by all parties as long as it's fair and equal as well.

Since you are Husband and Wife, if your investment of resources is as a team, then I'd consider you both (at the most) 50%, and me the other 50%. You don't get to invest as a shared entity, yet still claim individual shares of 33% each.

Again, it depends on who is investing what, and what you all agree is fair. Ultimately no one else can make that decision for you.

If I'm investing all of the money and doing all of the work, I'd question why I need anyone else to "split" with. It all just depends. No easy answer.

[vangogh]

I agree with Harold. I have a standard answer to this question, which is the fair split is whatever all the partners agree is fair. If someone doesn't think it's fair that person will eventually feel resentful or something negative toward the other partners. It's hard for anyone to really answer what's fair in your situation. That said, I thin there are some general guidelines, for lack of a better word.

I'm again with Harold thinking you and your husband would count as one partner together in this and the architect in Lisbon represents the other. A 50/50 split is probably a good place to start. Based on your description, the architect and his team will be doing all the work and you'd be funding it. You'll have all the risk though as it's your money and I presume you'll be on the hook for any expenses if the properties don't sell.

Usually when there's a partnership where one side does all the work and the other side supplies all the money, is that the financiers are probably more important to the business at first, though the side doing the work becomes more important as the business itself has money to spend. You might work something out where you have a larger percentage of the business at first, but over time some of that percentage goes back to the architect.

In the end though, it's about all of you agreeing one something you're all happy with. I would spend some time thinking about everything each side will be contributing to the business at first and then over time and do your best to decide what the value of each contribution is to the success of the business. Then use that as a starting point for discussions about what each of you thinks is fair.

Hope that helps.

[tallen]

Another possible way to think about this: if you were going to get into this business without the architect as your partner, but instead were going to hire him or her as a contractor, how much would you be willing to pay for his expertise and his services? You can turn this around, too, by imagining the architect going into this business without you as a partner, but instead using you simply as a lender -- how much interest would you charge (and what other terms would you impose) on any loan you might make to him to do these projects?

You might also want to consider several different scenarios -- what if the projects just break even and don't turn a profit? Or what if they actually suffer a loss? Who absorbs that loss? Or rather, what has each party put into the project that would be lost? In whatever partnership agreement you come up with, you probably should specify how losses are handled as well as profits...

[marvadur]

Thank you so much for all your comments! To be honest, we are not prepared to go for a 50/50 split and I will try to explain here why. Maybe the easiest way is by giving some more details about our situation:
1) The Portuguese architect is going to help us, yes. But he is not going to be doing all the work while we only fund the project.
2) We (actually from our side it will be my 18 year old son, my husband and I) will be looking for and visiting properties, that means talking and negotiating with local realtors. Of course he will help us but we will be doing this together.
3) We are also thinking about building a website in Portuguese, English and German (My husband speaks German, English and Portuguese. I speak English and Portuguese. My son English) to advertise the property.
4) The architect will be responsible for deciding if the property is worth buying (taking into account how much would it cost to renovate it), finding/managing the working crew, and helping us decide where to buy.
5) The situation in Portugal is still pretty bad for professionals. He hasn't worked as an architect lately since all he could find were jobs that would pay him an annual salary of 12 thousand euros. He makes money by renting an airbnb flat and taking photographs for an architecture firm. He would continue doing these activities while also working on our project. So it wouldn't be a full time endeavour for him.
6) If at the end the bubble burst (I think the real estate market in Portugal, or at least here in Lisbon, is getting too overheated) we will sustain all the losses.

[Harold Mansfield]

I guess it would be up to him to accept or deny the offer based on whether or not he thinks it's a fair deal for him.

I will say this, the economic situation in Portugal and what else he does to make a living has absolutely no bearing on whether or not he should receive fair compensation for his work with you and I would think it kind of insulting if you tried to make that argument to justify compensating me lower rate than you would anyone else for doing the same work.

If you're taking all of the financial risk but need his service and expertise, why not just hire him or pay him per job?

You guys have to decide what is fair. He obviously is free to say "No thank you".

[Vathani Ariyam]

It depends on the contribution that each one of you all have put in the business, that is financially, physically and mentally.

[MyITGuy]

6) If at the end the bubble burst (I think the real estate market in Portugal, or at least here in Lisbon, is getting too overheated) we will sustain all the losses.

Based on this statement what your proposing is not a partnership, as a partner should not enjoy all the benefits of profit, but none of the loss. Especially when it will be this persons job to determine what is profitable or not.

Personally, it would be my opinion that if you are providing 100% of the funds, then just pay the architect/general contractor/contractors for their time & service and you keep 100% of the profits.

[MaryGreen]

If the architect is doing all the job on his/her own then it would be normal to offer him 33% as it was already said above, but if you're not only giving money but also take part in some processes I'd just pay an architect some fixed commission as MyITGuy offered.