Private Money Partnering

Kinds Of Returns And Rewards

Chapter N.

The Costs Of Money Vary
Bigger Risks Deserve Bigger Rewards
Partner Goals Reflected In Negotiated Agreements
Make Adjustments When Necessary
Don't Be Greedy

Forms:
Examples Of Venture Money Arrangements
Who Gets What - Dividing Up The Benefits

A Certain Dollar Amount Return

For example, if you give me $8,000, I'll give you $9,000 within six months.

Some Type Of Blended Returns Or Profit Pool Adjustments

What's fair, that will make it work ?One type would be with certain dollar amount plus a percentage after a certain point in time. For example, $8,000 will give you $9,000 within six months, and if for some reason the house hasn't
sold, I'll include an additional 1% per month from that time or that's owed to you when the house does close. Another type of blended return would include both a base return and portion of the profit. The amount coming from the profit pool would vary based on a timeline. For instance, someone puts up $30,000. The Money Momma will get a minimum of $3,000 for the use of the money and the deal maker a minimum of $5,000 for putting the deal together. Beyond that, the percentage split from the profit pool to each of the two partners will be determined by how fast the house is resold, or how well Debbie Has-A-Deal, the operating partner, performs. The faster the deal is completed, the more that Debbie gets to keep. The longer it takes, the less total she'll get.

For instance, if the total net profit is $20,000, and $8,000 is the total minimum base for the partners, $12,000 remains in the profit pool. The partners agreed that if everything is done within six months, Debbie would take 100% of the profit pool, and the percentage to Debbie would decline every month after the six month's initial point. If the whole deal took a total of only six
months, then Debbie Has-A-Deal would take 100% of the profit pool, the original $5,000 plus the whole profit pool of $12,000, for a grand total of $17,000. The Money Momma would have $3,000 profit in six months, for a total of 20% annualized return on the use of $30,000. Everybody is happy.

If the deal takes longer, the operating partner's percentage of the additional profit pool money declines for each additional month that it takes to return the money and finish the deal. With this kind of arrangement, both partners benefit from getting what they want and by addressing the concerns of the other partner.

For example, take the property at Huntsman Bend. As an experiment I incorporated the concept of a profit pool in my discussions with a potential client. The profit pool is a powerful concept, because what does an investor who is putting up money want? What are they risking? They're risking the time that their money is out. I'm risking the time of doing it. Time is a big factor on
the risk and I thought we could do the deal in six months. I thought it would go quickly, since it was in a nice neighborhood, and we should get a buyer relatively fast. All they wanted for their $30,000 was 10%, so I assured them the project can afford to feed them that much.

DEAL	INITIAL PARTNER	ONGOING $COST	FINAL SPLIT
"THE PROFIT POOL" Huntsman Bend	$29,400 + 5K extra (inc. 5K up front)		Partner profit $4,683 + $2500 + tax bennies over 12.5 mo. MC got $5K up front +75% profit pool $5050

And after the initial six months, there would be a profit pool. Every month after that, they would get a higher percentage of the profit and I would get a lower percentage of the profit. At that point it would supposedly be my expertise that wasn't selling the house or getting the right people or doing something right. They decided it sounded fair. Interestingly enough, when I put together a chart about the rate of return and what each month was, I thought to myself, this looks good but what would happen if I halved the amount to the partner over each time period? I presented it, and yes, the smaller monthly percentage increment was still acceptable to the partner. It worked. The situation was fair to everybody. It was also the first time I didn't do a 50/50 split. It was the concept of a guaranteed amount plus potential profits on a sliding scale
that worked for those partners. That concept worked for me as well.

Kinds of Returns and Rewards - Chapter N (continued)