7 Key Tips: How To Properly Structure a Real Estate Joint Venture

“When a person with money meets a person with experience, the person with the experience winds up with the money and the person with the money winds up with the experience.” -Harvey MacKay

 

At HMB HQ, we’ve been seeing a lot of investors who are finding fantastic real estate deals, but are having a difficult time getting a loan.  This could be due to credit problems, lack of cash or collateral, lack of experience, or maybe even just having too many properties.  And this doesn’t just apply to conventional financing.  Gaining access to private/hard money loans can be tricky if you’re inexperienced or don’t have enough cash to put into the deal.

So what should you do if you can’t get a loan?  Walk away? Flip the property for a few bucks and call it a day?  Flipping can definitely earn you some quick dollars, but you may be unnecessarily giving away profits.

Instead, try a joint venture (“JV”).  Joint venturing can be a highly effective way to fund properties you may not otherwise be able to.  It is a very basic concept:  You find a property to buy, another person finances the project (with cash or credit) and, when the property sells, you both split the profits.  If you can find good properties, it then just becomes a question of finding reliable capital sources.

Although easy in concept, JV’s can get rather complicated when you start working through the details.  Whether you are joint venturing with your cousin Fred or with Mortimer, the local zillionaire, you must address the following 7 items:

 

Purpose & Structure:  The JV agreement should clearly spell out who the parties are to the transaction and what each person brings to the table.  Money?  Credit?  Construction know-how?  Also, you must decide what the legal structure of your JV will look like.  LLC?  Land Trust?  How you title the property will have a lot to do with what other terms you must have in the agreement.

Termination & Default:  Your agreement must not only specifically define what will act as an event of termination or default of your joint venture, it must also define what happens in the event of termination or default.  What if one of the parties declares bankruptcy or dies?  What if one of the parties allows a judgment to be placed against the property?

Actions & Responsibilities:  In any joint venture, each party should have specifically defined responsibilities, and the agreement must indicate what those are.  Who’s going to hold title to the property?  Who’s going to hold the keys?  Who’s going to control the checkbook and handle record-keeping?  Who’s going to handle cost overruns?

Define Profits:  Your definition of net profits may by different than your joint venturer’s definition.  Clearly set forth your definition in the agreement.  I often go so far as to provide a numerical example to make certain all parties understand exactly how the end-split will happen.

Renovation & Sales:  You should clearly set forth who will be responsible for the day-to-day construction decisions and how those and other important decisions will be made.  Does one joint venturer have the right to make all construction and sales strategy decisions?  Who chooses the Realtor?  Makes material choices?  Sets the sales price?

Arbitration:  Litigation is costly.  You and your JV partner must decide whether, in the event of disagreement, it is best to arbitrate or leave it up to the regular court system.  This decision could involve waiving significant legal rights, so it must be addressed in the agreement.  What will the arbitration process look like?  Where will it take place?  Who’s responsible for costs or attorney fees?

Documentation:  Handshake deals may be fine for Sunday football bets, but not for JV agreements.  For reasons too lengthy to list here, it is important that all terms of the JV be placed into a formal, written, binding document.  It may also be necessary, depending on the structure of the JV, to create certain other loan or collateral documentation to properly protect one party or the other.

As with any business venture, each joint venturer should consult with an attorney and CPA to make sure all legal and financial aspects of the investment are properly handled.  Also, the more specific you can make the agreement, the better.  Generalities make the rights and obligations of each party that much harder to figure out later if a judge needs to intervene.

With so many great opportunities in today’s market, stop stressing about that loan denial and start joint venturing!  I’m no math whiz, but isn’t it better to make 50% of something rather than 100% of nothing?

At Hard Money Bankers, we’ve been involved with many successful joint ventures.  In addition to providing hard money loans, we use our cash or credit to fund real estate deals with a select group of trusted JV partners.  If you are interested in accessing capital through our JV program, please fill out an application at:

http://www.HardMoneyBankers.com/jv

 

Til’ next time, Jeff