So, you have given some serious thought about seeking a partner (or partners) for a real estate venture you are considering. However, because you haven’t had much experience with partnerships before, you don’t have a clue where to start. Before we get into the 7 Tips, let’s start with a few initial considerations. Please note that when we indicate a partner, it could be just one person or possibly more than just one.
1. Will this be a long term or short term venture? Short term ventures also know as Joint Ventures are normally for just for the duration of a particular project such as a rehab.
Long term partnerships are when you partner with someone in order to do multiple types of projects over a long period of time. Both are treated very differently. In this article, we are going to concentrate mostly on the short term, rather than a long term partnership, which is a whole discussion itself.
2. Many times investors will just form a General Partnership. This can be risky as you are each liable for the actions or inactions of the other partner. Normally, Joint Ventures (short term) are formed between your entity and the entity of the other partner to provide some form of liability protection. It’s better to form an entity for a long term projects that you are all participants in. Whatever you do, it’s best to get it all in writing! A good Joint Venture Agreement between parties can keep things in order for everyone and the project (Note: for a long term partnership a Buy-Sell Agreement along with other considerations is important)
OK, now that we have given some thought about our initial considerations, let’s get into the 7 tips
1. Do I Need a Partner?
First of all, you should ask yourself if you actually need a partner? Can you hire a contractor, attorney, accountant, real estate agent or other professional to fit the needs of the project? Can you borrow the money, rather than bring in a money partner? Although these professional may not come cheap, in most cases they won’t cost you nearly as much as some sort of partner that could take a significant slice of the back end profits. An example might be a hard money lender. They will probably cost you about a third of your net profits, where as you might have to give up 50% of those net profits to a partner.
2. What Will I Give Up?
There is a solid argument for having a partner such as two heads are better than one and other factors that we will discuss soon. Be aware there are some things that you will give up in return, such as profits, control, time (this can go either way) and more. A partner can save you a lot of time or they can cost you considerably more time if they aren’t holding up their end of the bargain.
You just have to weigh whether having a partner makes the project worth the while. Also, if you have doubts about your partner’s honesty and ethics, it can cost you more than a few sleepless nights.
3. What Does Each Partner Contribute to the Partnership?
You want a partner that is not your clone. Instead they should bring things to the table that you can’t furnish or hire for this particular venture such as skills, experience, money, credit, resources, contacts and more. In other words you should complement one another.
They should have areas of strength and skills where you are lacking a bit and vice-versa.
4. Do All Partners Have Open and Honest Communication Styles?
This is arguably the most important of all! Partners need to communicate on a frequent basis. Looping your partner into emails regarding the project and a periodic phone call for updates is a great way to stay abreast of what is going on. In addition to ongoing communications and updates, a once a week meeting or call in order to discuss the project’s progress, successes and any recent problems is in order.
It’s vitally important that all communications are open and honest. There may be a thing or two that has occurred that your partner may not want to hear about, but this is not the time to “candy-coat” the truth. Obviously you want to be diplomatic in your delivery, but you can only deal with problems head and successfully – only if you both know all of the details, good or bad.
5. What Experience Does a Potential Partner Have that Specifically Benefits the Deal?
What past, specific experience do they have that will assist in the successful outcome of this project? More importantly, have they been in partnerships before and how did that go? Some people in this world are not meant to be in partnerships.
6. Who Is In Charge?
Each project needs to have someone that is in charge of specific areas or aspects of a deal. This person obviously moves the project forward at the wishes and guidance of the partners. This could be a “hired hand” such as a contractor that coordinates the project or it could be one of the designated partners whose responsibility is to coordinate and communicate between contractor and partners. In some cases a joint venture might have a person in charge of keeping track of the progress of the deal and another who keeps a close eye on the finances.
7. Do You Have Compatible Personalities, Goals and Work Ethics?
Some folks that are brilliant investors do not necessarily make great partners. In order to be a great partner, you have to have compatible personalities and work styles. For example two partners that are Type “A”, may possibly clash heads on a frequent basis, engage in “power struggles” and waste a lot of time trying to gain control of rather than concentrating on a deal. On the other hand, a couple of passive personalities may not accomplish much as they can’t make a solid decision in order to move forward.
The same can be said for goals, work ethics and work styles. If the goals are not specifically defined and it is not agreed upon; who is responsible for what and when it should be done, then you could have problems. Whatever the personality style, partners have to be flexible but always focused towards the successful and profitable completion of the project. A good Joint Venture Agreement can help identify each participant’s responsibilities and profit share of each deal.
It’s a good idea to spend a little time upfront over coffee or lunch and just have a general discussion in order to get to know one another better. Obviously one tends to put on their best face during this time, so each potential partner should do their due diligence on one another. Google one another, ask acquaintances or past business relationships or partners about one another. Don’t have skeletons in your closet. If you have poor credit, your JV partner needs to know this. If you plan to fund a project with your money, be prepared to furnish a Proof of Funds or Letter of Credit to the other parties.
Joint Ventures are a great way to see if you can work together and possibly join forces for a long term business. Some of the most successful companies started this way. Partnerships can allow you to do more deals and can be a great way to move your business forward successfully. However, like anything else in life worth having, one needs to do their homework upfront in order to better their chances for victory!
Here is to your success!
