How would you structure this "joint venture" deal?

This is a retail flip project. The other investor located a short sale and was able to get it under contract where the numbers work. He is funding the purchase of the property. Our role is to fund and execute the rehab. Once sold the profit will be split between the two parties. The numbers all work as far as ARV, rehab cost, etc. We have strong and recent comps within 1/4 mile of the subject property above our target exit price.

My question is - how would you suggest securing our interest as the 2nd investor? I do trust the investor we are entering this deal with but you still want to structure things properly. We aren't bringing funds to the closing, we are funding the rehab as costs are incurred. I am not a builder so I don't think we can lien the property. Any ideas?

Joel Owens

Commercial Real Estate Broker · Canton, Georgia

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Nov 12 '11, 09:40 AM

It would be worth the time and money to find a local attorney who specializes in joint venture arrangements.

This way the paperwork and protections will be in place for both parties.

A deal always sounds encouraging in the beginning but can later fall apart.

Jason S.

Real Estate Investor · Upland, California

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Nov 12 '11, 10:01 AM

What's the amount of the re-hab? I know others will differ but there is an amount that, if you already trust the partner, will be more trouble securing with anything more than a simple MOU/Contract and Hiring contractor with a power of lien.

Are you doing the work yourself? Do you have contractor laws in your state? Maybe he plans to call you an unlicensed contractor at the end - not pay you a dime and report you to the contractor board?

Best practices say you need to have a contract. But that contract should not include that you are to do illegal activity (acting as a contractor when you are violating laws) - at that point the contract would likely not be enforceable - and if it is enforced through the courts, as stated earlier, your deposition will implicate you in illegal activity.

Or maybe I am rambling this Saturday morning, maybe you are hiring a licensed contractor - in that case - get a contract.

Will Barnard

Rehabber · Santa Clarita, California

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Nov 12 '11, 10:56 AM

Is the other party bringing all cash to close the front end transaction? If so, the easiest way to protect both parties is for you to fund an escrow account with all the rehab funds and then seciure a deed of trust for that amount against the property. This way, the property can not be sold until your principle is paid back. That covers your rear for the principle and is easy and inexpensive to complete.

All that remains is your profit share split which if you really trust this investor and have a good relationship and history with him/her, you have 2 choices, do it on a hand shake and trust that you get your split (I don't recommend this option even if you trust them) or 2. Draft a simple operating agreement that states what each party is reponsible for, what happens in the event of (death of 1, death of both, who dies first, who makes decisions to lower exit list price if it does not aell, who pays and performs work on costs in excess of rehab budget, how and who covers holding costs - taxes, insurance, utilities, maintenance, etc., and any and all details pertaining to the joint venture.

So long as you trust the other party, you don't need to worry about all the fine line details, just enough that spells out in writing what will take place and how. Your principle is already covered via the deed of trust and that is the important part.

Will Barnard, Barnard Enterprises, Inc.
E-Mail: info@barnardenterprises.com
Website: http://www.barnardenterprises.com
info@barnardenterprises.com

Kevin Suksi

Real Estate Investor · Dearborn, Michigan

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Nov 13 '11, 06:33 AM

Thanks everyone for the replies - very helpful