Establishing a Partnership for a Real Estate Deal
Author: Joshua Dorkin • URL: http://www.biggerpockets.com/April 4th, 2007 •
Earlier today I received an email from someone asking for help. She had found a property and a partner to purchase the property with, yet hadn’t figured out how to split the proceeds / profits / etc. The question is a good one, but I hope she was not asking it after the fact.
NEVER GET INTO A DEAL WITH PARTNERS WITHOUT HAVING A FORMALIZED REAL ESTATE PARTNERSHIP AGREEMENT
If you don’t take the time to work up a formalized agreement and purchase a property with partners, you can get yourself into some real trouble.
Make sure you consider the following things in putting this real estate partnership document together:
- Who is putting up funds and how much are they giving?
- What is the percentage split of funds?
- Who will be actively managing the property?
- What will each partner’s role be in the day to day care of the property? (consider little things like who wants to be woken up at 3 AM if the is a problem with the property)
- Who will be on title?
- Who will apply for the loan?
- How will expenses be covered?
- How will any monthly profits be split?
- If sold, how will the proceeds be split?
Break things down even further and have a clear understanding of all roles of all parties. When you have figured out the roles and amounts of money that are put up for the deal, negotiate a fair balance between these to come up with percentage splits in profits, proceeds, ownership, etc. Write these down in the partnership agreement. Once you’ve completed the document, pay the extra money and have an attorney review it to be sure both parties are protected. Then, and only then, should you move forward with a deal with partners.
Are there any other points that I’m missing . . . ?
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Joshua Dorkin
Charles Feldman
Ted Karsch.
Richard Warren
[...] If sold, how will the proceeds be split? Break things down even further and have a clear understanding of all roles of all parties.” (Bigger Pockets) [...]
I woul add a buy-out clause as weel in case one of the partners wants to cash out early.
Great suggestion Fred. That one somehow escaped me!
[...] Joshua Dorkin has some very important advice on establishing partnerships for real estate deals. [...]
Just had to stop by and read your carnival post and say Hi how are you? busy I am sure.
One of the first questions is how to take title. Tenants in common is the most common way that investors do it. However, a lot more families and/or “partners” (in the not married but committed way) are buying properties together and asking the question of “who should get the property if one of us dies”? In joint tenancy it can just switch over to the surviving owner instead of going through the deceased owners estate. Personally, I don’t know if I want to give my family a reason to root for my demise.
Another big point is purpose. Talk about why you are buying the property ahead of time. Is it to be a long term hold? Do you both agree on what long term is? Are you flipping it as soon as it has made you money?
How will future capital contributions be dealt with? If it is a long term hold, what do you do when it needs a new roof? Can one partner make the decision to put the roof on and then require the other to pay for half? What if one partner has low cash flow and the roof needs fixing immediately? A lot of investment agreements have “calls”. A call is the ability for one partner to notify the other that a contribution is required and there are time frames for response. All of these things must be written out.
These are what came to mind as I was reading this article. The bottom line is you MUST contact an attorney. There is so much more that can come up to bite you in the bottom if you are unprepared. A good attorney will try to anticipate as many problems as possible and give you a written solution in advance. That way everyone is on a level playing field and knows what will happen.
This is exactly the information I was searching for about structuring a real estate partnership deal. I need a private money real estate investor asap for a Tallahassee, Florida property rehab.
I have an investor who wants to put up 100% of the funds for purchasing a property. My role will be to renovate the property. The investor knows nothing of construction and I have all the construction experiance. I will be the 100% of the labor and he will be responsible for 100% of the investment capital. What is a fair split?
Thank you,
Dayan Borges
Dayan,
You pose a great question. What did you end up deciding on the split? I have a similar situation where I will put up a small portion of the investment but manage the rehabs and finding the deals. The outside investor / partner will end up putting up the majority of the funds. Any suggestions?
Jeff