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Find a Good Real Estate Partner Using The “5-Deal Test”

by Jason Hanson on February 6, 2011 · 9 comments

  
Don't partner with this guy on your real estate deals!

When it comes to real estate investing, I definitely think you should have partners. However, there are many caveats.

First off, I believe that you should only do partnerships on a house by house basis; in other words, I would never add someone to your LLC, because then they’re a 50% partner in your entire business. If you’re partnering on individual properties, if something goes wrong, you can never partner with them again, and you don’t have to worry that they’re on your LLC — which would make it pretty tough to get rid of them.

Secondly, get everything in writing. It doesn’t matter if the person is your brother, sister or best friend. On every deal you do, you need to have an agreement in writing that states how the profits are split and what each person is contributing to the deal.

For example…

If you’re a brand new investor, you probably don’t have a lot of money to invest. (I know I didn’t.) So you might go around and find deals and then partner with an investor who will put up the cash.

Or the situation could be reversed. These days, I’m the one putting up the cash, and investors are bringing the deals to me. Now, your role — whether you’re putting up cash or just bringing a deal — will determine the level of due diligence you need to do.

If a person has zero experience, then they’re likely going to be the ones who are going to bring the deals and will be partnering up with a successful investor. The new investors are the ones who need to do the most homework to make sure that the supposed “expert” investor who they’re partnering up with, knows what they’re doing, has the right paperwork, and is going to honor all obligations.

How can you tell if the investor is actually successful and knows what they’re doing?

Well, the first thing you want to do is go to your local REIA meeting and ask about them. Find other successful investors and ask “what can you tell me about John Doe.” Next, you want to go to “John Doe” himself and say “can you give the details about 5 of your deals including the addresses?”

Don’t be shy to ask this question, just tell him you’ve heard horror stories about new people getting ripped off and you don’t want to be one of them. Of course, we all know that there are many dishonest gurus out there that have probably only closed one deal in their life, if any.

And if you ask the “expert” investor to give you the details on five of his deals and he flinches or starts making excuses on why you can’t have that information, then walk the other way quickly. This “5-deal test” is probably one of the smartest things you can do to make sure you don’t get taken advantage of.

On the other hand, when you become the expert, you get to be more in control. The main thing you have to worry about then, is people wasting your time by approaching you with crappy deals.

Either way, I recommend partnering up on a per-deal basis — that way you leverage your time and are able to close more deals this year – just remember to get EVERYTHING in writing.

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{ 9 comments… read them below or add one }

Mike Morrison February 6, 2011 at 3:02 pm

Jason this is fantastic advice. Most new folks have no idea how much easier it is to get started with a partner. Here lately, I’ve seen experienced investors looking for “new” partners but thru a mentor relationship. Which the “new” partner is charged for. Nothing wrong with the idea but, there is a big difference between Partner and Mentor. The trick is to know the difference when new investors get in the game.

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Steve February 6, 2011 at 5:11 pm

Jason, are you hypothesizing brand new investors should do this from the beginning to meet the players?

I am typically the one that wants pre-qualify someone, usually mostly their deal, before spending too much time discussing a partnership. A lot of people are “forever new” or “professional time wasters.”

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Kevin Kaczmarek February 6, 2011 at 8:55 pm

Jason, I like the 5 deal test, and the only way to partner is deal by deal where there is a beginning, middle and end. If you can go into partnerships with the end game in mind and agreement from the beginning, you can be successful.

Great article, and I loved the image choice!

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Paul Timmins February 7, 2011 at 9:56 am

Jason
If the potential partner says they have money ask them for a POF letter. That will separate out the talkers vs the players.

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Julie Broad February 7, 2011 at 12:49 pm

Hi Paul,
I think that approach can be used when you’re further along in the discussion but if you start asking somebody for proof of their funds before you’ve established any credibility I bet you won’t get very far with a lot of people. I know if someone challenged me – especially someone looking to work with me because of my funding – and asked me for proof of funds before I was ready to move forward on an investment with them I would wonder why they aren’t trusting me to begin with. What I’ve found is that people who don’t trust you when you first start out are often the ones that you shouldn’t trust. Not always – but somebody not trusting me from the outset gets my own radar on full alert.

Also – conversely – after we’ve reached a level of trust and an interest level in doing a deal where it would be expected that we’ll do due diligence on each other – if that person is so keen to move forward that they don’t ask me about my financials I would also be questioning this person and whether I want to work with someone that partners with others so freely.

In other words – there’s a balance – not a hard and fast rule in how you vet your partners. A proof of funds letter is not going to do much for you unless you get it at the right time in my opinion.

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Elli Davis February 8, 2011 at 9:25 am

I definitely agree with you Julie. It’s a thing of virtue to approach a person with whom I want to venture into a project with respect and trust. And also expect honesty from the other side. Of course, before doing any important writing, due diligence is necessary, everybody understands that nobody with a clear conscience will be offended by an inquiry for a POF letter.

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J Scott February 13, 2011 at 8:58 am

Great point, Julie…I’ve had newbie investors come to me before asking for a partnership, and then within 10 minutes ask for proof of funds. I just laugh. Why the h*ll did they come to me in the first place if they don’t think I can follow-through on my side of the deal…

That said, of course POF should be obtained when the time is right…

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MH February 7, 2011 at 3:57 pm

Great post, great advice. Partnerships are a great way to start out – but it seems to me that charging for one is a little bit… not nice.

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dorothy February 23, 2011 at 6:15 pm

They believe that the money they invest in your business gives them the right to offer
advice and they expect you to take it, in the way you run your office, what properties you
purchase, what rehab workers you hire, and so forth.
Just be aware that some folks will want to be a partner and if this is not what you want,
be prepared to correct the situation before it goes too far in the relationship.

Reply

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