Real Estate Partnerships: Making Them Work!
I am often asked about the secrets of effective partnering, and wish that I had an answer where one size fits all. Regrettably, the perfect formula for a perfect partnership, in my opinion, does not exist. However, with a clear set of objectives and open (and honest) communication, along with a clear written agreement, real estate partnerships can thrive and can help you to achieve your goals.
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Common Values and Beliefs
Over the course of these past 9 years as a real estate investor I have had the opportunity to watch many partnerships come and go. The most significant observation I can make about successful partnerships is that the individuals involved in the partnership shared common values and beliefs. This is an extremely difficult issue to get your arms around and yet, you must fully understand your values and beliefs in order for a partnership to succeed for you.
What if you end up with a partner
– who makes fast or sloppy decisions;
– who refuses to follow agreed upon criteria for getting into a deal;
– who all of a sudden wants to hold the deal for long-term appreciation;
the partnership will be extremely uncomfortable for you and will most likely be a failure from your perspective. Know your values, your comfort level regarding how decisions are made, and the types of commitments that you are willing to enter into.
Why a Partner?
Prior to seeking out a partner or partners it is my belief that you must first understand why you need a partner. For many new investors a partner means increased knowledge, and a reasonable way to shorten the learning curve. For investors who are short on cash partnering is a great way to get into a deal that they may not have otherwise been able to take down. Also, partnering represents a reasonable approach to consolidate resources and create synergies that each individual investor would not have otherwise realized. Your job if you want to “take on” a partner is to clearly define what you are attempting to accomplish.
Know Your Strengths and Weaknesses
In addition to defining your objective, you must also know your strengths and weaknesses. Why is this important? Well, consider this scenario: In your enthusiasm to get started in real estate you decide to partner with another investor without clearly understanding your strengths or their weaknesses. So you execute your partnering agreement (more on that later) and both proceed with haste to find a deal. You find your first deal, get it under contract and then find out that although you both have funds to get into the deal, neither of you has ever gotten a deal financed. OOPS! The first response from your partner will go something like this: “I’ve never gotten a deal financed before, I thought you would take care of that!” Have you ever found yourself in a situation similar to that? Not a fun place to be. Very clearly put, know what you are good at, and then seek out partners who are good at those things that you are not.
Once you have gone through the above evaluation regarding your values, why you’re partnering, and you know what the partner(s) needs to bring to the table, how should you locate your perfect partner? First and foremost you should become a member of your local real estate investment club. In addition, make sure that everyone you meet knows what you are looking for in very clear terms. A statement similar to “I am looking for a partner” is way too vague and will not result in the response that you desire. I find it absolutely uncanny how solutions (partners) magically appear when I clearly advertise my needs. I am sure you will too!
OK, you know what you value personally; you have a clear understanding regarding what you want to accomplish by partnering; you have assessed you strengths and weaknesses, and you have identified a likely partnering candidate. Now what?
Get it in writing… and here are just few things that should be captured.
- Clearly identify what each partner will be responsible for accomplishing. Take it one step further, for every action item include performance metrics. These might include the amount funds to be supplied by the partner(s) or completion dates for specific actions.
- If the partnership includes managing contractors the agreement should spell out who is authorized to conduct business with the contractor(s) and under what circumstances.
- If you or your partner are going to perform most of the work, make sure that it is clearly identified how you or they will get paid for performing that work. Be specific! If you are going to replace the electrical system include how material costs and your labor are going to be paid. A statement up front similar to “as agreed for work performed” will not yield the result you are looking for!
- Identify how the profits will be split. Sounds straight forward enough doesn’t it. It is if you clearly define the term profits and specify what deductions will be made from those profits prior to arriving at the final number.
- If you are entering into a partnership that you anticipate will be long term, think about putting a clause/statement into the agreement that allows for a periodic review of the progress made by the partnership and in conjunction with that, how the partnership would be dissolved and assets distributed in that event. If you find yourself in a minority position in a partnership perhaps a clause that states that unanimous agreements are required for all major decisions.
There are a variety of ways to get these agreements in writing ranging from a contract specific for a particular deal to the formation of a company with shareholders/members. In any event if you have any doubts about their wording by all means seek the advice of a lawyer. The money spent up front will be worth many times more then money spent or forfeited when trying to resolve partner issues after the fact.
Many great and profitable partnerships have succeeded over the years, yet many, many more have failed. Although the reasons for their failures are many, most of the pitfalls of partnering can be managed through the implementation of those items addressed above. Good luck as you move forward and consider the “partner” option.