Let’s face it, there are many ways to joint venture (JV) on a real estate deal. The same is true in the note business. There’s also an old saying that “just about anything you can do with a house you can do with a note.” For example, you can broker it, rehab it, flip it, borrow against it, buy and hold, and so on. You can also do a joint venture or even raise private money to acquire a note or a pool of notes.
Ways to JV
If you’re trying to purchase a note but just need a money partner to help acquire the deal, there are a few ways to set this up.
One way would be to take joint title at the time of purchase. For example, I once bought a note with my Roth IRA, my wife’s IRA, and my HSA all owning a portion of the note, and our assignment of mortgage and note sale agreements spelled out the exact percentage of ownership. I’m not sure I would recommend always doing this because most loan servicers may charge you additional fees to send a statement to each person on the title, but it’s really a business decision. With certain tax advantages or just the benefits of doing the JV, a lower yield after the fees may not be as big of a deal.
How to set up the JV also has a lot do with your exit strategies. What’s your business model or strategy?
If my strategy is to broker a note, I may be able to just line up a seller and buyer and make a fee just for putting the deal together.
If I want to buy a nonperforming note (NPN), I may just need access to capital until I can purchase and work through the note, whether I can exit through the borrower (usually a cooperative situation resulting in a payment plan or a discount on arrears) or exit through the property (foreclosure, deed in lieu, etc.). If I exit through the borrower, I usually have a re-performing asset that I can recapitalize on in some way, often by selling a note or a piece of the note (aka selling a “partial”), or I can even borrow against it via a collateral assignment of note and mortgage.
If you’re a buy and hold investor, you may just need a partner to acquire the deal, and you can buy him/her out of the deal later or continue to share revenue until maturity or cash-out.
This is more complicated, but just as you can take joint title of an actual note, you can also JV on the ownership of the company or entity (e.g. the LLC) that owns the notes.
One final strategy that my company uses is that we JV with hundreds of money partners in our private placements, where we use their capital to buy thousands of mortgages with the intent of paying our investors a fixed return, with the plan to pay them back upon maturity or roll them into a new offering. By having a note fund, it enables us to perform various strategies depending on current market conditions.
Regardless of which way you choose to JV, there are a few things to consider first.
There are many advantages to being able to JV on a note deal. Sometimes it’s access to capital. For the money partner, it could be access to a deal that pays a nice yield with collateral. The investor may not have the time or wherewithal to work with the actual notes, so he or she may prefer to be a passive money partner. This can be a great way to share not only the workload and skill sets, but also the risk. Doing so well also help you diversify, especially in a note fund. Many high net worth folks prefer note funds just for that reason, along with the fact that there’s limited liability in that they can’t be sued as a limited liability partner.
I’d say the biggest potential disadvantage of a JV is that you’re giving up some form of control. Although notes are an asset-backed investment, you still need to know your partner and your deal. Be sure the terms of your JV are spelled out, along with all the roles and responsibilities. Who’s in control of what? Who’s responsible for what?
Most importantly, what happens when things go south or there’s a default or liquidation trigger? Along with defaults, there can be compliance and third-party risks, as well as various market risks. Pricing or the supply of notes can change as well. But it’s important to know that you can adjust accordingly, just like you would if there are changes in the real estate market. In fact, note values are in direct correlation to real estate values.
After thinking through the advantages and disadvantages, I still believe that it’s a business decision to be made by each party. Personally, I enjoy sharing the workload with my partners, while providing an opportunity to my investors to diversify amongst many note deals.
Do you prefer JVs for your real estate? Better yet, would you consider a joint venture on a note deal?
Let me know with a comment!