Real Estate Investor Partnership Horror Stories
Joshua D.Pro Member
BiggerPockets Founder · HI · Member since 2008 · 16k+ posts · 5k+ votesReal Estate Investor Partnership Horror Stories
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votesI entered a business partnership in 1981 that worked out very well. Sold out to my partner's family in 1985 for a 275% profit.
Entered into a real estate speculation with same partner in 1991. We immediately sold half the land and recovered 90% of our cost. Sold the remaining half two years later and booked very nice profit.
So the same guy comes to me with a partnership proposition a couple years later. This involves purchasing land, building an automotive repair facility, obtaining a franchise, having my partner run the franchise for a couple years, and selling the franchise while maintaining ownership of the property. He's running the business for about a year and sales begin declining. He calls me to tell me he needs $25,000.00 immediately or we are out of business, and of course all his personal assets are tied up. I visit with him, examine our books and records, and come up with three different alternatives to right the ship. We agree on one of the alternatives and I transfer $15,000.00 into the company bank account. So, I'm getting weekly updates from him, at the end of the month I receive a financial statement. Things have really picked up. The next month another financial statement - revenues are up again. In fact business is so good, we need additional working capital to carry receivables.
So I wire another $10,000 to company account. Third month I receive another excellent financial statement. Now summer is over and I am on my way back to Houston (spent three months in cooler climate). I get a call from an individual who owns a business across the street asking if I would like to sell the business and or property. I ask if he has spoken to my partner. He tells me that he has not seen anyone at the shop for three months, the business has been abruptly closed three months ago, equipment removed, lights out, etc.
I come back to Houston and immediately go out to the property to confirm this info. Sure enough it's true. So I track down my partners family, nobody will give me any information. I finally arrange to "bump into" my partners wife a the grocery store, and she fesses up.
Seems my partner obtained a bit role in a movie being produced locally. While the shooting occured he left the business unattended and revenue was way off, inventory and equipment was stolen, money was stolen, etc. Meanwhile, a secondary actress in the movie thought my partner had acting potential and connected him with her agent. My partner needed money to go to Hollywood and persue this dream. All his money was tied up with his wife and needed joint signatures for withdrawl - which his wife refused. So he closed the business, scammed $25000 out of me, concocted the financial information for the now fictional business.
My partner's acting career fails, six months later he is back in Houston reconciled with his wife. I tell him he owes me $25,000.00 that he stole - and he tells me he owes me only $12,500.00 as we are partners! I file a lawsuit against him for the $25,000.00 he stole, and the $10,000.00 of other bills I ended up paying that he skipped out on. He retains an attorney and we agree on a $35,000.00 note with monthly payments. Payments are paid for three or four months and then I receive notification that he has filed for bankruptcy and listed me as a creditor to be wiped out with the bankruptcy! So I call him a few times, he never returns any calls. I leave a message for him telling him exactly what i think of him. He then leaves me a message justifying what he did because his therapist told him that he had a mental breakdown and was not responsible for his actions!
23 Replies
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes15y
I had a partnership that didn't work out because we all had competing goals. It really didn't get ugly, but it would have served us all well to talk about our goals before spending so much energy building a partnership that didn't work out.
- Investor · Lenexa, KS · Member since 2010 · 215 posts · 121 votes15y
Josh,
Thanks for starting this thread. I am about to get into this situation and would love to hear everyone's experiences.
Bryan, as far as competing goals, could you elaborate? Were they too similar? Like two chefs - one kitchen?
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes15y
No....they were too different. I have the financial stability to want to invest for the long term and hold money made for long-term gain of the company. The other guys in the partnership needed to eat on the money we made while adding significant value to the business. The partnership really would not have worked without all of us being engaged and ultimately the lack of clarity on how to invest retained earnings was our undoing.
We had very precise agreements drawn up prior to starting the business and it was very successful for about 6 months or so. If people aren't forthcoming about their goals up front though it doesn't matter what the partnership says. People will stop producing and doing work if it doesn't serve their needs at the time.
- Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes15y
Did you guys discuss the cash flow needs of each partner and try to find a solution for it? Perhaps have a salary for the labor of each member and then reinvest the remaining profits? Or perhaps have some partners reinvest their profits into the business in return for either an increased equity or loan to the business at an attractive interest rate?
Good communication and a willingness to try to figure out solutions to the problems facing each partner is important for the success of a partnership.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes15y
No...we didn't Vikram. Those are lessons learned from guys that were all trying to do the right thing. When we were bootstrapping there really wasn't enough money for everyone to take a salary fat enough to sustain their lifestyle though. Perhaps with more starting capital this could have worked well, but in the throws of the credit crisis it was hard for that to be an option.
9 out of 10 businesses fail because they are under-capitalized. I really think this was the root cause of our problem because what you have described was not possible with our capitalization.
- Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes15y
Bryan, is this because you guys had less cash flow than expected? I would think that each partner knew his personal financial situation before starting the business, so if they depended on the cash from the business to sustain their lifestyle but could not, then it must be that the business generated less profits than they had initially hoped.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes15y
The business generated pretty good profit for about 6 months or so. Fundamentally, the business model had flaws though and we didn't have enough cash to sustain our lifestyle and work through the flaws to make it viable long term. Sufficient capital and margins allow for you to screw stuff up for a while to get it right. I guess we just didn't have enough reserve to make that happen.
We also made the decision at the beginning of the business not to take on debt capital so that constraint tied our hands a bit for expansion. Equity capital would have been welcome, but the track record wasn't sufficient to procure angel funding or anything else when it was needed.
The partnership was a great learning experience and we did make some decent money, but ultimately the capital wasn't sufficient to let us screw it up long enough to get it right and viable for the long term. Competing partnership interests were a big drain on cash too, which made our margin for error on spending capital smaller.
- 15yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
I entered a business partnership in 1981 that worked out very well. Sold out to my partner's family in 1985 for a 275% profit.
Entered into a real estate speculation with same partner in 1991. We immediately sold half the land and recovered 90% of our cost. Sold the remaining half two years later and booked very nice profit.
So the same guy comes to me with a partnership proposition a couple years later. This involves purchasing land, building an automotive repair facility, obtaining a franchise, having my partner run the franchise for a couple years, and selling the franchise while maintaining ownership of the property. He's running the business for about a year and sales begin declining. He calls me to tell me he needs $25,000.00 immediately or we are out of business, and of course all his personal assets are tied up. I visit with him, examine our books and records, and come up with three different alternatives to right the ship. We agree on one of the alternatives and I transfer $15,000.00 into the company bank account. So, I'm getting weekly updates from him, at the end of the month I receive a financial statement. Things have really picked up. The next month another financial statement - revenues are up again. In fact business is so good, we need additional working capital to carry receivables.
So I wire another $10,000 to company account. Third month I receive another excellent financial statement. Now summer is over and I am on my way back to Houston (spent three months in cooler climate). I get a call from an individual who owns a business across the street asking if I would like to sell the business and or property. I ask if he has spoken to my partner. He tells me that he has not seen anyone at the shop for three months, the business has been abruptly closed three months ago, equipment removed, lights out, etc.
I come back to Houston and immediately go out to the property to confirm this info. Sure enough it's true. So I track down my partners family, nobody will give me any information. I finally arrange to "bump into" my partners wife a the grocery store, and she fesses up.
Seems my partner obtained a bit role in a movie being produced locally. While the shooting occured he left the business unattended and revenue was way off, inventory and equipment was stolen, money was stolen, etc. Meanwhile, a secondary actress in the movie thought my partner had acting potential and connected him with her agent. My partner needed money to go to Hollywood and persue this dream. All his money was tied up with his wife and needed joint signatures for withdrawl - which his wife refused. So he closed the business, scammed $25000 out of me, concocted the financial information for the now fictional business.
My partner's acting career fails, six months later he is back in Houston reconciled with his wife. I tell him he owes me $25,000.00 that he stole - and he tells me he owes me only $12,500.00 as we are partners! I file a lawsuit against him for the $25,000.00 he stole, and the $10,000.00 of other bills I ended up paying that he skipped out on. He retains an attorney and we agree on a $35,000.00 note with monthly payments. Payments are paid for three or four months and then I receive notification that he has filed for bankruptcy and listed me as a creditor to be wiped out with the bankruptcy! So I call him a few times, he never returns any calls. I leave a message for him telling him exactly what i think of him. He then leaves me a message justifying what he did because his therapist told him that he had a mental breakdown and was not responsible for his actions!
- Homeowner · Knoxville, TN · Member since 2011 · 207 posts · 73 votes15y
Don gets the first prize. +1 for that story. Keep them coming guys...
- Engineer · Pensacola, FL · Member since 2009 · 67 posts · 22 votes15y
I bought a short sales course and began to seek people to pick their brains. I ran across a guy who was a loss mitigator and we had an idea for a business. He sold me on building 2 websites (I'm a web developer) for him and he would split the profits. what was my mistake. I HAD NO AGREEMENT!
So when I pushed for an agreement, he cut me loose and took all of my work. There is more to the story, but the bottom line is to trust and get a freaking agreement. I lost alot of time with that bozo.
Don't worry so much about your self- esteem. Worry more about your character. Integrity is its own reward.
~ Laura Schlessinger - Real Estate Investor · Carrollton, TX · Member since 2010 · 83 posts · 8 votes15y
Oooohh man what an interesting story Don.. You need to present this to the producer and have them make this movie..
Now, that's what I call "A nightmare dealing with business partners".
I bet now you know the next time you deal with a partner, have all your ducks in a row before handing them money on a silver plate. - Real Estate Investor · Milwaukee, WI · Member since 2008 · 1k+ posts · 671 votes15y
Don't trust people you meet at guru boot camps!
- Lender · Fort Pierce, FL · Member since 2009 · 825 posts · 486 votes15y
Mitch,
Looking back, what actions would you take if you find yourself going down a similar road?
What lessons learned?
- Real Estate Investor · DFW, TX · Member since 2011 · 81 posts · 11 votes15y
Friends to enemies to friends again. I'm sure some of you have been in this situation at some point in your REI career. The last deal I did. I purchased a property that was vacant for a few years which happend to be accross the street from my best friends of 30years, house. Husband and wife. You know that feeling you get when you come accross a deal you know is to good to pass up. There is money to be made and tunnel vision sets in. As an ex realtor from FL now in Pa. where the prop is. I did my DueDili and went for it. Knowing my friends would help rehabbing. There idea to partner up. My money there help.
You know where this is going already Im sure.
Not knowing the local area. I learned the hard way that he and I would be doing most of the work. We are the fixerupper types that enjoy the challenge. After interviewing over 20 different subs. Roofer, plumbers and electricians and other scum bags that after finding out you are flipping the property think you are full of cash and highball the job. After literally tossing several of them off the property knowing full well what a job should cost. We decided to handle more of the work ourselves. Note to beginners! Do not tell someone you hire to do work for you that the prop is a flip! Unless you have worked with them before and they know what you do. Good help is hard to find.
After close to 8 months of work due to weather. Snow! who knew, right? I did by owner for a bit being an ex realtor. Lack of exposure. I finally listed and sold. Made close to 30% roi. Now pay day comes. I gave my friends 1/3 of the profits. Key word Profits! Which was agreed upon orginally. Invested my money and my full time to there part time help. They have full time jobs. Some how she(friends wife) got in here head a fixed amount of money which was double the amount I paid them. If the property sold for what I had originally hoped for, than yes. I could and would be happy to have paid them. She couldn't get it out of her head a fixed amount. Which at that point would be most of the profits. Her time was more valuable than mine. In her mind. He understood and tried to explain to her. She would not let it go. This caused close to 6months of seperation of our friendship which I thought would never happen. Who is really at fault? In my opinion. Me for not clarifying the obvious. No matter what you think is true. Someone else will see it differently. Before entering something with friends. Make sure they understand A+B=C. Happy Ending? Maybe. After some time she admitted to having a fixed number in her head and couldn't let it go. Back to being friends again like nothing happend. No apology from her to this day. Am I asking to much? Live and learn. - Real Estate Investor · mokena, IL · Member since 2011 · 33 posts · 1 vote15y
I bought a nice foreclosure and it needed updated electricity. i asked my good friend who is an electrician to put some switches and light fixtures in for me. We did not discuss any fee or money, when he was done he billed me 3,000 , he said his fee was 75.00 per hour but would charge me 45.00 per hour. I feel kind of let down b/c he never even quoted me an estimate. I did tell him that I wanted the work done and I had money, but I think it would have been more fair to warn me or give me an estimate up front? what do you guys think?
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes15y
So your friend took over 60 hours to put in some switches and light fixtures for 3,000??
That is highway robbery!! You can rewire a whole house down to the main connection faster than that.
I can also tell you from my restaurant builds when I owned my pizza place.NEVER leave your check book anywhere on the premises or open the check book when discussing payments or fees for a job.They will look for how much you have (balance) and try to justify that much for a bill to milk you dry.
Have a clause where if the work isn't completed up to standard and passes inspection and certification within a certain time frame for each day past the date so much is taken off the job price.
This will keep them from being hot on your job and then jumping to a bigger job they land in the middle of yours.Having the inspection requirements and certifications makes sure they can't just slam in a junk job to finish it.
I believe having a GC on site is critical to make sure jobs are completed right so you don't lose time tracking them back down to redo something or touch it up.
On the partnership thing people even if on the same page starting out change down the line.
You might all start out with the same goals but then want to take the business 2 different directions for a growth strategy.
So talking upfront helps but will not solve all partnership changes down the line.
My experience has been friends and family will burn you more than anything else.When you are business partners everything is based on the performance of the agreement.When you are best friends it's hard to remain objective and not be sympathetic to their problems.This often times puts the business especially at start up at a systemic risk for failure.
Having family in management positions in the past really put me in a bad situation (restaurant business) .Had to make tough choices and never will do that again.Family is fine today but learned from that one.
- Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes15y
what happened to this thread?? i wanna hear more stories..
BUMP!!
- Real Estate Investor · Boca Raton , FL · Member since 2010 · 69 posts · 17 votes15y
Josh,
Beleive it or not I was very close to creating this topic. I am in the midst of filing suit against a partner that I am involved with that includes 10 peices of real estate. The worst part about this situation is that this partner is family and close family at that(lesson 1 learned).
I am not very good at going into detail via a forum so I'll get right to it. For 3 years now I have provided the capital for this partner to acquire property in a designated area.For 2 years it seemed that all was going very well. I would get a check from him every month as I was a majority shareholder of the entity but with 50/50 voters rights. I was a silent partner. All I did was provide capital and he would acquire, rehab and lease which he did very very well. In fact he seemed to be so good at it and was receiving shareholder distributions for so long I could have never imagined someone like this would be so negliegent with the simple administrative items...like oh, I dont know...how about paying the property taxes over the last 3 years on any of the properties! Thats right, he was not paying the property taxes on any of the properties for 3 years. I pulled title not to long ago and found that I had tax liens on 4 of the properties that were already sold. He was making interest payments to the lien holders but never told me anything.
Guess what else? The property insurance lapsed on every single property. oh it doesnt stop there...I ask for lease agreements on the properties and he tells me he needs to find them and indirectly says he may not have lease agreements on all of the properties. Currently all of the properties are leased out(as I stated before he is very good at getting tenants). He has a very good in road with a network of indivduals in the latin community in this area and anytime a property is ready to be leased out, he will have a tennant standing by to rent the place out.
It gets better...we have 3 properties leased out by section 8 and for 3 years we received the section 8 money like clockwork when all of the sudden last month, they stopped. It turned out that the CPA did not file the extension request to file the 2010 taxes. So the IRS levied the entity for the penalties and fees(89bucks per partner every month for 6 months). Thats when the 2010 taxes were filed(September). so Section 8 simply sent payments up to the IRS but now you have to get a release from the IRS for section 8 to begin sending payments back to our entity and of course prove to the IRS that the extension was in fact filed to get the fees waived and the money refunded back to the entity
P.S. after a hours on the phone with section 8 and the IRS, I got these two issues resolved but I will have no choice at this time but to sue my partner for complete and utter incompetence and negligence in the way of his breach of the operating agreement.
If it was anyone other than close family I would have sued him as soon as I realized what he failed to do but he is close family and tried to give him chance after to chance to fix everything and though he has been better, he still fights me to this day with getting me lease agreements. All of this was found out over the last 6 months.
I blame myself as well as this was embarrasing that I let this happen. Lessons learned here in a big way. Stay away from family when investing, even a slient partner needs to wacth things down to the staplers at least for the first year or so.
- Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes15y
great story jarred...i thought of you when i saw this topic actually...glad you shared, and hopefully we can all learn from it!
- Investor · DFW / Austin, TX · Member since 2013 · 188 posts · 80 votes12y
I'm sure a lot of other investors would have horror stories to share for everyone to learn from. I'm looking at taking on partners from afar and interested to learn from other's bad experiences.
@Joshua D. Can we get a bump or repost of this thread?
- BiggerPockets Founder · HI · Member since 2008 · 16k+ posts · 5k+ votes12y
@Jacob Michaels - I think you just bumped it ;)
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