Joint Venture Flip Questions

9 Replies

Good morning, BP.

I've got a first time situation concerning a flip house I have under contract. My plan was originally to use hard money to purchase and flip the home, however, one of the investors in my local group has approached me to do a joint venture on the flip. He has funding available in the form of a pre-approved bank loan, and I have the contract in my LLCs name. 

Is this going to be a problem, with him having bank financing in his company name and me having the contract in my company's name? If this is an actual problem, what is the easiest way to fix it while maintaining my leverage in the deal?

Originally posted by @Aaron R. :

Good morning, BP.

I've got a first time situation concerning a flip house I have under contract. My plan was originally to use hard money to purchase and flip the home, however, one of the investors in my local group has approached me to do a joint venture on the flip. He has funding available in the form of a pre-approved bank loan, and I have the contract in my LLCs name. 

Is this going to be a problem, with him having bank financing in his company name and me having the contract in my company's name? If this is an actual problem, what is the easiest way to fix it while maintaining my leverage in the deal?

 Depends on the requirements of the pre-approved bank loan. 

If the loan is to him but not on a specific property you can use that money to buy the house and put both of you on the title. You can assign the property to him and he can give you joint ownership. Just because one person provides the financing it doesn't mean others can't be on title. That would not obligate you to the loan. Ownership and financing are two entirely different things.

It's best to have a flip in an LLC but it doesn't have to be in one. You can buy umbrella insurance and in most cases accomplish the same thing as an LLC regarding liability. The bank will most likely want the property to be in his name, so using the LLC might not work anyway.

Whatever way you do things, and there are plenty of ways to skin this cat, make sure everything is in writing before hand. Have a clearly defined exit strategy and define what happens if things go south or if one of you wants out prior to conclusion, what the profit splits are and how that is defined and when it is paid, what happens if you lose money on the deal, what about unexpected expenses, cost overruns and you end up holding the property for a lot longer than thought because the market changes. Who is going to decide to what level of finish the house will have (adequate for sale, nicely done, gorgeous) who gets to make those decisions?, What if one of you gets hurt and can't fulfill your side of the deal? The easy part is buying a house. The next easiest is the rehab. The tough part is the decision making along the way. Plan it out in advance so you cut down on wasted time and disagreements. Use a title company and an attorney.

So I'm gathering from your explanation that at a minimum both of our LLCs need to be on title?

Originally posted by @Aaron R. :

So I'm gathering from your explanation that at a minimum both of our LLCs need to be on title?

No, I guess I wasn't clear. The bank will demand that the name on the loan is how title is taken. You can't take out a loan as Fred Flintstone and buy a house as Bedrock, LLC using that loan. They are not the same "person".

An LLC is considered to be a "person" for legal purposes.

So, if the loan in his name ie: Fred Flintstone, then his name has to be how he takes title as Fred Flintstone. You can later *add* whatever person such as Barney Rubble or add an LLC, ie: Bedrock LLC, if you want, using a Quit Claim Deed. They can be added ten minutes after the loan closes. But this does not obligate the add-ons to the loan. The loan is still only to Fred Flintstone.

It *does* mean that everyone and every LLC that is on title for the property has liability if someone should get hurt and that is why you have umbrella insurance. But you don't need an LLC usually if you have only one or two properties *and* have umbrella insurance.

@Mike S. you explained that perfectly! that was great information! I literally was approached with the exact same situation. very informative thanks for the game. 

Originally posted by @James Fonteno :

@Mike S. you explained that perfectly! that was great information! I literally was approached with the exact same situation. very informative thanks for the game. 

 Glad it was helpful.

@Mike S.

Thank you so much for the info! This has directly resulted in traction on this JV flip I'm currently involved in. Last question: Do you have a recommended contract or contract source you use for situations like this? I know there are a lot of legal form sites, but having someone here who has used one previously makes the decision much easier.

Originally posted by @Aaron R. :

@Mike S.

Thank you so much for the info! This has directly resulted in traction on this JV flip I'm currently involved in. Last question: Do you have a recommended contract or contract source you use for situations like this? I know there are a lot of legal form sites, but having someone here who has used one previously makes the decision much easier.

 My contracts were specifically written for me by my attorney for my specific needs and specific places where I invest. I for one, wouldn't use a form agreement bought on-line if the project is serious. Since I only buy properties using Subject To, Wraps and Lease Options the agreement is geared to that. If you use any bank financing you need to have provisions that cover it. You can check with Attorney Dan Castro in Austin and see if he is still drawing up agreements. There is an attorney in The Woodlands which is closer to you but I can't think of his name. He wrote a website on Lease Options in Texas so you might do a search and find him. He does all kinds of creative financing legal work.

Originally posted by @Mike S. :
Originally posted by @Aaron R.:

@Mike S.

Thank you so much for the info! This has directly resulted in traction on this JV flip I'm currently involved in. Last question: Do you have a recommended contract or contract source you use for situations like this? I know there are a lot of legal form sites, but having someone here who has used one previously makes the decision much easier.

 My contracts were specifically written for me by my attorney for my specific needs and specific places where I invest. I for one, wouldn't use a form agreement bought on-line if the project is serious. Since I only buy properties using Subject To, Wraps and Lease Options the agreement is geared to that. If you use any bank financing you need to have provisions that cover it. You can check with Attorney Dan Castro in Austin and see if he is still drawing up agreements. There is an attorney in The Woodlands which is closer to you but I can't think of his name. He wrote a website on Lease Options in Texas so you might do a search and find him. He does all kinds of creative financing legal work.

Definitely find an attorney to talk through this. Single member deals can be easy enough, but JV means conflicts.

Originally posted by @Aaron R. :

Good morning, BP.

I've got a first time situation concerning a flip house I have under contract. My plan was originally to use hard money to purchase and flip the home, however, one of the investors in my local group has approached me to do a joint venture on the flip. He has funding available in the form of a pre-approved bank loan, and I have the contract in my LLCs name. 

Is this going to be a problem, with him having bank financing in his company name and me having the contract in my company's name? If this is an actual problem, what is the easiest way to fix it while maintaining my leverage in the deal?

Keep us posted on how it goes. 

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.