Joint Venture - Is this a Scam?

Joint Venture - Is this a Scam?

Real Estate Agent · Audubon, NJ · Member since 2015 · 36 posts · 29 votes

Hi all,

I'm a long-time lurker/listener, but this is my first post in the forums.  After attending an awesome BP meetup in Philadelphia (hosted by @Troy S.) some red flags have come up regarding the structure we're looking to use to fund our first flip.

My partner, @Phil Sabella, and I have connected with a financier/partner who does JV's. It's set up as follows ('We' being Phil and I, 'They' being the financing company):

  • We find the deal and we use our finances to find the deal.
    • We can find the deal however we'd like. MLS, direct mail, through a wholesaler, etc.
    • The property can be located in PA or NJ, they do not care.
  • We have to send them a detailed comp report
  • We have to have our GC's come out for bids (on our dollar)
  • We have to have our inspector come out (on our dollar)
  • We have to get the property under contract with a 10 day inspection period before we can show it to them or have their inspector come out
  • The contract has to be assignable
  • $50,000 is the profit they ask us to shoot for
  • 6-8 week rehab time, no structural issues

Once we find a property and get it under contract, we must immediately pay $795 for their inspector to come out, send them our comp report and our GC estimates. They will verify what we send, and if they agree, we assign the contract to their company & we enter a JV agreement with them agreeing to split the profit 60% us, 40% them or 50/50 depending on the deal. They'll then put up 100% of costs including selling/staging and we will manage the entire project from start to finish.

At first I thought it sounded too good to be true.  But I started to come around when I realized this is a great way for their company to get deals done without lifting a finger, and we pay for their inspection.  Limited risk for them, limited risk for us.  They also rehab houses on their own, so if we screw up they come in and take the deal over and complete the project themselves.  If the deal is successful, they also offer hard money and encourage that for the next project.  I think this is a great way to set up a business, actually, and am impressed with the way they do things, if we're not being baited.

So, has anyone had success using a structure like this?  Is there anything we need to look out for?  My *biggest* concern is the $795 'commitment fee'.  There is nothing stopping them from saying "no" to five properties, pocketing the fees, end of story.  

I'd love to hear horror stories as well as success stories with this strategy.  Any advice would be fantastic!

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Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
11y

I read most of the posts. Pretty good thread.

A few thoughts.

1. If your a newb, you have to start somewhere.

2. If your a newb, you have to pay your dues.

3. Price seems a little steep, you may be able to do better BUT don't forget about 1 & 2. 

4. Real estate is about relationships.

Is this company the right company for you and your career? I don't know what other options you have. What I do know is that if you think they are it's worth it to take your lumps in the beginning.

@Jay Hinrichs touched on relationships. Not saying this is necessarily a good, bad or marginal deal for you. However even if it is marginal sometimes you have to take a step back in order to take two steps forward. Real estate is not about houses or. It is about RELATIONSHIPS.

You don't create relationships by always second guessing whether or not you squeezed every single penny out of every single deal. You make them through doing business with people in the industry. In the beginning the deals and terms are always going to be the worst. With a quality relationship they will just continue to get better and better.

Example: I met this local lady. She had some properties she wanted to sell via owner financing. She's getting out of the rental game but didn't want to pay capital gains taxes so she wanted to sell on 10 year terms. SWEET.

She owns 20 something houses mostly all in the heart of my investing area. So we come to terms on two of these houses. She told me what she wanted for them and I bought them. I could have countered and got a better deal but I didn't. Why? THE RELATIONSHIP. She owns 20 of these things and does not want all the cash at once. I wanted to be the first guy she called because I was the easiest guy to work with.

Fast forward a few months later. Guess who calls me and wants to sell two more houses? Yep, same lady. 

One house was great. The other I really didn't want. Bad neighborhood. She really just wanted it off her hands. So guess what I did? I bought the darn thing anyway. Never even went inside. Actually I never even went to the street it's on. My partner John did a drive by, was not impressed but hey we are cultivating a relationship here.

Fast forward again. Guess who called me with another great house to sell in my prime area? Same lady? Nope. Her daughter this time. Guess what, her daughter owns 40 homes in the area and wanted to start unloading some as well. 

So who was the first person she called? Why of course the easiest guys to work with.

Bought that house on owner financed terms with a Joint Venture partner and it was a pretty great deal. Cheaper than anything on the MLS and it was owner financed.

Guess what my reason was for taking this great deal to this particular Joint Venture partner? Our Relationship. I have about 30 people who would have done that JV with the terms I got, but I ran it past his desk first. Why? Our relationship. I Have done many deals in the past with this investor and he's always been the easiest guy to work with, has treated me fairly and understands that our relationship is more important than any one deal.

See this reply in the discussion

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  • Lender · Dallas, TX · Member since 2015 · 283 posts · 128 votes
    11y

    The $795 is not my concern, I would be more worried about them performing. To me these kind of arrangements are always one sided.  Not saying they are bad deal but that one party always has the the win win scenario. 

    If I follow the process you outlined above, what you are saying is - bring me a deal that is a homerun and I will share that with you. Honestly, if you have that deal, I would venture to guess that there are more than a few people on BP that would be willing to be your partner on it. We do lots of JV and have found that the best relationships are where everybody has "skin" in the game.

  • Dev HornPro Member
    Flipper/Rehabber · Arlington, TX · Member since 2013 · 1k+ posts · 2k+ votes
    11y

    Man, I do not have the answer here as I have not seen a JV being offered exactly like that. In fact, I am very intrigued by this and now want to know what you want to know - does this make perfectly good sense, a win-win for both parties? Or does this basically PAY THEM to cherry pick properties from a bunch of wholesalers?

    I am fascinated by this - can't wait to see what others think or have experienced.  Great post, @Jim Stoffey!

  • Investor · Philadelphia, PA · Member since 2013 · 177 posts · 80 votes
    11y

    I'm interested in this as well. I'll be following this thread. It was nice to meet you last night. Too bad we didn't have the opportunity to talk much. 

  • Investor · Baltimore, MD · Member since 2014 · 1k+ posts · 688 votes
    11y
    If you had a deal paying 50k, why would you do anything with anyone? Borrow hard money yourself, keep 100 percent. House is collateral for lender. Not difficult is you have a deal and are competent.
  • Real Estate Agent · Audubon, NJ · Member since 2015 · 36 posts · 29 votes
    11y

    @Account Closed "Bring me a homerun and I will share it with you" that is a great way to put it! I guess, I don't mind sharing at all. In fact, I'd do it for nothing to get the first deal under my belt. But I'm sure, like you said, we could find someone on BP or one of our local REIA's who be on board. Again though, I like that they have so many resources, checks, and balances at their disposal to get us through the deal smoothly. Perhaps we could use these guys as a last resort.

    @Dev Horn Thank you for the great response!  Your thoughts are similar to mine.  Like Nicolas said, I feel like it's always a win-win for ONE side, but I have never seen it set up exactly like this.  Don Wenner is the guy who started this company and he has become immensely successful with this strategy.  It's called DLP "Direct Lending Partner" in Bethlehem, PA.  I am trying to get a few referrals.

    @Mark Redmann We didn't really get a chance to talk last night, I know.  But no worries, I'll be at the next one and we can catch up.  You guys did a great job, it was awesome.  I wish it would've gone on until 10pm.

    @Account Closed I appreciate the response.  I know where you're coming from, but like I said to Nicolas, I like that they hold my hand through the process since it's my first deal, and I would have no (or very little) financial responsibility.

    Thanks again everyone for your interest.  We'll update this post as we advance.

  • Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    11y

    "At first I thought it sounded too good to be true."

    For you or for them?

    Nothing here smacks of a scam @Jim Stoffey, just a bit one-sided. How many here would like to own a company where others bring them viable deals to pick and choose from and then charge $795 for a final review. Then, the opportunity to buy and completely control the property, while having their seller/wholesaler do all the work.

    Sign me up.

    In fact, 50/50 JV splits are common. So is the common problem of ownership. That is, who actually owns the property while the work is being performed? You, your money partner, an entity you both hold ownership in? Personally, if it were 100% of my money, I would want to control 100% of the asset. That way, if you messed-up I could take control, send you on your way for perhaps a finders fee, and complete the work myself.

    I see no reason why I would charge you $795 for the privilege of bringing me deals. In fact, since great deals are so scarce now, why wouldn't you charge them a $795 opportunity fee? Frankly, I would just offer them any deals as you would to any other interested JV partner. Any review would be their cost of doing business.

    Realistically, if you have the experience, contractor resources, and skills to do the rehab, then borrowing money is your best bet. Depending upon the size of the deal a hard money loan might eat 25% of the profit. Your partner will want 50%. Even though HML rates are steep, when you do the math they are almost always cheaper than a 50/50 split.

  • Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    @Jim Stoffey

    I am moderately familiar. Feel free to PM. 

  • Real Estate Agent · Audubon, NJ · Member since 2015 · 36 posts · 29 votes
    11y

    @Jeff S., thank you for the constructive response.  It's challenging because I think it's too good to be true for both of us where I'm at right now, but later in my career it would be too good to be true for me, and weigh heavily in their favor for your reasons.  You're correct, I am essentially paying them $795 for the privilege of finding THEM a deal. However, I look at it like this; my risk is limited to $795 for my first rehab project. And to your question of who owns the money, DLP thinks like you: they lend 100% so they control 100% of the asset until closing. That is how the JV is arranged.

  • Lender · Dallas, TX · Member since 2015 · 283 posts · 128 votes
    11y

    Jeff

    I did not want to leave you with the impression that this was a bad deal, just simply to say that all deals have their pros and cons. Everyone has their comfort zone, so being wary and asking questions is always a good thing. Best of luck on your real estate adventures.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Jim Stoffey

      I do a little bit of this type of work... and from the Money's side of the table they are taking all the risk,, you simply risk time.. and if the deal is that great it will all work as long as you trust them to be fair and honest... I would in no way give someone with no money and new to the business any kind of ownership of the asset period end of discussion.. Most Hard money lenders are going to require 20% of cost so if you have that plus reserves then that is by far the best bet.

    If this Is for real and they are not just trying to get a thousand bird dogs to pay them a 795 up front fee for their inspector they probably pay 100 bucks to drive out and look at and fund very few deals ( like many mortgage scams) .. then these can be pretty nice set ups for you to gain experience and build your resume'

    I would also hit Mark off line he is a very experienced licensed Broker in that area and one who knows the investor side of the coin

  • Real Estate Agent · Milwaukee County, WI · Member since 2009 · 3k+ posts · 525 votes
    11y

    Keep us posted 

    DLP-> I guess you learn something new every day.

  • Investor · Philadelphia, PA · Member since 2013 · 177 posts · 80 votes
    11y

    @Jim Stoffey

     I think I am going to stop in their Poconos office tomorrow and see whats up. I happen to be at my parents house in the poconos today and tomorrow.  Apparently the CEO has been on TV (Fox news, CNBC, MSNBC) and is endorsed by some big names.  

    Anything you want me to ask?  I am interested in this as well and have a deal in mind that a wholesaler sent me today. 

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Mark Redmann

    JV TV GURU :) just kidding

  • Real Estate Agent · Audubon, NJ · Member since 2015 · 36 posts · 29 votes
    11y

    @Jay Hinrichs - that's exactly right.  I understand their side of it, but to your point exactly, it's a great way to build experience.  After speaking with Mark, I have confidence in DLP.  I can't find anyone with a negative opinion of the company.  I think we will stick to this route.  Thank you for your response!

    @Mark Redmann The CEO, Don Wenner, has a pretty cool story.  He seems like a very intelligent guy and has created a ton of success with this model.  Let me know how it goes up there...I'm curious to hear.  I'll reach out to you via email.

  • Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    11y

    @Jim Stoffey

    Keep in mind that you can pay people to endorse you fairly easily ;) 

    That being said, as to help other members who might be interested in Don's services, I told Jim that I have been involved in transactions with Direct Lending Partners as the funding source. I have not been a client, but I would say chances of scam are very slim. 

    THAT being said, for newbie investors you need to be careful of taking on large projects. It's the easiest way to get taken for a ride by a contractor. You need to have an excellent contractor who isn't going to gouge you. Also, to find deals with $50K spreads you're usually looking at major problems such as septics, structural, etc. 

    Perhaps for your first rehab ride, you find the deal, you earn a fee by letting someone else fund it, and simply be an "intern" on the first deal. Learning by doing. THEN jump in on deal 2. The works especially good if you're doing something else full time. 

  • Real Estate Agent · Mechanicsburg, PA · Member since 2014 · 529 posts · 217 votes
    11y
    Man, to me it sounds like the company wants you to do all the work, take all the risk, and if it's not a home run they will still make 800$ for a hour worth of work. Also, good luck finding a 50k spread on your first flip. Without having done a flip before, I would say it's very unlikely that will happen seeing most people break even or lose money on their first. If you truly found such a great deal, I would find an experience local investor to split the deal. Pretty sure it wouldn't be too difficult to find a partner for a 50k spread. Good luck!
  • Real Estate Agent · Mechanicsburg, PA · Member since 2014 · 529 posts · 217 votes
    11y
    Also, by risk I mean its your time and you have to get their approval or you wasted $800. They could very easily say no to multiple properties. However, besides the initial fees, you don't take the large financial risk.
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Christian Bors

      Don't follow you... the company is putting up 100% of the money were is the risk to the @Jim Stoffey  is it just risking his time... he has to learn somewhere.. and if he does not have the cash to do the deal ... then what do nothing.

    I see this constantly out in the market place those who want to jump in the RE world that have limited to no resources and they are far to worried about what the equity or money partner is going to make.. or they spend months trolling the internet trying to find that private investor who is happy with 8% or 10% which they never find and they just lose the dream ... if there is not enough money in a deal to split profit or be able to comfortably pay HML then the deal is too skinny to start with.. Or you should save up your money and just do the deals yourself out of cash on hand.

    What many may want to consider is how do they scale it.. because as stated 50K profit deals although talked about a bunch on line are not that common at the 200k ARV and under price point.. in these deals I do and see 20 to 30k is the norm.. And then it becomes speed and efficiency... get a few going and close them every 90 to 120 days that's our goal ( which we hit sometimes sometimes not) But if my ground partner can be working on 4 or 5 all in the pipeline and we have a closing monthly ( which is our goal) they can make 10 to 15k month and when we hit a good one more... As the money we take a little different tac as we do not look to do this with the mass's and want to concentrate on one's who can do volume and appreciate a true Capital partner in their business. but of course I do not charge an up front fee as miniscule in the big picture as this company is charging. That fee should be the last thing on their mind... But I get it from the company perspective I am sure they make quite a bit of money on their turn downs.. and its a good way to filter the folks that think they can do it and have a plan with those that can actually execute.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Christian Bors

      so my main point is how many people getting started..   would like this

    1. little to no personal money invested just time.

    2. have a capital partner that can keep you in deal flow as long as you can mange it.

    3. have a realistic expectation to once your pipeline is full make 120 to 240k in ONE year.

    4. build a nice portfolio as your Capital partner is behind the scenes.

    How many contractors that are really experienced and have good wholesale or realtor connections do you think could benefit from this..  Or Realtors who have great contractor relationships and in this tight market control their inventory.. they get commission coming and going and a profit bonus....

    this is what my goals are for my ground partners.. and so who cares what I make or how much fo the deal comes to me for doing NOTHING... LOL.. like risking 100's of thousands of dolalrs on a rehab project is nothing... that's the problem .. those with the attitude of they do ALL THE WORK and the money just sits back and does nothing.. :)  that is very nearsighted thinking and someone who probably won't get much going in the bizz.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Christian Bors

      and if you vette these guys  and like Marks says he has been in transactions that they are the funding source so there is one Top local Broker validating that they actually do fund transactions.

    So once this is done.... your sitting there focusing on a measly 800 bucks.. heck we blow that on dinner.... for 800 dollars you could jump start a whole career..

    I have 2 ground partners this year that quit there day jobs BECAUSE they do all the WORK and risked their time... both on track to make 100s of thousands this year.. and I will make 100's of thousands from the fruits of their labor... or they could just keep working were they were working and doing a deal a year or so...

    If you find the right money partner then jump on it.. if it is your goal and dream.. as long as there is enough in it for everyone to make money... and of course if you have capital then just go get a HML that's simple enough...

  • Real Estate Agent · Mechanicsburg, PA · Member since 2014 · 529 posts · 217 votes
    11y

    @Jay Hinrichs your right on the financial risk. Jim doesn't carry that burden which is great. He can only lose his time and maybe $800.  I've never done a deal with a structure like this, however if it were me I would look at different avenues to start my career. What stops the company from turning down 3 or more deals. Obviously they were most likely not deals and this would save him a lot more the a few thousand, but I would still be skeptical.  From the business view, seems like a great model. They will finance incredible deals. And if it's not a incredible deal they will still make a small fee. This would seperate those who are wasting time from those who are serious. However I personally would not want a deal like that.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Christian Bors

      One size does not fit all  that's for sure.... this is one of the few industries were I can see someone with no real capital ... but will work their tail off can realistically  make 100 to 200k a year in the right situation... And for someone coming from a W 2 5k a month job.. to freedom to make your way in the world and double or 4X your income... seems like a decent risk on their part.

    I agree on the 800.. But it should be pretty easy to vette these up front... and not waste money on turn downs. You will only do it once or twice and you will figure it out or should.

    I have to turn down many deals because once numbers are run they don't work.. but I do it for free and with a smile and encouragement on what WILL work

  • Investor · Los Angeles, CA · Member since 2015 · 37 posts · 5 votes
    11y
    Originally posted by @Jay Hinrichs:

    @Christian Bors

      Don't follow you... the company is putting up 100% of the money were is the risk to the @Jim Stoffey  is it just risking his time... he has to learn somewhere.. and if he does not have the cash to do the deal ... then what do nothing.

    I see this constantly out in the market place those who want to jump in the RE world that have limited to no resources and they are far to worried about what the equity or money partner is going to make.. or they spend months trolling the internet trying to find that private investor who is happy with 8% or 10% which they never find and they just lose the dream ... if there is not enough money in a deal to split profit or be able to comfortably pay HML then the deal is too skinny to start with.. Or you should save up your money and just do the deals yourself out of cash on hand.

    What many may want to consider is how do they scale it.. because as stated 50K profit deals although talked about a bunch on line are not that common at the 200k ARV and under price point.. in these deals I do and see 20 to 30k is the norm.. And then it becomes speed and efficiency... get a few going and close them every 90 to 120 days that's our goal ( which we hit sometimes sometimes not) But if my ground partner can be working on 4 or 5 all in the pipeline and we have a closing monthly ( which is our goal) they can make 10 to 15k month and when we hit a good one more... As the money we take a little different tac as we do not look to do this with the mass's and want to concentrate on one's who can do volume and appreciate a true Capital partner in their business. but of course I do not charge an up front fee as miniscule in the big picture as this company is charging. That fee should be the last thing on their mind... But I get it from the company perspective I am sure they make quite a bit of money on their turn downs.. and its a good way to filter the folks that think they can do it and have a plan with those that can actually execute.

    I think the OP is actually putting all the money 100% plus time, the only thing the Investor is doing is reviewing the deal and telling him, "Yep, its a good deal lets do it", and basically hold their hand through the process of closing etc, that's it I don't see any risk on the investor's part

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Juan Perez

      Ok I did not read it that way... @Mark Gallagher

      mentioned in a transaction he was involved with they were the funding partner, so I guess that needs to be cleared up.

    But if the OP is putting up 100% of the money and this company is charging 40% for due diligence and construction management .. the OF COURSE that makes ZERO sense.. at least in my mind...

    On one of my new home developments here in Oregon I paid a construction Risk manager a flat fee of 15k.. to over see the underground process.. And that was money well spent.

    The OP if they have that kind of cash should just skip this all together and switch hats and be the LENDER on the deals...

  • Investor · Los Angeles, CA · Member since 2015 · 37 posts · 5 votes
    11y
    Originally posted by @Jay Hinrichs:

    @Juan Perez

      Ok I did not read it that way... @Mark Gallagher

      mentioned in a transaction he was involved with they were the funding partner, so I guess that needs to be cleared up.

    But if the OP is putting up 100% of the money and this company is charging 40% for due diligence and construction management .. the OF COURSE that makes ZERO sense.. at least in my mind...

    On one of my new home developments here in Oregon I paid a construction Risk manager a flat fee of 15k.. to over see the underground process.. And that was money well spent.

    The OP if they have that kind of cash should just skip this all together and switch hats and be the LENDER on the deals...

    I'm new to RE too, but done my due diligence in reading on extend on the subject matter, and if I was the OP (still have not done my first deal), I would secure the deal, if its really such a great deal with 50k spread, in my mind I think he could get 15k wholesale deal to another investor and he does not have to do anything more than sell the contract, then after you have done a few of this and cash in your pocket, I would start with rehabs and rentals etc

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