JV arrangement for notes

30 Replies

Hi,

I'm new to note investing and I am considering a JV arrangement to get my feet wet and learn more about the process. Is it typical in a JV arrangement for the newbie to provide ALL the money and the experienced person to provide the know how and actually do the work (most of it anyway) for a 50/50 split? I ask because I'm a little uncomfortable that the "expert" has no real skin in the game and if it went sideways they aren't out anything but time. I'd appreciate any feedback regarding folks experience with JV agreements regarding notes. Thanks in advance!!

Yes, most of the JVs I've seen are where you fund 100% of the acquisition and work out cost, the experienced investor finds/vets/leads the deal and work out process, and then profits are split 50/50. 

There are several previous threads that might be helpful:

http://www.biggerpockets.com/forums/70/topics/4251...

Type the following in a Google search: 

site:http://www.biggerpockets.com/forums/70 jv

Wow a good broker can sell you a performing note were you get 100% and walk you through it.. all your money and their great idea  Not sure about that.. LOL

@Mickey Bradshaw Yes, that is the norm.  Anything is negotiable though.  If you'd feel more comfortable with the active partner putting some cash in the deal, then ask for it.  They may want more than 50% split though, depending on how much cash is involved. 

@Linda Hastings thanks so much for your input!! I noticed in that first link that you mentioned that you were evaluating whether or not to do a JV agreement a year ago or so. Did you ever end up doing it? If so, would you mind sharing your experience? Btw, that google search that you gave me is perfect!!!

@Tim Simmons, thank you for your feedback.  I anticipated that it may be negotiable.  I might ask them to add some cash to the deal and see what happens.  

@Mickey Bradshaw
That is the norm. While they don’t have monetary skin in the game they have time. I have had deals that I have spent 100’s of hours in and essentially not make a penny because I gave my partner the returns

Look at it another way - i would wager the “average” investor targets acquisitions around $20,000. If each made 12% over the course of the year that is $2,400. If you were to pay a consultant to manage the note you would easily pay $100/hour. (I think that is low but let’s run with it).

Over the course of a year I would bet every note investor spends more than 24 hours on each NPN they have. Just the buying process alone I spend approx 4 hours. Then approx 20 minutes a week after that on the note.

@Chris Seveney thank you for your input. Your explanation makes sense. I guess one of my concerns is this. If the experienced investor has X number of personal notes and Y number of JV notes, do the personal notes get priority because she/he has money to lose on those? I guess, in the end, this all comes down to vetting your partner.

@Mickey Bradshaw - Yes it comes down to vetting your JV partner and talking with people who have JV'd with them prior. Also, a JV is not like a marriage where you have only one JV partner. Look to JV with multiple people if you have the funds so you can see what you like and dislike about each. a JV is all about communication and relationship. If the partner does not know what your likes, dislikes and pet peeves are then it makes it more difficult on the relationship.

@Mickey Bradshaw I agree with Chris on the "skin in the game" response. Yes, it's a different type of skin in the game. We commit our time and energy into a joint venture. This is also a full time job for many of us and our livelihood depends on our deal flow and we need capital to sustain it. A risk we face is that a new investor puts up the capital for a deal or two, learns enough to get going, and goes off to do the business on their own. This is ok as long as both parties are aware of the arrangement but I'd rather not spend too much time on a partnership when I know my partner is going to leave in this way. My business partner has also had partners that have tried to cut him out and go behind his back to his trading partners. It didn't work out for them and they ended up getting blackballed.

I got started in this way (50/50 split) and looked at it as the cost of learning. I made less money but it set me on the path where I am today. I learned a lot about notes and business and it's become my full time job. I do this to put food on the table first. Once my emergency fund is set and my retirement contributions are maxed out, I will happily co-invest in my Funds because that'll be the best place to put my extra money.

$100k is a reasonable investment for a JV for those that do that. You might find some funds out there that offer better :)

@Mickey Bradshaw

In a typical JV arrangement, you may put in 100% of the funds, but you are BOTH responsible for and split any losses 50/50 as well. So although you may only have 50% of the upside, you are somewhat protected vs going it alone and only exposed to 50% of the downside. And given the experience level of the note investor, this downside should be greatly alleviated, which is the value that they bring to the table.

As for skin in the game, I often cap the projected workout expenses to a set amount and if they go over that amount, my company is responsible for any overage. For instance, if the max projected expenses are $8K, then I might cap it to $4K for the JV partner.

If it's decided we can make a better return by rehabbing the property if taken back thru foreclosure, then we'd split this rehab cost 50/50.  

Originally posted by @Brian Garrett :

@Chad Urbshott Are the notes you buy all here in our local area or are they nationwide?

Haha I wish I could get my hands on NPN's in the local area, but they are few and far between. Mostly upstate FL and concentrated in the Mid-West.

One thing that rarely gets mentioned here is that you also pay for the education the JV partner provides you. If you were only interested in getting a return, then that might be different.

But I have yet to talk to a potential JV partner from BP that didn't expect me to teach them how to buy notes, my vendors, the processes I use etc. Well.. that has value.

I try to give a lot of value so for that reason I'm not really interested in potential JV partners that are looking to skew the terms in their favor to an unreasonable point.

Just my 2 cents

Originally posted by @Mickey Bradshaw :

Jay, I didn't really understand what point you were making.

MY point is you can invest with really good reputable HML in your market make basically all the return they do all the work and they charge the borrower points.. they don't take half your return.. is my point..

Back in the day when I had my HML company in Oakland I had about 250 investors.. and the company was 40 years old I took it over from the founder.. we did all the heavy lifting no work at all for the investor.. and the returns were very consistent.. and if there was a problem us as the broker jumped in and fixed it for our client.. you can find people like this in your market NO doubt..

so my point is why would you risk partner with someone on the internet to buy a note and give them half of your returns.. that I simply don't get.. 

as an alternative you can go with some funds that are out there  PPR  Mike Hartzog  Ed Malaki they all have funds. that you can join in ready for prime time companies.. 

@Mickey Bradshaw   I would agree with several points already made by others,  @Chris Seveney second the option if your funds allow to have multiple JV partners to see the differences in approaches. As you will find experienced note investors will have a limited amount of time, bandwidth and quality investments they would be willing to take on new JV partners. Also, have a discussion prior as to your involvement if you would like to be completely passive and simply receive quarterly updates on your investment progress, or if you would like to know the challenges and why specific decisions were made along the way... latter of course takes additional time commitment.

Also think of your investment strategy, NPN's (1st or 2nd) take longer with inherent risks involved, which can be minimized partnering with experience note investor. For myself I consider a mixed portfolio approach that includes performing notes as well... I believe that is what @Jay Hinrichs was alluding to being easier to buy a performing loan and collect the future payments and keep 100% of proceeds,  they downside is quality performing loans have a higher price point. 

Lastly, I second @Chad U. there is a cap on the expected capital to be invested from JV partner. In such cases which the property is take back there, its quite difficult to project expenses involved in a rehab without being able to see the inside of a property when the note was acquired. You can make sure assumptions based on the condition of the neighborhood and outside condition but there is always a wild card involved. That's also one of the aspects I like about note investing is multiple exist strategy and can be a future discussion with JV partner if a rehab would be best option or simply sell as is.

Originally posted by @Ken Hobbick :

@Mickey Bradshaw   I would agree with several points already made by others,  @Chris Seveney second the option if your funds allow to have multiple JV partners to see the differences in approaches. As you will find experienced note investors will have a limited amount of time, bandwidth and quality investments they would be willing to take on new JV partners. Also, have a discussion prior as to your involvement if you would like to be completely passive and simply receive quarterly updates on your investment progress, or if you would like to know the challenges and why specific decisions were made along the way... latter of course takes additional time commitment.

Also think of your investment strategy, NPN's (1st or 2nd) take longer with inherent risks involved, which can be minimized partnering with experience note investor. For myself I consider a mixed portfolio approach that includes performing notes as well... I believe that is what @Jay Hinrichs was alluding to being easier to buy a performing loan and collect the future payments and keep 100% of proceeds,  they downside is quality performing loans have a higher price point. 

Lastly, I second @Chad U. there is a cap on the expected capital to be invested from JV partner. In such cases which the property is take back there, its quite difficult to project expenses involved in a rehab without being able to see the inside of a property when the note was acquired. You can make sure assumptions based on the condition of the neighborhood and outside condition but there is always a wild card involved. That's also one of the aspects I like about note investing is multiple exist strategy and can be a future discussion with JV partner if a rehab would be best option or simply sell as is.

you know this JV stuff really borders on securities issues.. IE the Hoary test.. I would be quite cautious being the sponsor.. if it does not go right you know the little guy is going to lawyer up.. and the lawyer is going to hit you with a securities action. I just know this as I know my own name..

@Jay Hinrichs I admit I increased my vocabulary looking up definition of hoary, meaning old, white or ancient... but point well put and found way to Howey test (1946) for securities is broad and can be applied to JV's, LLC and general partnerships

As such, those being a sponsor of agreements should have proper legal counsel to advise them appropriately with caution,  as mentioned its all great until it doesn't go right and money is lost. 

Originally posted by @Ken Hobbick :

@Jay Hinrichs I admit I increased my vocabulary looking up definition of hoary, meaning old, white or ancient... but point well put and found way to Howey test (1946) for securities is broad and can be applied to JV's, LLC and general partnerships

As such, those being a sponsor of agreements should have proper legal counsel to advise them appropriately with caution,  as mentioned its all great until it doesn't go right and money is lost. 

Sorry I misspelled that and sent you on a goose chase.. I for one have been called to the Mat on the Howey test.. and got a Cease and desist and a 5k fine form the state of Oregon.. they were nice to me.. but it cost me an additional 20k in legal fee's LOL.. and I was just like all these folks thinking they can JV notes.. until I was talking to someone on a note JV and that someone told an attorney and the attorney filed a complaint against me.. So there is no question in my mind all these folks that think Hey I will just help these people and let them invest with me while I do all the work.. etc.. run a huge risk.. and for what to buy some low value asset to make a few grand a year.. not sure like I said why anyone would do that.. but I suspect its taught at some of the note schools.. and we know gurus are not on the front lines of what is legal and not.

other wise there would be no reason for the bigger established players to create 500 series funds.. no need at all they would just JV all the notes.. easy peasy...

in CA you can fractionalize notes legally without securities but you need to be a CA broker or NMLS or have consumer finance license all these states have their thing..

that was part of my problem in Oregon.. I did not realize you could not fractionalize in Oregon and did a few because that is what did in CA for years.. NOPE .. LOL...  Anyway.. I now subscribe to the ONE note one investor rule or FUND ... but that's me personally and who cares what I think anyway.. right ? 

I see people posting all the time about looking for $ which clearly violates the SEC laws. 

As it states: If an investment opportunity is open to many people, and if investors have little to no control or management of investment money or assets, then that investment is probably a security. 

If, on the other hand, an investment is made available only to a few close friends or associates, and if these investors have significant influence over how the investment is managed, then it is probably not a security.

This is why it is an absolute must to have a good attorney draft your agreement and for you to understand it. 

Note I am not an attorney and this is not legal advice

@Jay Hinrichs thanks for the qualifier about how your HML business worked. I am not very experienced, but it seems to me that the JV question is really about partial notes? Not quite a JV as I understand it to be, but has a JV aspect to it.

Originally posted by @Chris Seveney :

I see people posting all the time about looking for $ which clearly violates the SEC laws. 

As it states: If an investment opportunity is open to many people, and if investors have little to no control or management of investment money or assets, then that investment is probably a security. 

If, on the other hand, an investment is made available only to a few close friends or associates, and if these investors have significant influence over how the investment is managed, then it is probably not a security.

This is why it is an absolute must to have a good attorney draft your agreement and for you to understand it. 

Note I am not an attorney and this is not legal advice

Exactly and meeting someone on the internet is not exactly a close associate.. and since the investor has basically never done it.. Just like these folks post on BP hey I don't know anything about NPN I would like to partner with someone.. they are relying on that someone to run the show..

let me tell you I had a 4 hour grilling over this with a state financial investigator who was one sharp attorney.. and with my attorney we argued back and forth up and down.. but it does not matter.. the remedy is to take it to law court for 100k and see who is right the regulator or my attorney.. I told my attorney just shut up.. we will pay the fine.. I don't like having a cease and desist but hey 40 years 5000 transactions one blemish I can live with.. but we were not going to win  this one.. the investors are not personal friends .. they are not close associates  they are BP members ( well non of them were)  but came from the same sources.. and we controlled how the investment went.. so we did what I think most of those in the note business do.. we created a fund.. in Oregon its called a real estate paper offering.. its a hybrid of the 500 series and the state was forgiving on me I had raised about 6 or 7 million at the point I got turned in  on my model.. they could have tattoo d me.. but 5k  and 20k for the lawyer and create a doc the state liked and we were done.. 

I am just saying I am not sure why someone would take on a novice and open themselves up to the liability.. and I am not sure why a novice would just invest with someone who probably just learned this stuff from a guru and is not in the business or has limited experience themselves but can make post on BP... so that's my point.. the OP  asked what my point was that's m point. LOL

@Jay Hinrichs all great points. I see people  (wrongly) raising $ looking for people to fund deals and have never bought a note in their life or have never worked through an entire note from cradle to grave. I agree - starting a 506(c) where your dealing with accredited investors and can market is the way to go. 

It’s not only note investing but I see a lot of posts on here and some of my favorites are:

1. what book should I read to buy a 100 unit apartment building” when they have never been a landlord 

2. how do I subdivide and develop a parcel of land and how much should I budget when they have never owned anything. 

3.what should I do with my $100k. 

4. Can someone send me your legal document so I can copy it

5. I have no money so how can I buy 20 homes.

Originally posted by @Chris Seveney :

@Jay Hinrichs all great points. I see people  (wrongly) raising $ looking for people to fund deals and have never bought a note in their life or have never worked through an entire note from cradle to grave. I agree - starting a 506(c) where your dealing with accredited investors and can market is the way to go. 

It’s not only note investing but I see a lot of posts on here and some of my favorites are:

1. what book should I read to buy a 100 unit apartment building” when they have never been a landlord 

2. how do I subdivide and develop a parcel of land and how much should I budget when they have never owned anything. 

3.what should I do with my $100k. 

4. Can someone send me your legal document so I can copy it

5. I have no money so how can I buy 20 homes.

Well for sure the Guru circuit has hit the I want to wake up now and syndicate apartments.. there are going to be a lot of crocodile tears shed with investors and rookie sponsor the second we have a little hiccup and the deals done quite work.. Been there DONE THAT