First JV or Private Lending Partnership - Worst Case Scenarios?

Question

Hey everyone,

I’m seriously considering entering my first Joint Venture or private lending partnership on a single-family flip, and I’d love to hear from those who’ve done this before.

I’m trying to understand how investors and operators protect themselves in worst-case scenarios:

• What happens if you or your partner gets sued personally in a JV scenario?
• What if there’s an accident on the property (e.g., someone slips and falls) and sues you in a private lending scenario?

What happens if you or your partner gets sued personally in a JV scenario?

What if there’s an accident on the property (e.g., someone slips and falls) and sues you in a private lending scenario?

I’d love to know how you structure your entities, insurance, or agreements to handle these types of risks — and any lessons learned from your own experiences.

Jeff S. · Answer

There are many ways to do this, @Sasha Josephs, and it depends on your respective participation and funding contributions. Traditionally, when someone is paying all the costs, i.e., purchase and rehab, and you are doing all the labor (acquisition, rehab, selling, etc.), then you would split the profit 50/50 as a partnership.

Your partner would buy the property in an entity he controls 100%, and there would be a partnership agreement between you and that entity. Don't forget, he's taking all the financial risk. If you are unable to perform, per your partnership agreement, the entity could "fire" you and perhaps pay you a finder's fee of some sort (or nothing since you'd likely be leaving your partner with a busted flip).

If the deal goes as planned, you would split any profit from the sale after all costs were subtracted.

On the other hand, your partner could fund the purchase as a private loan to you using professionally prepared loan documents obtained from a lending attorney. In this case, you would own the property 100% but with a first-position lien from your lender. He or she could include the rehab costs in the loan, you could pay for them yourself, or you could borrow those funds using a second mortgage/deed-of-trust from someone else.

You would make monthly payments to your lender(s) or pay everything back at closing, as negotiated into your loan docs. Here, your lender would be entitled to his interest (and points if he's sophisticated enough to require them), and you would keep 100% of the remaining profits.

There are only about 764 variations on this, but those are the basics of an equity interest and a debt interest in a flip.

Just so you know, it usually works out that a hard money lender ends up with about 25% to 33% of the profit in a flip, for relatively little risk. In a 50/50 partnership, your partner will obviously get 50% but take on all the risk as the property owner. That is, even at the confiscatory rates most HMLs charge, and we're lenders, you're almost always better off borrowing the money. It also avoids the inevitable squabbles between partners and is much cleaner and easier.