Imagine you’re sitting in a movie theater, excitedly picking at your popcorn as a move trailer for the latest film arises on screen.
“A tale of betrayal” (clip shows man smiling and shaking hands with others), …”a young man must find out who he can trust.” (woman whispering into phone…”They’re not your friends, John! You don’t understand what they’re capable of!”). Deep voiced narrator continues “Coming late 2013, you won’t know which way to turn..” (Ominous and impactful outro HERE), with the title of the movie lingering….”REAL ESTATE INVESTOR SEEKS PARTNER” (dun dun dunnnnnn).
Download Your FREE Tenant Screening Guide!
Hey there! Screening tenants can be a tricky business, and this critical step can be the difference between profits and disaster. To help you with your real estate investing journey, feel free to download BiggerPockets’ complimentary Tenant Screening Guide and get the information you need to find great tenants.
Real Estate Partnerships
Ah, partnerships. The promise of finding another you that is willing to share the workload, money, or both, and tied to the common ideals of your business and lifestyle. If it were only so easy, no?
As someone that has worked in multiple partnerships, I can attest first hand, they’re great when you merge with like-minded and equally focused individuals that are clear on each others roles, payouts, and expectations. I’ve done it, it worked/s well, and like any other partnership, as lives change, agreements can change or dissolve, no harm no foul.
Whether you’re new in the business, or seasoned, nonetheless, let’s review some critical lessons I can impart on you as someone that’s also witnessed bad partnerships sprout and dissolve, usually not on good terms. Repeat after me…
“I, (your name here), do solemnly swear I will never, ever, do a deal on a handshake. Whether it be my grandma, best friend or preacher, I will have a signed understanding in place before any real estate contracts are signed or work is done.”
That wasn’t so hard, was it? Now, if the situation ever arises to where you’re going to work with a new partner and there’s nothing in place, simply say “Easy partner. I took this Oath a few months back and Tracy would kick my rear if she knew we didn’t have an agreement. Mind if we get some details on paper and make it official?”
Roses will bloom and the sun will shine when you’re first working with a new partner, after all, they’re supplying money, time, expertise, or any combination of the three. But, memories tend to get blurred, egos flare, and “fair” becomes much more subjective when closings happen and profits are issued. Not saying your affiliates are deceitful, bad, or greedy people, but why even chance the outcomes when you’ve worked so hard? Like a wise investor/mentor once told me, It’s easier to change an agreement down the road than to put one in place after the fact. Do yourself a favor and have a partnership agreement BEFORE anything on the deal gets started. (see a theme here?)
What Your Partnership Agreement Should Include
In the partnership agreement, I suggest outlining:
- What the specific roles are between any participating member (ie, lender, contractor, acquisition manager, etc)
- What the specific responsibilities and expectation are for each role (If you have an Acquisition Manger, don’t just put “Find deals”, be specific.)
- How each person will get paid, and when. Are they participating in profit share? Or are they tied to the re-sale? (for instance if you fix and flip). How far after closing can they expect to get paid?
- Is there a review period? A step up in profit percentage for exceeding performance benchmarks? Whatever else sort of understanding you and your team-mates agree upon, by all means, write them out.
- Get the Agreement signed. This may seem obvious, but in real estate as in life, schedules get busy, one party or the other gets weary in the negotiation and can’t come to a clear understanding they’re willing to sign on, and business as usual continues without ever having a solidified contract. Get.It.Signed. If necessary, have an attorney review it and have a counseled meeting to have everything tied up. Nothing creates urgency like a $300/hour bill and if you’re creating an LLC (limited liability company), LP (limited partnership), or any other form of legal entity, you might as well have an attorney review it for the both of you for piece of mind anyway.
Sleep Better with a Solid Real Estate Partnership Agreement
The best medicine is prevention, so save yourself the stress, sleepless night, arguing, and potentially losing face or friendship with a family member or affiliate by having a detailed agreement in place. And if it feels weird to ask a family member or friend to sign a contract? GROW UP. You know what feels more uncomfortable? Getting stolen from, lied to, or going broke. This is a business, folks, not play time at Chuckie Cheese.
If you’re brand new, you might not even know where to start, what you deserve, or how much work actually goes into what you’ll be responsible for. I’ve been there, gotten the short end, but learned from it and came out wiser. It happens. But you can always negotiate or move on.
So let the drama and double-crossing stay on screen, while you attract and retain great partnerships with those that are supporting your success in the real world.
What do you think? Do you steer clear away from partnerships or do you prefer them?