Newbie Joint Venture Story / Feedback Appreciated 😉

[Cristina Rodriguez]

 
Hello BiggerPockets Community,

I am new to the real estate industry and I just want to share my first joint venture experience in the hopes that you will share yours, your direction and feedback.

I met my prospective JV partner at a Real Estate event in Los Angeles. He and his partner are just getting back in to the industry, collectively have 30-years experience, and are doing Joint Ventures (fix and flips). They offered 66% for using my cash and credit and his team would be doing all the work and overseeing the entire project. He and his partner graciously answered all my questions, so I felt at ease.

The two deals that we discussed came fast. They provided the purchase price, ARV and investment amount, but I had to ask for pictures, comps, JV agreement (JVA), etc.

The first deal - fell through before we got to signing a Purchase Agreement (PA) and or JVA.

The second deal - came on the same day that I was told that we lost the first deal to another buyer. Again, I asked for pictures, comps, and the JVA with the terms and conditions that I requested for the first deal. I was presented pictures, no comps, no JVA, and I was told that I needed to do the PA first, then Earnest Money Deposit (EMD), then LLC, then JVA, then the loan, close escrow and then we start the work. I called the company that we were buying from and found out that the PA is final if I sign. As a result, I did not feel comfortable signing a PA, since it was final and I had not received comps or signed a JVA.

Although we did not get to the loan portion of the transaction, we did speak with a hard money lender. They were charging $10,0000 + 2%.

I'd love to hear from the community if this is normal percentages, procedures and if the loan fees are average, low or too high? Any feedback is appreciated.

Kindly,

Cristina

[Jeff S.]

Consider yourself lucky, @Cristina Rodriguez. These guys found a “live one,” couldn’t get the job done, and seemingly showed their true colors. Sorry for my cynicism, but the fact that they asked you to sign a PA without informing you that it was binding shows they either didn’t know, or they were being deceptive. Either way, shame on them. Your requests were completely reasonable though still shortsighted, in my view. Unfortunately, you also presented many red flags.

First, it does not appear that you have any criteria your partners must personally meet or any criteria their deals must meet before they bring them to you. Without these, you're subject to doing business with anyone good at selling themselves and/or investing in properties using their purchase criteria, which might not be well-thought-out or in your interest. I suggest you establish written criteria that you can provide to potential partners. We don't JV but provide similar criteria to all potential borrowers. Nothing is perfect, but this forces you to think about what you want. It also helps keep you focused and filters out the bad actors and the bad deals.

If you're going to invest in flips, make sure they are a good deal. You wrote that you were buying from a company with a binding PA (and I'll guess a non-refundable $10k earnest money deposit???). 😫 AARGH. These companies, such as New Western or Fair Trade (I'm guessing again, sorry), rarely offer properties with enough meat on the bones. Surely, with 30 years of experience, your partners have the skills and resources to find better, safer deals? If not, why not?

Plus, you weren't clear on the terms of your deal. How could you without the JVA? Nonetheless, you said there would be another lender, and you're using your credit. Does this mean you are the borrower and also putting the remaining money up? If so, as the 100% financier, you should own the property 100% in your name only. Your JVA should allow you to fire your partners if they don't get the job done.

It’s typical that when someone puts up 100% of the money and someone else does the rehab, they split the profits 50/50. Your 66% share appears to be in your favor - maybe. It’s important your partners make money. If not, with no money in the deal, and a minimal profit potential, they could walk.

Last, points at 2% + 11% simple interest are reasonable in Southern CA now for flips. Unless these were closing costs, i.e. escrow and title etc., a $10k fee to the lender on top of that is crazy and completely uncustomary in S. CA now. Please don't tell me this loan was from one of the lenders associated with your wholesaling company. You can do better.

Good luck to you, Cristina.