Partnership gone bad

[Steven Myers]

I am relatively new here an haven't posted but I have run accross an issue on one of my properties.

I bought a property with a partner and it is just now being rented out this month. He has more experience with rentals so I decided to let him take the lead but now he is wanting to charge me a 37.5% of the rent to find the tenants and 5% a month. I never agreed to neither fee, but I agree he should be compensated some but not at the level of a property management company because he is not that. If I would have known he was going to do that I would have leased the property myself as I have a couple of rentals. What are my options? I have tried to negotiate with him but he says it is final. Are my only options is taking him to court. Also, he put the leases in his name only and never ran the tenants by me so I have no clue who is in the property.

Thanks for any help.

[Brandon Krieg]

Do you have a written agreement? Does it talk about any of these things?

[Jon Holdman]

In addition to Brandon Krieg's question, what's your investment into the deal? What's his?

[Steven Myers]

We are both 50% partners and we split all expenses up to this point. We don't have any agreement in place, mostly because we were good friends and never thought it would be an issue this early.

[Jon Holdman]

Originally posted by Steven Myers:
We don't have any agreement in place, mostly because we were good friends and never thought it would be an issue this early.

AAARRRG! A serious error. The time to sort this out is when you're friendly and think nothing can go wrong, not when it actually has.

The fees he's charging are not unreasonable for a PM. Around here is 10% of collected rents plus half a month to fill a vacancy. If he's doing 100% of this work and you're doing none of it, then he is, arguably, entitled to this money. However, these fees should be charged to the property. Then you two should split what's left 50/50.

OTOH, him changing the rules when the deal is underway is a very, very bad sign. I'd figure a way out of this deal ASAP.

[Ben Hughes]

This is why everything must be written down beforehand, no matter what. What have you done anything other than fund 50% of the deal?

[Steven Walter]

"Everything ends badly; otherwise it wouldn't end." Coughlin's law from the movie Cocktail.

I'm not trying to be glib. It's just that I'm continually amazed at how many different ways things can go sideways. I believe Jon Holdman's last comment is spot on.

[John Thedford]

Sorry to say I agree with Jon as well. The time to sort things out is before money changes hands. Money can have a funny way of dividing families, friendships, businesses, etc. Your best solution might be to try and dissolve the partnership and go your separate ways. An amicable solution is less expensive than legal fees in many instances. In the future, the first five pages of an agreement might be how to set up a partnership, and the last 55 pages on how to dissolve one. Partnerships are like a marriage: easy to say "I do" but much more complicated if and when you decide "I don't". You need real estate partnership prenup agreements:)

[Roy N.]

Steven Myers

It happens, my partner of 10yrs and I parted ways last year. I had to buy out his interest ... let's just say it was sufficient enough a 6-unit MFH deal under negotiation had to be abandoned.

Take Jon's advice and get out now ... it will only be more expensive and disruptive the longer you wait.

[Brandon Krieg]

Tough spot. Perhaps if he won't budge on the numbers, you can work with terms? If he wants 5% of rent for property management, you should outline exactly what that entails. Is he responsible for fixing toilets or coordinating repair people? Write that up and sign it.

Also, you will probably have another vacancy in the future. WRITE DOWN the procedure for finding tenants in the future (and sign it). I'm really hoping you are on the deed for the property, or have some other legal support for your claims.

[Jeff S.]

Everyone here is correct about what you should have done. It doesn’t change where you’re at, however. I see a few not-so-awful options:

1) Insist on hiring a property manager. It will likely cost you more than the 5% and 37.5% you mentioned. Who would win here? (I assume by the way, that the 37.5% if of the first month only?)

2) Volunteer to manage the property for free under your partner’s guidance. I bet you’re not crazy about this one anymore than your partner would be about managing for free.

3) Understand that you should have agreed upon a management fee structure up front and accept you’re partner’s terms as those you would likely have agreed upon anyway. Yes? (Then, take a deep breath and cool down.)

Someone should be paid for this. It’s unfortunate you didn’t work it out sooner, but don’t throw the baby out with the bathwater.

Even though it’s late, it’s not too late. You should really generate a detailed partnership agreement.

Unless this is just an inherently bad deal, it’s probably best to avoid a scorched Earth approach involving suing your partner for something you would have to pay for anyway or whenever you get upset. This won’t be the last time.

This is a good place to find a sympathetic ear. If you want to come here and vent by calling your partner a horses *** every time you disagree, then do that. Never make a decision when you’re upset, though.

Jeff

[Jon Holdman]

What was your understanding about how things were going to happen? It sounds like the two of you bought a rental intending to split the profits 50/50. Did you each put in equal money up front? Are you both on the loan (or, is there no loan?) Both on the deed?

How was the management to be done? That is a piece of work that has to be done. If he's doing it an you're not, then he does deserve some compensation. If its supposed to be 50/50 and you've not been doing any of the management, then I could see where he might be upset and just decide to do it and want's compensation. OTOH, if you agreed to split the work 50/50, you're willing and able, and he's unilaterally decided to take it over and charge you, I can see where you would be upset.

I have at one investment where these management fees eat up pretty much all the money the deal is making.

What if more money is needed? Does the partnership have a cash reserve? This is a partnership, even if there is zero formal documentation. Does it have a bank account? Who's in charge of filing the partnership return with the IRS and distributing the K-1s to each of you at the end of the tax year?

How will you decide to sell? What if one of you wants to sell and the other doesn't? Are you in a position to buy him out or vice versa?

What if one of you dies? Or gets divorced? Or loses a lawsuit?

[Jon Holdman]

Leo Tolstoy wrote: “Happy families are all alike; every unhappy family is unhappy in its own way.” Partnerships are like that, too. What that means, is that a happy family or partnership has everything going right. There are many, many things that can go wrong and any one of them can make a family or partnership unhappy.

[Steven Myers]

First I want to say is that this place is awesome. I did not expect the type of quality responses I have gotten. Thanks

When we were originally buying the house it was a place we were going to fix up and live in for a while. That time has passed and we both have moved on to other properties. The house has great cash flow and is a great investement. I have asked him to buy me out because of this situation but he is unable to becasue of funds and he refuses to let me buy him out becasue the cash flow is so good. I also mentioned letting me manage the property or to sign up and use a property managment company and he has rejected both suggestions rather rudely. I have no problem paying him for his effort but he is not budging on any of his demands. I guess I might give him some time to think about some of his demands and if he doesn't change his mind I will just have to take him to court.

[Dawn Anastasi]

Steven Myers

Is there some where you both can compromise? You both want the property and it sounds like you both want to manage the property. Is it just to get the extra money that comes along with the property management? Are you willing to do the property management and finding a tenant for free? If not, then what would you charge him?

[Jeff S.]

“It reminds me of that old joke - you know, a guy walks into a psychiatrist's office and says, hey doc, my brother's crazy! He thinks he's a chicken. Then the doc says, why don't you turn him in? Then the guy says, I would but I need the eggs. I guess that's how I feel about relationships. They're totally crazy, irrational, and absurd, but we keep going through it because we need the eggs.”

-- Woody Allen, Annie Hall

I think you’re both being pig-headed, Steven. It sounds like you have a perfectly viable property, good cash flow, and acceptable expenses -- something every investor on this board aspires to. You’ve made no mention that your partner is mismanaging anything, just that he’s getting paid to do it and you don’t seem to like that or his demeanor. What exactly would you sue him for, bad manners? Sorry, but this is not a real estate question anymore. I think both of you need to cool down.

A few lessons confirmed here:
1) Never do business with family or friends.
2) Make sure you have negotiated partnership agreement in place before you enter into a deal with anyone.
3) Always go in with multiple exit strategies. The corollary is: Lawsuits are not normally a good exit strategy.
4) Real estate has hair. You must have skin thick enough to deal with that and not sweat the small stuff. (Sorry for mixing all the metaphors.)
5) Always know, like, and trust those you do business with. You can say you did, but it’s clear you didn’t.

Jeff

[Roy N.]

Originally posted by Steven Myers:
The house has great cash flow and is a great investement. I have asked him to buy me out because of this situation but he is unable to becasue of funds and he refuses to let me buy him out becasue the cash flow is so good.

Steven,

Do you have an existing first mortgage on the property? Are both your names on the mortgage?

If there is no mortgage and/or your name is already on the title, you can offer to finance his buy out of your half. You could write him a carry-back mortgage for that portion of your half he cannot afford to purchase outright. Alternatively, you could arrange an earn-out whereby you retain 80% - 90% of his portion of the the cash-flow-before-taxes (CFBT) until he has earned out your half of the property {this could be done even if there is an existing mortgage in-place}.

Be warned that if you have a mortgage and your names are both on it, the lender (especially a bank) may force the remaining partner to refinance (rather than simply issue a "release" of the other partner from the mortgage).

There are others here like Jon Holdman, and @Bill Gulley, who have deep experience and better know the financing options available to you in the U.S.A.

Whatever you do going forward, spend a little time with a real estate / partnership attorney and get things in writing.

[Lynn McGeein]

There are many property managers that charge 1/2 month's rent for tenant placement and then 8-10% monthly fee, so 5% and 37.5% isn't that unreasonable if he's actually handling the management and you're still receiving rents. Maybe agree to the fee or negotiate down, but let him know you need a proper management agreement in writing signed by both of you, including amount for repairs without getting your permission first, and you'll need monthly statements each month like a property manager would so you have some idea of what is going on monthly. And maybe explain that as partial owner, you have every right to inspect your property, have a copy of the lease and know who your tenants are.

[David J.]

You are in a dream position. I would love to have a 50:50 partner that will do all the work for half the cost of a PM. Think of the problem this solves. No one cares for a property as well as the owner. You don't have to worry about the misalignment of interests inherent with a PM. You have a principle investor managing his investment (and yours as a byproduct). If I were you I would sit back and enjoy the cash flow. Go buy 10 more with this perfect management solution.