Starting a Partnership? Do you have standards?

[Mike Hernandez]

I almost entered my first partnership (my first deal as well) with other investors this month, but did not let the possibility of making money and finally getting started get in the way of my standards...Communication!! In my case it was lack of communication. If you are an experienced investor, what are your standards? If you are new to investing, do you have standards? If not, don't jump into a partnership until you develop them. It will save you a headache down the road.

[Bill Gulley]

There is a difference between working with someone and partnering with someone. In RE, you may need to work with many that would never meet standards desired in a partner.

Here are aspects I consider before I partner:

Ethics, where is the moral compass? Usually, I can ask questions that will quickly identify their business ethics. This is the primary consideration, it often will be an indicator of other aspects below.

Reputation, if they have been in RE, I have people I can call to see how others regard them in the business. You are the company you keep in this business (or any other for that matter) your reputation is paramount in RE, while you may have friends in low places you certainly don't have to be known as their partner.

Knowledge, do they know what they are doing? I, and anyone else, would much rather partner with an expert, but they need not be, but they do have to at least know general business aspects. This really goes to what the plan is, if they are just a money partner, they need to understand the risks, rewards, their role and level of activity. If they are to do the rehab, they need to know what the heck they are doing, which leads to the next matter.

Experience, folks that have been there and done that are much easier to deal with, a newbie can take half the day to address issues that an experienced partner may only make a comment and will understand a simple reply. This leads to the next matter;

Trust, can trust be easily developed between you and your partner? You must trust a partner to do what they agree to do. Just like a marriage you need trust, each need to recognize the strengths and weaknesses of the other and trust their judgment in their area of expertise.

Financial matters, three areas of concern:

Credit, their credit says a lot about someone, degree of responsibility, maturity, judgment and keeping promises made. While it may depend on their role in some venture, forming a business entity with one with bad credit is asking for problems. Their interests in my company can be put at risk with judgments, collections and bankruptcy!

Income, do they have income sources besides the venture? Your perfect partner won't need a dime out of a project. If their sole income is from a project there is certainly motivation to work or perform, but that also increases the chances of desperate decisions being made, even worse, misuse of funds. The problem is that while someone may pass all of the above with flying colors, desperate people can do desperate things. While accounting and cash control measures can be put in place, understand that materials can walk off, side deals cut for kickbacks and other things can happen, so care needs to be taken. (See Trust above)

Assets, can they carry the water? If you are financially tied to someone do they have the ability to cover their end financially. Would you need to buy them out to continue business in some matter or can they hang in there and be financially responsible to you and others is the question.

These are the areas of concern for me and most any seasoned business person. There can be arrangements to reduce or even eliminate some risks, especially on the financial end. If you make concessions in one area those should be compensated by other aspects, for example the lack of assets can be made up with more knowledge or experience. The lack of ethical attitudes, a bad reputation or not being trustworthy can not be substituted with me, those are deal killers. :)