Joint Venture - Is this a Scam?

[Jim Stoffey]

Hi all,

I'm a long-time lurker/listener, but this is my first post in the forums.  After attending an awesome BP meetup in Philadelphia (hosted by @Troy S.) some red flags have come up regarding the structure we're looking to use to fund our first flip.

My partner, @Phil Sabella, and I have connected with a financier/partner who does JV's. It's set up as follows ('We' being Phil and I, 'They' being the financing company):

• We find the deal and we use our finances to find the deal.
  • We can find the deal however we'd like. MLS, direct mail, through a wholesaler, etc.
  • The property can be located in PA or NJ, they do not care.
• We have to send them a detailed comp report
• We have to have our GC's come out for bids (on our dollar)
• We have to have our inspector come out (on our dollar)
• We have to get the property under contract with a 10 day inspection period before we can show it to them or have their inspector come out
• The contract has to be assignable
• $50,000 is the profit they ask us to shoot for
• 6-8 week rehab time, no structural issues

Once we find a property and get it under contract, we must immediately pay $795 for their inspector to come out, send them our comp report and our GC estimates. They will verify what we send, and if they agree, we assign the contract to their company & we enter a JV agreement with them agreeing to split the profit 60% us, 40% them or 50/50 depending on the deal. They'll then put up 100% of costs including selling/staging and we will manage the entire project from start to finish.

At first I thought it sounded too good to be true.  But I started to come around when I realized this is a great way for their company to get deals done without lifting a finger, and we pay for their inspection.  Limited risk for them, limited risk for us.  They also rehab houses on their own, so if we screw up they come in and take the deal over and complete the project themselves.  If the deal is successful, they also offer hard money and encourage that for the next project.  I think this is a great way to set up a business, actually, and am impressed with the way they do things, if we're not being baited.

So, has anyone had success using a structure like this?  Is there anything we need to look out for?  My *biggest* concern is the $795 'commitment fee'.  There is nothing stopping them from saying "no" to five properties, pocketing the fees, end of story.  

I'd love to hear horror stories as well as success stories with this strategy.  Any advice would be fantastic!

[James Wise]

I read most of the posts. Pretty good thread.

A few thoughts.

1. If your a newb, you have to start somewhere.

2. If your a newb, you have to pay your dues.

3. Price seems a little steep, you may be able to do better BUT don't forget about 1 & 2. 

4. Real estate is about relationships.

Is this company the right company for you and your career? I don't know what other options you have. What I do know is that if you think they are it's worth it to take your lumps in the beginning.

@Jay Hinrichs touched on relationships. Not saying this is necessarily a good, bad or marginal deal for you. However even if it is marginal sometimes you have to take a step back in order to take two steps forward. Real estate is not about houses or. It is about RELATIONSHIPS.

You don't create relationships by always second guessing whether or not you squeezed every single penny out of every single deal. You make them through doing business with people in the industry. In the beginning the deals and terms are always going to be the worst. With a quality relationship they will just continue to get better and better.

Example: I met this local lady. She had some properties she wanted to sell via owner financing. She's getting out of the rental game but didn't want to pay capital gains taxes so she wanted to sell on 10 year terms. SWEET.

She owns 20 something houses mostly all in the heart of my investing area. So we come to terms on two of these houses. She told me what she wanted for them and I bought them. I could have countered and got a better deal but I didn't. Why? THE RELATIONSHIP. She owns 20 of these things and does not want all the cash at once. I wanted to be the first guy she called because I was the easiest guy to work with.

Fast forward a few months later. Guess who calls me and wants to sell two more houses? Yep, same lady. 

One house was great. The other I really didn't want. Bad neighborhood. She really just wanted it off her hands. So guess what I did? I bought the darn thing anyway. Never even went inside. Actually I never even went to the street it's on. My partner John did a drive by, was not impressed but hey we are cultivating a relationship here.

Fast forward again. Guess who called me with another great house to sell in my prime area? Same lady? Nope. Her daughter this time. Guess what, her daughter owns 40 homes in the area and wanted to start unloading some as well. 

So who was the first person she called? Why of course the easiest guys to work with.

Bought that house on owner financed terms with a Joint Venture partner and it was a pretty great deal. Cheaper than anything on the MLS and it was owner financed.

Guess what my reason was for taking this great deal to this particular Joint Venture partner? Our Relationship. I have about 30 people who would have done that JV with the terms I got, but I ran it past his desk first. Why? Our relationship. I Have done many deals in the past with this investor and he's always been the easiest guy to work with, has treated me fairly and understands that our relationship is more important than any one deal.