Partnership in deals, what kind of documents should I have?

Question

Hello BP,

2 projects I am working toward:

1.  I have a verbal agreement with another investor to do a flip: I buy, he rehabs, we split profit 50/50.  The house is 40K, rehab is estimated at $40K.  I am paying cash so my name is in the deed/title.  He will have to put $40K in time/material/management of the project.

Here are the list of questions:

a. He added me to his LLC as partner, 50% interest.  Do I need to have a lawyer to review the LLC?

b. What kind of legal documents I need to have to protect my interest?

c. Do I have to have his name in the deed/title as well?

2.  This same partner has duplex that he wants me to be in $40K to buy 50% interest of his duplex.  He is planning to rehab the duplex, separate the duplex out into 2 separate single family unit and sell them separately.

Since it's his duplex, and I am buying 50% interest...what do I need to do again to protect my interest:

a.  I should ask to have my name added into the deed/title?

b.  We are just filling out a Joint Venture agreement for this second deal.  Is that all I need?

Thank you much in advance for the help!  BP members have been so great.

Matt Huber · Answer

Hello Thu,

Partnerships are a crap shoot.  Typically you get the best or the worst in my experience.  As you gain experience, knowledge and contacts you'll find turn key general contractors and don't need a partner if you have the cash.  That said if the partner turns out to be a good one and can source deals and manage rehabs well, you've found something valuable.  As a newbie you, like most, are probably more comfortable having everything taken care of for you - you will find out if that ends up being a good thing or a bad thing.

Here's the real bad side of partnerships.  You are both jointly and severably responsible for your partners mistakes.  That means he can make the mistake and you get to pay for it, especially if he has no assets with which to pay.  That's where the LLC may be useful by limiting your liability to that single project.

In real estate everything needs to be in writing.  My concern is never for the upside as that takes care of itself (though always do YOUR OWN RESEARCH to verify the values), the downside is the concern.  Your partnership agreement should clearly spell out who is responsible for what, and who continues to be responsible if larger repair problems are found or if the deal takes longer to sell than originally thought.  Who pays for those additional holding costs?  I think it is more important to determine how the unexpected will be handled than the expected.

Deal 1:  You are on the deed so you are protected, though a partner or contractor can always sue if unhappy.  Having the property in your name gives you ownership and control, that's always the strongest protection.

a) I don't understand why he made you a 50% parter in his LLC unless the LLC owns the house.  I doubt I'd waste time for an attorney to review.  Your chances of getting sued are much more likely between you two as partners than from a third party.  The LLC might not have the tax formation (such as an S Corp) that is likely best for your tax situation so long term that might be something you want to address, but I recommend making money first before getting focused on cor porate formation.  I'd read over the corporate docs yourself.  They are probably standard boilerplate.

b) You don't HAVE to do anything with his name.  If you are an honest person you can do it on a hand shake, even though it has no legal basis.  Your interest is protected by having your name on title AND a clearly written partnership agreement on who is responsible for what.  I'd include time frame as well since completing the rehab in 2 months is not the same as completing it in 2 years.  Covering the negative contingencies is where you protect yourself, perhaps having a way to extricate your partner from the deal could be your most important protection should he prove to be less than you hoped.  Owning 50% of his LLC, even if the LLC owned the property, says nothing about who is responsible for what so I don't think partnering within the LLC does anything to protect you from your own partner.

c) Putting his name on title protects him and gives him more control.  If I were him, I may insist on it.  If he doesn't insist on having his name on title it gives you more control having it only in your name.  Naturally you have more responsibility to do right by him in that situation.

Deal 2: To protect myself I'd want to be an owner,  but you don't have to be on title to be an owner.  If it is owned in an LLC and you own half the LLC then you are an owner.  Conversely you can put it into a land trust and change owners with no formal recording (but only AFTER the land trust is recorded on title).  Again I think the partnership agreement that clearly points out who is responsible for what, including cost and time overruns, is important.  It sounds like the duplex is planned in a similar agreement so getting one good agreement complete and using it again for the next property should work for you.  If I'm putting money with an expectation of 50% ownership I want to be on title in one way or another, that may be as part owner of the duplex.  The JV is NOT a recorded instrument so the managing member of the LLC could potentially sell the duplex on you and keep the money.  The JV is needed, but not sufficient in my way of thinking.

You should join the Rich Club (a member here on Bigger Pockets) and start educating yourself.  I believe it is the largest real estate investment club in the U.S. (again), certainly one of the largest if not the largest.