How would you structure this "joint venture" deal?

[Kevin Suksi]

We have a deal in principle with another investor and I'm wondering how others have structured similar deals in the past.

This is a retail flip project. The other investor located a short sale and was able to get it under contract where the numbers work. He is funding the purchase of the property. Our role is to fund and execute the rehab. Once sold the profit will be split between the two parties. The numbers all work as far as ARV, rehab cost, etc. We have strong and recent comps within 1/4 mile of the subject property above our target exit price.

My question is - how would you suggest securing our interest as the 2nd investor? I do trust the investor we are entering this deal with but you still want to structure things properly. We aren't bringing funds to the closing, we are funding the rehab as costs are incurred. I am not a builder so I don't think we can lien the property. Any ideas?

[Will Barnard]

Is the other party bringing all cash to close the front end transaction? If so, the easiest way to protect both parties is for you to fund an escrow account with all the rehab funds and then seciure a deed of trust for that amount against the property. This way, the property can not be sold until your principle is paid back. That covers your rear for the principle and is easy and inexpensive to complete.

All that remains is your profit share split which if you really trust this investor and have a good relationship and history with him/her, you have 2 choices, do it on a hand shake and trust that you get your split (I don't recommend this option even if you trust them) or 2. Draft a simple operating agreement that states what each party is reponsible for, what happens in the event of (death of 1, death of both, who dies first, who makes decisions to lower exit list price if it does not aell, who pays and performs work on costs in excess of rehab budget, how and who covers holding costs - taxes, insurance, utilities, maintenance, etc., and any and all details pertaining to the joint venture.

So long as you trust the other party, you don't need to worry about all the fine line details, just enough that spells out in writing what will take place and how. Your principle is already covered via the deed of trust and that is the important part.