Always Put a Partnership Agreement in Writing

Partnering on deals is a great way to accomplish your real estate goals. It is a great method for those people who may not have the funds to take down a deal, but have the time to find and/or work on the project, paired with people that have the funds, but not the time. And, as I’ve heard many times, and it’s true – 50% of a deal is better than 100% of no deal. So, if you have a deal you can’t take down yourself or want to be part of a deal to start building your track record, you might want to consider partnering. However, anytime you partner with someone on a real estate project it is important to put the partnership agreement in writing. I’m not a lawyer and this isn’t legal advice. This is just my opinion. But is also common sense.

I’m not suggesting getting a lawyer to draw up an agreement every time you want to partner on a deal. That would depend on the size and complexity of the deal. As with most of my posts, I’m really talking to people that want to partner to do a flip. But the subject matter applies if you want to partner with someone on buying a rental, apartment building, etc. But I can tell you for my partnerships on flip deals, my partner and I use a one-page agreement we drew up together and it has worked on over a dozen deals. And even after many deals, we still use a partnership agreement. Why? Because the written agreement is in place to handle the black swan event – What if one of us gets hit by a bus? The written agreement really isn’t for the partners, it’s for executors or family members of said person hit by bus to understand what the partner would have been responsible for or entitled to in the partnership agreement.

Things to clearly spell out in an agreement:

• Equity splits - clearly indicate how profits will be determined and divided between partners.
• Roles/Duties – be clear on who does what and who is responsible for specific items. In our agreement, one partner funds, the other partner owns the property and manages the flip and has total control over the rehab and sale.
• Timeframes – how long will the agreement last? For our flip agreements it is one year with a buyout option at a specified return.
• Investor Protections – for example, if you are funding a flip, make sure you are first lien position and that there will be hazard insurance and title insurance on the property.
• What is to happen if there is a loss on sale of the property?

The best outcome in having a written agreement between partners is that you never have to look at it. Everyone stays in their lane and does what they are expected to do. The deal progresses as expected and everyone is happy. The written agreement is there just in case someone or something goes wrong. If things go haywire, you can refer to the agreement signed by all parties. While it is no guarantee of a smooth landing if things get bumpy, you have at least documented what was supposed to happen rather than leaving a “I said this” and “you said that” scenario. If you are not comfortable drawing up one on your own, please consult a lawyer, or ask other investors for one of their templates.