Top 5 Things to Consider When Entering a Real Estate Joint Venture

Real estate joint ventures are a popular method for dividing up the work and funding for fix and flip projects. Joint ventures can be structured in many different ways, but ultimately they should lead to lower risks and more support for the people partnering on the project. Whether you’re considering entering into a joint venture with an entity (like a lending firm) or a person, here are five things you should consider before you agree to anything.

• 1.Speaking with a lawyer

This consideration is especially important if you’re considering a joint venture with a friend or colleague (as opposed to a lending firm that can underwrite a legal joint venture agreement). A lawyer can help ensure that you cover all of your bases in case things go wrong. It’s in your best interest to have a written contract in place when you enter any joint ventures in real estate, and a lawyer can help with that.

Now, you might be thinking, “I’m doing this with my brother-in-law, not a stranger or someone I’ve only worked with a few times. Do I really need anything written down?”

Yes, you do. Sometimes disputes with family can get even uglier than disputes with colleagues. A written contract gives you something you can point to and find definitive answers in when disputes arise about who’s responsible for what, among other potential issues.

• 2.Who will secure funding

Your joint venture agreement should specify who is responsible for providing funding for your project. If you need third party funding, it might make sense for you and whoever you’re partnering with to create a limited liability corporation to take out any necessary loans. That way you are both legally responsible for the loan, rather than taking it out in one person or the other’s name.

If you are providing funding for the joint venture yourself, make sure that your agreement covers who will be responsible for securing additional funding if the costs of the flip exceed your available capital.

• 3.Who has final say

If you’re planning to do a flip with a partner, who makes the final decision as to what house you’ll buy? Who gets final say on which realtor you’ll use? Or which color you’ll paint the kitchen? There are countless decisions that need to be made during a flip. Some decisions are much more important than others, but every decision is a potential conflict with your partner. Be clear in your agreement about who gets final say over different types of decisions.

• 4.Who will do the work

The best joint ventures are usually ones where one party provides the money and the other party does the work. This creates a clear split, and no one ever needs to fight about responsibility. But if you decide to share the work with someone, again, be upfront about responsibilities to avoid problems down the line with one party not pulling their weight or the other party overstepping their bounds.

• 5.How to back out

If for some reason the flip fails, you need a plan in place for how the resultant costs will be split. You also need a plan in place for what to do if one of the parties needs to pull out of the joint venture early. Will you go to a mediator? Will that party be forced to pay some sort of penalty?

In planning for all of the worst-case scenarios, you can help yourself steer clear of major issues from the beginning.