Why Putting a JV Partner on Title is not always a Good Idea!

People are funny, especially around money. About thirteen years ago a business partner of mine from the Warranty business, made a statement which has stuck with me ever since. You see Bill L. had been a top executive with Prudential Investments, during the go go days of the 80's merger and management buyout mania, and had made a lot of money.

Prior to Prudential he had graduated from Law School, but never practiced Law.

One day as we were discussing what to do with a merchant processor who owed us a lot of money, Bill said to me;

"The most valuable thing I ever learned in law school, was that it did not matter what you had in a written contract with someone, but, what is the motive of the person you are dealing with." I want you to read it again.

"The most valuable thing I ever learned in law school, was that it did not matter what you had in a written contract with someone, but, what is the motive of the person you are dealing with."

I am sure that right now, somewhere in America, someone is saying, "but in our contract it states....." and someone else is saying, "I don't care sue me!"

June 2015, a young couple with the husband looking for a career change, decided to venture into the flip business with a former colleague of mine. Now they had been passive investors in some projects with him prior, but now the husband wanted active involvement.

The deal was, that they would put up the down payment and rehab money, (I had already secured the project), a four bedroom three bath home with a $100,000 gross upside on a $38,000 rehab budget. The husband would participate in the rehab process and the net upside project split would be 60/40 in our favor. We executed a simple JV agreement and It should have stopped there, but we also put them on title as tenants in common. Little did we know this was a big mistake.

Being avid consumers of HGTV and all of the flip TV shows you can imagine, the husband decided that he wanted to complete the flip in 30 days or less. On a simple straightforward project, certainly doable (mop and glow), but on a project which is a complete gut, adding a new master bedroom (loft conversion) with a new master bath and making the house newer than new, I would say almost impossible.

Being a former sports pro, with no type of simple math skills, the husband went about managing the project into the ground, doubling the cost of the rehab. To make matters worse, he took on another project, AND, he and his wife starting having insane martial challenges. His idea of managing the project was calling the crew lead from the tennis court.

Okay, so where did this lead? A project that was horrendously under water and over budget.

What's the answer? Sell your way out of it.

We had purchased the property for $225,000, the rehab was two and half times the original amount. We priced the property at $326,000. The GOOD NEWS, very quickly we landed a buyer at FULL PRICE.

The BAD NEWS, to sell the property, the JV Partner needs to cooperate with the sale, as it relates to signing relevant documents, escrow etc.

We all knew that there would be a small loss on the project, but we would just take our lumps and move on.

Two weeks before closing, the JV Partner informs our listing agent that they will no longer cooperate with the sale unless they receive ALL of the proceeds from closing!

I will tell you what happens next and how it is resolved in my next. But in the mean time, if your JV Partner, says "Hey I will not cooperate with the closing unless I get ALL of the money!" What would you do?