"The Real Story with "Joint Ventures" and Private Lenders”

 

"Joint venture" is probably one of the hottest and overused words in all of business.

 

I'd like to shoot the person that invented the term.

 

But it's here with us to stay, so in that case, we might as well figure out a way to deal with it. It just seems like everywhere I turn around, somebody has a joint-venture for me. Most of these so called joint-ventures are one-sided: like I take all the risk and the person proposing the JV has all the upside. Here's a good one for you:

 

"Adam, how about I find a deal for you and you bring the money to fund the deal from your private investors. You guys can manage and rehab the deal and we'll split the profits?"

 

Whoa! Where can I sign up?.....NOT! (i love bringing that term back whenever I can)

 

It's more like: "how fast can I run the other way!" Why? Because this isn't a "joint venture" and it's not something I'm even remotely interested in. So, here's what I told this person: [More...]

 

"Ok. Tell you what: you bring me a deal. I will either A: pay you a commission or finders fee for the deal or B: purchase the property from you wholesale."

 

Of course, the other persons interest waned considerably. This tells me one thing - they were interested in making a bunch of money for not a lot of value added. This just doesn't work.

 

A joint-venture only meets the definition if both parties bring considerable value to the table and share in the profits proportionately with the value they contribute. Otherwise, it becomes a "dis-jointed" venture.

 

Now, I'm going to tell you the right way to approach these things when it comes to private money.

 

Maybe you think that by telling a prospective private investor that you'd like to do a "joint venture" with them that they will be more enticed to place funds with you. This can really mess things up in your relationship with the investor. They may think that they are equal business partners with you. Next thing you know, the investor wants to help you pick out the tile for the bathroom rehab. Not good.

 

In addition to this, some people think they can get around securities laws by saying that their private money investor is a joint venture partner, and thus they do not have to comply with the securities laws.

 

Not true.

 

Unless your private investor is a materially contributing partner on the deal (meaning if their profits can depend upon their actions) then you must still fill out the required securities filings/disclosures.

 

It can bite you in the behind two ways if you are running around proposing joint ventures that really aren't.

 

Keep it nice and clear and concise: you're looking for an investor, not a partner. Well, maybe you are looking for a partner, but I really caution you against letting other people in on making business decisions with you or for you. Never forget the reason YOU are in business - and that is to make money.

 

Be very leery of anybody proposing a joint venture to you. Make sure you clearly understand what each party is bringing to the table. If you don't have the market knowledge or connections to get the best deals, but you can raise the cash and handle the rehab, be sure that any joint venture you enter into clearly spells out how much you are getting and what the other person is getting.

 

Of course, there are relative and absolute dollar considerations here. If you have the potential to make a massive profit on a deal (like six figures or more) and the other person is really proposing something that you'd be dumb to pass up, then don't pass it up! Don't be penny-wise and pound foolish. Just make sure that you know what you're getting into. Spell all the details out on paper before spending time or money. Set up a good operating agreement or partnership agreement. Watch the dollars.

 

-Happy Investing