Weather you are new to investing or a pro, at some point you have either already entered into a joint venture relationship, or someday down the line will be approached too. Regardless, it’s safe to say that in all partnerships, some work out great whereas others can be the proverbial crash and fail. So weather life has already taught you the pitfalls of failed partnerships, or you have yet to experience one. It may be helpful to learn some new ways that can assist in a joint venture down the line.
First, though, it would probably be helpful to stop and actually define what a joint venture is. A joint venture is a business arrangement in which 2 or more parties agreed to for the recesses for the purpose of accomplishing a specific task. In this article we will primarily be talking about a joint venture ship that has to do with real estate. However, these principles can probably be applied in any form of business.
Principle #1: Purpose of Joint Venture
Before you start any joint venture you must first answer the question what is the purpose. Are you buying, fixing, and selling a property together? Or are you buying, fixing and renting a property together? You need to get specific on the purpose of your joint venture. That way both parties have a clear understanding and will be completely comfortable.
Principle #2: Purchaser of the Property
This one is key. You have to know who is purchasing the property. May sound obvious, but often times can be overlooked in a joint venture. The purchaser of the property is the one that is taking on the most risk, so this arrangement needs to be spelled out in your agreement.
Principle #3: Term of the Agreement
This acts almost like a contract between you and your partner. It’s here you’ll want to spell out the specifics of how you will handle your property and the decision-making process that you will go through when it comes to the property. It will also be helpful to include all contingencies and worst-case scenarios in this agreement.
Principle #4: General Definition Section
While some say this is just a legality, it is helpful to define the key phrases and terms you’re going to use in this agreement. Keeping in mind that not everyone defines these common terms the same way, so it’s important to spell it out now.
Principle #5: Obligations of a Joint Venture
This is probably one of the most important aspects of the agreement. You will have to spell out in the most clear possible terms what each person is or is not responsible for. This can include who will be responsible for obtaining the commercial loan and how much that commercial loan is for, what equity each partner is responsible for, who is running the day-to-day operations of the rehab versus who is responsible for the bookkeeping in record-keeping, and who is responsible for marketing and selling the finished product. Again, it’s key that you spell out every single little detail and include everything. When it comes to obligations nothing is too small to include.
Principle #6: Allocations
Even though this may have been covered in another section, you need to include the percentage of profits each partner will receive after all liabilities and holding costs are taken care of. This will completely depend on the value the partners are bringing to the table.
Principle #7: Termination
Keep in mind that joint ventures are not meant to be long-term agreements. They are designed to be short term, with a very specific goal in mind. So, once this goal is met you need to have the end details spelled out so that way, when you come to the end of your agreement, there is no confusion.
Principle #8: Rights and Duties of Parties Included in Joint Venture
This is mostly legality but it is helpful to include protect all parties involved.
Principle #9: Payment of Expenses
In this section you need to specify who will be handling the funds and who is in charge of the banking relationship. Also, you’ll need to spell out who will be paying the contractors, service providers and other fees. More than likely you will have covered this in the responsibility section, but if you’ve not specified how much equity each partner is putting in, then this is a place to add it. You also should specify which partner’s business checking account the funds will reside. After all money allocation and disbursement is probably the most important area you’ll need to cover in these joint venture agreements.
Principle #10: Insurance
This section is also important because it specifies how this project will be protected with insurance. And which types of insurance are important to purchase and maintain during this project.
Joint ventures can be tricky, but if you follow these 10 principles you can help set yourself up for success. And further expand your reach into the real estate industry.