Hey what's up guys, It's Clint Coons here.
And in this video, we're going to talk about five common mistakes
when setting up a real estate joint venture.
Okay, let's get started.
Now, I got to tell you,
you know, I've been doing this for so long and now my hair is turning gray.
But here's a recurring theme that I've seen in 23 years of practice
is that when real estate investors get together to put together deals,
many times these ended in divorce because there are violated expectations.
And that is why I wanted to put together my five typical concerns that I have
whenever I hear a client coming to me
and they say they want to start a joint venture for a real estate project
with another investor.
And I think these are key.
If you want to go out there and you want to work with someone else
to expand your investing through real estate,
you've got to make sure that you're you're following these procedures.
So you don't end up in a situation
where you're going to lose all your investments
or you're going to be
bogged down in court cases, which means you're going to lose all your investments,
because we know attorneys love to get paid.
All right.
So what is this, the first mistake that I see people make when it comes
to setting up a joint venture that is vetting, okay, they're J.V.
partner.
This is critical, right?
No, we're getting in bed with you.
Heard that story before. Right.
Know who you're going to be working with.
Now, I understand that you can't always determine
or have a working relationship or knowledge of someone else.
But here's the thing.
There are a lot of services out there that you can use to perform background
checks on an individual, and you should do some due diligence.
All right.
Trust but verify use FBI mode is I've heard people refer to this before
go out there and look into that individual may ask them but you know if say
somebody came to me and said, hey, Clint, I want to do a joint venture with you,
I'm going to use I have the expertize.
I want you to put up the money
and we're going to make tons of cash on the sale of this investment.
Well, the first thing I'm going to have to ask myself
is, what is my prior relationship like?
What do I know about them?
So I want to know, hey, give me some referrals.
All right? I don't know who you work with in the past.
Ask them, you know, how many people have you worked with
before you've done this deal with?
They say, Oh, I've done nine.
Okay, give me six.
So now they've already set the number.
So if they can't give you six out of the nine, there is a first red flag
that you're going to have asked them if they'd be willing to consent
to a background check, say, hey, listen, you know,
I want to work with you, but I got to do my due diligence.
So I want to do a background check on you.
Maybe even run a credit report would be get them to consent to that.
So you can see whether or not they have a lot of outstanding obligations.
Because I tell you what, if there's a lot of debt involved on that person,
whoa, your deal is going to go south before we even get started.
Maybe they can take your money and pay off
those other individuals that they may owe money to.
So digging into their background
is really important, especially if they're asking for you to put up money.
Now, if you're working with someone who's not asking you to put up money,
some of the things aren't as a concern, but still you want to have
some semblance of who it is.
Because let's say you have a person that's involved in some lawsuits,
those lawsuits, if the judgments entered against them,
because, you know, I'm not asking them to put up the whole deal.
Maybe we're coming in 5050, they could impact your investing.
So vetting your partner, I think, is critical
before you enter into a joint venture agreement.
Okay.
So what is the second thing we want to look at when we're putting together a JV?
The second thing is talk about responsibilities.
Okay.
I want to know what each party is going to be responsible for.
Or maybe you have one party that's not going to be responsible for anything,
but that has to be clearly defined.
Go into this and say, sorry, you're going to do X, I'm going to do Y,
or maybe you're not doing anything and I'm doing it all.
But list all that out.
Because later on what typically happens in these types of agreements
is that people have a conversation and they get all excited about it
and they say, Hey, I'm going to do this and you're going to do that,
and this is all going to turn out great.
But then as we start progressing one party,
they lose interest in the project and then they don't perform
and they don't fulfill their into the their responsibilities.
And that falls back on to you.
So that could be a situation that comes up.
And then what do you do?
Well, that's why you have to have number three.
Okay. Failure
to perform.
Okay.
So you have to have some language in your joint venture agreement
that addresses what happens if, number two gets violated.
We have violated expectations by partner's not doing what they're supposed to do.
And now I have to step in to my partner's shoes
and wear his pants and do all that in addition to my own.
Well, maybe you're okay doing it, but here's the thing.
You need to receive compensation.
So in order to make it fair to incentivize someone to do that,
we need to put in there some incentives for you to make sure that if the person
who's responsible for doing A doesn't do it, that the at the end of the game
you're going to be compensated a little extra
for your additional responsibilities that you have to take on.
So this is what will typically put into a joint venture agreement for our clients.
We'll go through that and say, all right,
so if they don't do X, then here are the ramifications for that.
Maybe they don't get their full interest or we're going to allocate
a higher percentage of the profits over to the party.
That does this because we've outlined out that the you know, the responsibilities
one through six are weighted as follows ten, 15, 26% of the deal.
And so as long as you do them check, you now are entitled
to that percentage of the profits.
But if you don't
and someone else does it, then they're going to receive that share.
So putting in failure to perform, I think is really important.
Now, the other thing that you're going to want to talk
about is how conflicts are going to be handled.
All right. So let's talk about conflicts.
What do I mean by that with conflicts?
Well, what happens when you can't agree on something?
How are you going to determine the path forward if there are two people?
This can be really problematic when you have a joint venture agreement
because you don't have a third party that you could say, hey,
you know, two thirds of the members agree, then we're going to go forwards
with the overall project based upon what they agree upon.
When it's just two individuals that can be an issue.
In many times what people I see in the operating agreements are that it's
unanimous consent that everyone has to agree.
Well, that can then lead to these other problems that are up here
that people then don't perform
because they're no longer have an interest in the project
because they feel like it's going in a different direction.
And so maybe in that scenario, what you should build into your agreement
is that you have a third party, an arbitrator,
maybe someone else that you both agree on, who is a real estate investor,
who understands projects that you would go to
and you'd say, Listen, here's what I want to do this.
They want to do this.
What do you think?
And then you agree that whatever that party state will be binding
upon the overall joint venture and each partner agrees to abide by it.
So you can choose somebody to serve in that capacity, namely
someone who has experience.
Of course, I've watched read joint venture agreements
before in the past where their real estate joint ventures and
they say, we're going to submit it to arbitration.
Listen, so you're going to go and submit it to a judge or an ex judge or
an attorney who's serving as an arbiter, and they have zero real estate experience.
And so now you have to educate them. What does that mean?
Lots of money.
The person who is the best operator is going to probably win the day.
It'd be better if you just chose someone that you know
that has real estate experience, that's doing what you're doing, that can easily
step in and make a determination and keep that project moving forward.
So I think conflicts is really important, should be specified in there.
Number five, who's going to run day
to day ops?
All right.
So with any type of real estate
joint venture that you're getting involved with
or there are things
that are going on on a daily basis, who's going to be going out, meeting
with the contractors on the site, answering questions about,
hey, are we going to use this type of trim here?
You know what type of doors you want?
You want louver door sticking stuck over here in this closet.
How are we going to trim out the closet itself?
It's just going to be a shelf with a bar.
We're going to do a full package with drawers.
Those types of those types of things that come up on any job site, you know,
where are we going?
To mount the hood for for for the range or we do an offset.
Who's going to do that? All right.
So if you're involved in a real estate joint venture,
you needed to find out that day to day operations are going to be handled
by one individual, because the last thing you want
is a scenario where you've got contractors that have to reach out to two people.
All right. They're going to
they're going to lose interest in your project, number one,
because if you're not on the same page and you're
they're getting conflicting information, they're not going to want to do anything
and then they're going to quit responding, quit showing up at the job site.
So you've got to have someone that's only take on the hat and carry the mantle.
And the other person has to agree to step out into the background and say,
all right, I trust your judgment and I'm going to let you handle the day to day.
What is what you can do here,
though, is when you're putting together the day to day operations, you should put
a financial threshold in there that any individual
if I gave it over to two partner a you're handling the day to day,
but you cannot commit the joint venture to more than $2,000
without the approval of unanimous two thirds.
Three.
This depends how many partners are involved in your JV
in order to move beyond that financial threshold
so they can't encumber or bind that partnership, that LLC to a contract
to say, come in and they decide, you know, I just want to rip out this
entire kitchen, do a full remodel on it rather than just doing the cabinet door
fronts like we originally planned.
So that would stop that from happening.
Going from a 1500 dollar
change fee to a $15,000 change fee for that JV.
All right.
So the last one that I think is is really important
that many people over overlook is your exit strategy.
Okay.
So so
what is it about the exit strategy that is so crucial?
It comes down to figuring out what we want to do with this property
that we're getting involved with.
So if you're putting a deal together to flip and what is that price going to be
when you go to market, you have to you should figure that out ahead of time.
Hey, if we've done our comps and we know what this property's worth,
we agree that when we go to market, we're going to elicit at this amount.
I've seen real estate investors before that are in JV agreements
and they have one partner
that has no concept about the market that they're investing in.
And they have this presumption
that everything's like California where it's really overinflated.
And so they want to list the property at $800,000.
You're like, Dude, it's not going to sell at 800 K, this is a 6075
going to market at not the 800,000.
They think you're leaving money on the table.
So you should specify that at the outset what the what
those parameters are going to be.
What happens if it doesn't sell when we do a drop, how much we're going
to do a drop on that price, assuming that was a scenario.
And if it's if it's on market for, what, 90 days
and it isn't selling, you've done the two or three drops that you agreed to.
Then it becomes a rental property.
You're going to rent it out. Is it going to be Airbnb?
Is it going to be traditional rental?
How is that going to be determined?
You need to go through all this stuff, okay.
So that, you know, when you exit out of that JV
that those expectations or you've met
the expectations of the parties going into it at the outset.
And I mean, I've just touched on a few points for each of these
that you should be considering, and there's many more.
And that's why I tell people, you know, my comes to setting up a joint venture
with another party.
It's really an area where you need to sit down with a qualified individual,
someone like Anderson, where you can work with one of our attorneys
that do this stuff and they can walk you through the various scenarios
and the provisions that you need to have in there
to make sure that your interests are being protected.
Because if you like this video, make sure you hit the like button.
And if you want to learn more, we've got great links in our show
notes to bring you other services, services that Anderson have offer.
If you want to see me live the teaching my tax and asset protection event,
be sure to check out that link as well where you can register for that course.
I teach them every every 2 to 3 weeks or so.
It's on a Saturday.
Myself, my partner, Toby Mathis.
We go through different
tax and asset protection strategies for real estate investors.
You learn a phenomenal amount of content in a very short period of time.
So people have often described
it as trying to drink from a fire hose while you be the judge and sign up for it.
Hope to see you there.