When you start buying properties with the assistance of Joint Venture partners, you end up putting a lot of trust in the hands of someone you might not know very well. Particularly if they’re the money partner, they can get cold feet at the last minute and leave you standing at the altar with no way to close on the deal.
Neil sent me an interesting email on this exact topic.
Hope all is well and you had a nice long weekend.
I have an interesting situation/dilemma with a few potential JV partners that I wanted to share and ask you about:
Before spending time and putting effort into looking for a new property for you and your JV partner, how do you make sure they will not walk away last minute (either before closing or before releasing the conditions) and you just wasted a lot of energy and time finding a good property?
I am considering having them sign some document, perhaps an intention to purchase with me or something similar to what RE agents use(?) not sure though especially since some of them are kind of friends. Do you have your partners sign something before you start working on a new purchase? does it help?
So here’s what I wrote back:
I do have several levels of paper-based commitment, all out of the REIN JV Secrets package (there’s also a new e-book that’s like JV Secrets-Lite and is only $37), talking to other investors and my own experience. Not every partner has to jump through every step, but everyone gets at least a written JV agreement and usually a letter of intent (which is what you’re looking for). It seems like a lot of steps, and it will reduce the number of people who make it through to the other side but you’ll reduce your risk substantially and end up with better JV partners. This is what works for me, and if nothing else, the first three steps will take care of 90% of the problem people you’re likely to find.
The full funnel for Joint Venture partners that I use on people who are less-well known to me has 9 or 10 steps and goes like this.
- Interest Questionnaire – who you are, where you work, what you have, etc. Weeding out the tire-kickers.
- Letter of Intent – Ballpark numbers and general agreement. E.g. JV Partner A brings $100k and JV Partner B does all the management. Acquire a 4 bedroom townhouse on a long term buy and hold, split 50/50.
- Cash Deposit – $1,000-5,000, best if it accompanies the Letter of Intent.
- Draft Joint Venture Agreement – in tandem with the search for a property, your lawyer will be able to take the letter of intent and draw up a JV agreement. Here’s where your JV has to take the draft and get their independent legal council.
- Property Acquisition Begins. Find it, write an offer and once your offer is accepted move to #6. Now’s also a good time to make sure you have the rest of the cash (before you remove conditions).
- Full Joint Venture Agreement Prepared – You’ve got almost all the particulars of the property, so you can finalize the JV agreement document.
- Property Closes – Real money moves, title gets transferred and the real work begins.
- JV Agreement Signed – Make sure everything is locked and loaded.
- Caveat Registered – If you’re registering the JV agreement via caveat, you’ll want to do this. As a rule, I like to wait at least 6 months so as not to spook the bank if they happen to pull title. If it’s not an issue for the JV partner I don’t bother registering a caveat.
- And don’t forget to plan for the exit. You’ll dispose of the property and have to send out a statement and a pair of cheques. Make sure to refer back to the original JV agreement to make sure you’re doing what you said you’d do. I know of a couple people who changed policies half way through and nailed their JV with fees they’d never agreed too.
It looks like a lot of steps, but it’s worthwhile. Yes, you’ll lose some people, but they’re people who will cost you more in the long run. Someone who promises $60,000 and then backs out after you’ve removed conditions can potentially cost you more than $300,000. Finding the right person with $60,000 can make you both another $60,000.
N.B. This isn’t intended to be legal or professional advice. It’s just what I do.
Photo by hans.gerwitz