Picking up the wrong type of milk from the grocery store might not be the end of the world, but if you pick the wrong deal, there’s a chance that you’ll be in a tough situation. The same can be said for skipping out on your homework – it can be detrimental to your bank account and your portfolio. You’re best option is always to cover all the bases and make your decisions based on facts and not your gut feeling. Here’s your chance to find out five things you need to avoid to ensure success in your joint venture dealings.
Click here to purchase a copy of “Real Estate Joint Ventures”
Click here for Part One of the 20 Landmines series.
Click here for Part Two of the 20 Landmines series.
Landmine #11—Picking the wrong deal: You invest in the wrong property just to get a partner onboard
Nothing will derail your business plans faster than investing in the wrong property. Believe it or not, this can be easier to do when you have a money partner. Sometimes, the issue is the sheer desirability of the partner himself. Don’t let your desire to work with a particular individual cloud your due diligence. There is no question that some partners can make a huge difference to an investor. These folks may have the money and contacts to help you bring deal after deal into your portfolio. Protect that relationship—but not at the expense of the wrong deal!
The other reason people make this mistake is related to greed. The fact that you are working with someone else’s money should make you more diligent, not less. You should do more due diligence with JV deals, and always make sure that the deals you are offering to co-venturers are deals that you would be willing to invest your own money in even if the partner didn’t get involved.
Don’t let the emotional high of closing a deal cloud your judgment. Instead, focus on the deals that make sense. Remember always have a Plan B. If you are not prepared to swing a deal completely on your own, then it’s not a “good enough” deal for you to risk someone else’s money.
The “perfect partner” is only perfect when the deal makes fiscal sense. Be honest with your prospects about why you want to work with them (e.g., they have the money), but tell them you won’t work on a deal that’s not a win-win deal for both of you.
Practice the same due diligence when it comes to choosing the deal. Use this question as a measuring stick, “Would I put my mother’s life savings into this deal?” In the end, your reputation is your most valuable commodity; a couple bad deals and you could be done. This is not an area where you make mistakes. It’s where you under promise and over deliver.
Landmine #12—Not enough information: Your prospect doesn’t understand the deal
When a potential money partner turns down a deal, always ask them what you could have done to get them to say yes. Their responses will teach you the importance of making sure your deals are well understood. Sticking with the principle of attraction versus pursuit, the key principle is to “tell, not sell.”
Make sure that every one of your prospective partners gets a one-page executive summary of the deal you’re working on, or a deal you have recently completed. That summary for a completed deal covers the items in the following list.
Profit and loss summary (quarterly and annually)
Balance sheet summary:
Joint investor share of gain
Highlights of the past quarter:
Profit and loss, and the cash-flow position (positive or negative)
Plans such as a property rent increase
Summary of any deduction in the mortgage
Five specific items regarding the economic fundamentals of where the property is located
Key factors impacting the local real estate market
The goal of an executive summary is to provide financial detail without overwhelming your potential partner. This showcases your due diligence and your knowledge of the economic fundamentals.
Use the following formula to help present your research:
Landmine #13—The Pollyanna problem: You are overly optimistic and it scares prospective partners
You can make money with real estate investment—and you can lose money, too. Never forget that your partners need to understand both sides of that equation. As the real estate expert, it’s your job to find deals that will make you and your partner money. But never try to sell a deal, even a “great deal,” as perfect. Make honesty, and realism, your friend.
When REIN™ principals and our guest speakers teach novice investors about real estate investing, we like to talk about the need to look at what’s “behind the curtain.” Our goal is to remind all real estate investors that they should never take anything or anyone at face value. This has nothing to do with not trusting people. When choosing partners, we simply want you to ask the tough questions so that you can be sure you’ve got the best answers. Believe it or not, some JV prospects might not have thought about how their interest in a JV deal could be impacted by their spouse’s lack of interest in that same deal. Others might want into your deals so badly that they are willing to mislead you with regard to their current financial situation because they see you as a kind of financial savior.
This look at what’s “behind the curtain” goes both ways because your business partners will also be asking you tough questions. Learn to anticipate those questions and plan your answers accordingly. Again, under promise and over deliver.
Do this by being honest about what your partners need to know and then deliver the goods. When working with new investors, part of your role as the real estate expert involves education. You want to teach them how to “look behind the curtain” so that they can see that you know what you’re talking about.
Real estate experts who focus on being realistic will deliver more than they promised. One of the easiest ways to deal with this issue is to provide estimates instead of hard numbers (see Landmine #14!).
Landmine #14—Guaranteeing an outcome: You risk your reputation on assurances you can’t deliver
There is no such thing as a guaranteed joint-venture real estate investment. We repeat: there is no such thing as a guaranteed joint-venture real estate investment.
JV investors who ignore this landmine are doomed to failure. Human nature is such that if you quote a range of return, people remember the higher number. So if you say the return will be between 8 per cent and 12 per cent, your partner will remember the 12. If you talk cash flow of $50 to $300 a month (which may be reasonable depending on maintenance and repairs), your partner will hear $300. Worse, they will likely do the math and calculate an annual return of $3,600, perhaps even multiplying that over the course of an investment’s projected lifespan.
Never guarantee numbers. Talk in percentages and be realistic about what can impact those figures. If a potential JV partner wants a guarantee, arrange to take their money as a loan and use it to secure a property. This may mean they’ll make 10 per cent interest when they could have owned 50 per cent of the property. That is not your problem. They can’t have a guarantee and half the property.
A deal isn’t necessarily lost when a partner sets terms you can’t live with. This is a creative approach to a problem. Some investors find it easier to deal solely with loaned money versus co-ownership. If that’s what works for your system, that’s okay.
Landmine #15—Stiffed: A JV partner walks out as the deal is ready to close
This is a major frustration and it’s not a landmine you can necessarily avoid stepping on at least once in your JV career. Even with the four levels of commitment (a partner’s word, cash in your lawyer’s trust account, an Expression of Interest letter and a Letter of Intent), some deals fall off the rails just as you’re about to sign the legally-binding agreements that will close the deal.
Can you sue them? Maybe. But why would you want to revive a dead deal with a partner you can’t trust to meet his end of a bargain? It’s probably wiser to put that lesson in the bank and move on.
This is where your Plan B comes into play. Let’s say your real estate agent doesn’t actually look for a deal until he knows you’ve got your Letter of Intent along with a partner’s word and some cash in trust. And now that agent is frustrated because it looks like the deal can’t close, so he’s out time and money. At this point, you may also have talked to other members of your real estate dream team, giving a heads- up warning to everyone from your lawyer to your home inspector and property manager.
Your Plan B should enable you to make the deal regardless of what happens with a particular partner. If you have been cultivating new leads, you may even be able to qualify a different partner and sell them 50 per cent of the property soon after the deal closes. This frees up your cash for the next deal—and your next Plan B backup plan.
To keep your Plan A option as open as possible, I suggest the cash deposit you request from your money partner be set at $1,000, with another $5,000 due upon removal of conditions on the deal. If your partner backs out before the conditions are met, you can still walk away from the deal and you won’t have wasted a lot of your team’s time. When potential partners realize they could lose $6,000 if a deal doesn’t close with them onboard, they are more likely to stay in the deal.
Click here to purchase a copy of “Real Estate Joint Ventures”