Whether it’s selling yourself as part of the deal or failing to report all the details to your mortgage broker, mistakes in the joint venture game can be costly – for the present and the future. If you haven’t had the chance to read the first three parts of this series, I encourage you to check them out after you’ve been through the final set of landmines. Do your due diligence on both the properties you’re looking to acquire and the partners you intend to work with. It will make your working relationship smoother and will ensure you optimize the work to maximize your profit.
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.
Click here for Part Three of the 20 Landmines series.
Landmine #16—The weak deal: Your JV agreement is not enforceable
Errors or omissions on your JV agreement can leave you vulnerable and at risk of failure.
This is an area where excuses never fly. You can fix an agreement after a deal closes, but why would you ever put yourself, your partner and your investments in that position? Seek legal counsel early and make sure your JV agreement is thoroughly vetted by your lawyer and an independent lawyer paid for by your money partner.
Landmine #17—Sacrificing legal diligence: You don’t insist your JV partner get independent legal advice
Smart real estate investors don’t like to waste money. But they don’t cut corners that will cost them later.
Refuse to deal with a potential money partner who will not get independent legal advice on your JV agreement. You are the real estate expert, but your partners should want to understand how the deal works to protect their interests. They should be reading all the information you forward, and they should understand what they are signing.
If a partner simply refuses to get independent legal counsel, have them sign a document that states that they were advised to do this and opted out.
Landmine #18—Keeping secrets: You don’t provide full disclosure to your lender and lawyer
This landmine is way too common. In addition to giving lenders and lawyers the wrong information, some real estate investors are prone to leaving things out because they wrongly believe that’s the way to get a deal done faster.
This is not the way you want to conduct a professional real estate investment business—especially when you are using other people’s money.
Information changes as real estate deals progress. That can be frustrating, but it’s never an excuse for not making sure lenders and lawyers know exactly what you’re dealing with. The documents you use to get lender pre-approval and then qualify for a mortgage with must be kept up to date. Anything less could constitute mortgage fraud.
Err on the side of caution. Make sure your lender and lawyer know about changes, including the addition of new names to a mortgage application. These changes could alter the way you structure a deal (especially if a partner has trouble qualifying for a mortgage), and that may not be a decision a lender allows without input.
Always disclose changes as early as possible, since last-minute changes are likely to boost your legal fees and will most definitely annoy your lawyer.
Where a partner’s participation is questionable, use “nominee” language to close the deal and then add the partner later.
Landmine #19—Poor communications: You don’t provide quality communication to your JV partner
One of the main reasons JV deals encounter problems is that the real estate expert doesn’t provide the communication the money partner wants. It’s great to work with money partners who don’t want a hands-on role in the deal; these people are attracted to joint ventures by the real estate expert’s knowledge and the deals he or she proposes.
But you should expect your partners to ask questions—and they should expect answers. Remember, this is a relationship and that demands a commitment to two-way communication. There’s a very good chance a new partner will ask a lot of questions precisely because they don’t know the answers. They’re seeking information, not trouble.
Real estate experts who want JV partners for their deals will always be cultivating new leads. But they also know that it is easier to work with existing partners and that these people are your best leads to new partners.
Make it your business to address issues up front. Send your partners regular updates on the investment and on the economic fundamentals of the places you’re investing in. Why risk an opportunity to let them know how well you know the business of real estate investment? Use regular communications as a way to remind them of why you are good at what you do.
Landmine #20—You sell yourself short
Real estate experts make this mistake when they fail to address all that they bring to an investment deal. This is how you end up owning less than your “fair share” of a property, or making other concessions you will regret.
The following graphic comes from Strategic Real Estate Solutions (www.strategicrealestatesolutions.ca). It is a powerful reminder of why real estate experts are worth at least 50 per cent of a deal, and experienced and novice real estate investors sometimes show it to prospective co-venturers who question the real estate expert’s value as part of a negotiating strategy.
If you are not sure what you bring to a real estate investment deal or are unclear about all of the relationships you manage, deconstruct a deal. Write down every person you dealt with, from your real estate agent to your lawyer, home inspector and insurance agent and all of the assistants in between. Now calculate how often you phoned, e-mailed or met with them. Do you think this makes you worth 50 per cent of the deal?