In order to make sure that you avoid problems later on, always make sure that you have clearly defined roles in a business partnership, especially if you are planning on purchasing real estate together. I found this post from Bigger Pockets that talks about what a written business agreement should include. From the article:
“Make sure you consider the following things in putting this real estate partnership document together:
- Who is putting up funds and how much are they giving?
- What is the percentage split of funds?
- Who will be actively managing the property?
- What will each partner’s role be in the day to day care of the property? (consider little things like who wants to be woken up at 3 AM if the is a problem with the property)
- Who will be on title?
- Who will apply for the loan?
- How will expenses be covered?
- How will any monthly profits be split?
- If sold, how will the proceeds be split?
Break things down even further and have a clear understanding of all roles of all parties.” (Bigger Pockets)
My take on it:
I have seen way to many of those daytime courtroom shows and they always tell people to always get a deal in writing. Any business agreement that I get into, no matter how small, has a contract associated with it. Don’t get screwed by working with a partner that decides they want a bigger slice of the pie now that the deal is done. I have seen it happen, and it normally ends in a courtroom with the profits from the deal going to lawyers. Write it down.
Read the entire article from Bigger Pockets.
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Adam – I’m glad you liked the post and appreciate your take on the matter. See you around the site and hopefull, the forums!
One other reason for having a clear agreement -> An event that has nothing to do with the property but which forces a change of control. Let me explain further.
Things happen. You could become ill or otherwise unable to perform your role. You might even be in a state where you can not express yourself to clarify as to what was assumed when the partnership was created. Or you could be going through a divorce where the other side does not believe what you are saying. Or you might have died. In all of the above you want your wishes to be clear even if you can not advocate your position directly.
Flip it around. It is your partner that has had some misfortune so you are facing a change involving people you do not know. You may be about to get a new partner. You likely do not want then changing the decisions already set in motion. Your partner’s ex-spouse or their heirs might not have the same interest in the property as you do.
A settlement to a judgment where your partner’s interest is now owned by a stranger who wants to liquidate at the wrong time would be a further example. You want the management and business assumptions to be clear. You would also want the first right of refusal if they go to sell their stake at a fire sale price.
It is much easier to agree who to operate the partnership and how splits might occur in the future when you are entering the relationship. At that point the partners want the venture to work so they will be open to clarifying roles and responsibilities.
Get it all on paper. Assume that you will not be there to explain to the judge what was intended. Make the document stand on its own so an independent party could pick it up and read the details before reaching the conclusion you intended.
Some folks will want to avoid being partners (with the full legal implications that a partnership implies). As an alternative they will fund a deal as a private lender. The roles and responsibilities are clear along with the legal remedies when you are a lender or a borrower. The other ‘partner’ in this case is much more in control so none of the normal hassles related to discussing paint color, market timing, improvements and pricing. How the lender is compensated can be agreed between he parties and it does not have to be restricted to simple interest payments.
John Corey
RE investor
johncorey.wordpress.com