5 Items to Clarify Before Joint Venturing

Joint venturing is a great way to invest in real estate. In our situation, a private lender lends all the funds to purchase the property and all the renovation costs. Knowing the investors criteria, it is our responsibility to identify and contract real estate investments opportunities, deal with the contractors and exit the project. Once a property is identified and acquired, it is time for the renovation. This is where the joint venture can become a bit more complex.

The relationship in a joint venture is clear cut until it reaches renovation. This is where a project can go from being a 1-2 month renovation to a 3-4 month renovation. Keep in mind that the majority of the joint ventures you do as a veteran investor will be with newbie investors or investors who have never done real estate investing. However, they always tend to have opinions on how to run a project or what should go into a renovation. Once in a while you may joint venture with a seasoned real estate investor who no longer wants to be involved in the day to day operation but they usually will be. To avoid these issues here are 5 tips to keep the joint venture running smoothly.

1. Agree on who is in charge of the renovation. Before closing on the property there is already a scope of work. As long as you stick to the scope of work the JV partner lending the funds should not be arguing with you over the tile or granite selection. I am not saying to avoid his/her input but if it is only a personal opinion, stick with the plan. Remind him/her why you are on the team and show sold listings in the area that support your selections. Your knowledge is just as valuable as the funds he is providing.
2. Agree on when and how contractors and materials get paid. We all get busy or tied up at work but the contractors still need to get paid and materials need to arrive on site to keep moving forward. Usually, the contractors know coming in that they will be paid on completed jobs at the end of the week. A rule I will always follow is, “NEVER, pay a contractor anything up front.” A reputable contractor can float the job until payday and not work off each pay check. Materials should be ordered and paid for immediately. Home Depot and Lowe’s both have great ways to order, pay and have the contractor pick up. If you are ordering items online, do not forget delivery time affects the timeline. I usually handle the logistics of materials, setting up the contractors and submit the invoices for both. Once approved, the payment should be cut on the same day. Any delay in payment equals delays on the project.
3. Agree on how any major change to a project will be handled. If you have invested in enough real estate you know there is almost always a change. How that change is handled can affect the budget, timeline, and/or the marketability. For example, in the last joint venture we agreed on keeping the kitchen cabinets but ended up having to replace them. There was an issue behind the majority of them that caused them to be removed in order to deal with the issue. During the removal they were damaged and would not look the same if they were reinstalled. There was a disagreement on reinstalling the original or buying new cabinets. I wanted to replace them. We finally decided on replacing after a week of lost time. The house came out amazing and sold 1 day on market. However, this could have happened sooner had we not lost a week deciding on what to do with the cabinets. I would have made the decision and kept moving forward.
4. Agree on who decides the list price. I know that a list price/ARV (after repair value) was agreed to before purchasing the property but markets change. Lately, we have seen it increase. If the market justifies an increased list price, increase it. However, do not increase just because you want to test the market. Look at the neighborhood’s history and see what happened to those that “tested” the market for you.
5. Agree on how to decide which offer to accept. Sometimes the highest offer is not the best. I would rather take an all cash offer, zero contingencies, and fast closing over a financing offer for a few thousand more. Worst case scenario, you keep the cash buyer’s earnest money if they do not perform. The investor may not agree so this is important to figure out.

Having these 5 items handled from the beginning should result in a very profitable and much smoother joint venture.  Joint venturing as with everything else in real estate should produce a win-win situation and coming to an agreement on these items will assist in accomplishing this.