Marriage and real estate partnerships aren’t that different. There’s a courting period, there are things that each person has to bring to the table to make it work, and there are as many problems as there are possibilities for success.
In real estate investing, just as in a marriage, there are many ways that a partnership can fail. If you rush into a relationship without dating or doing your due diligence you may find that you’re not as compatible as you once thought. You may find that you and your partner end up having different objectives for the relationship. One of you may oversell what you’re bringing to the relationship. Or, maybe things change, and one of you just decides it’s time to move on.
There’s plenty of ways a partnership and a marriage can go wrong. It can get messy and it definitely can be stressful and emotional. And it can happen when you least expect it. And it can feel like there was no warning.
We’re no strangers to turmoil in our real estate partnerships. While the majority of deals we’ve done have been with partners, and they’ve gone very well, there are always new lessons to be learned.
So, if there’s potential for so much turmoil with partners why bother? Why not do all of your deals solo?
Well, just like the right partner in your life can make you happier, more fulfilled and even more successful, the right partner in your real estate deals can allow you to do bigger and better deals with reduced risk.
In fact, the right partner can bring any one or more of these positive things to a joint venture:
- Skills and Expertise:For example, if we decided to get into flipping properties we’d be interested in partnering with someone that has experiencing working in the trades or working as a contractor. Someone that has never invested in real estate before may wish to work with someone with experience on their first deal.
- Money:Most of our deals involve us bringing our expertise and experience to the deal and doing all the work in exchange for a partner putting up most of the initial capital required.
- Financing Options:On a recent deal we were unable to secure the kind of financing we wanted so we brought in a partner who could. Sometimes the best way to look good to a bank is to bring in people that fit into their tiny little box of lending requirements.
- Risk reduction:Having additional parties involved in a deal allow everyone to carry a lesser share of the risk on a deal. It reduces each persons exposure and downside should something go wrong.
- Network:In the past we partnered with someone that had a gigantic network of high net worth individuals. This guy knows someone in just about any field and could get them on the phone pretty quickly.
Julie’s parents aren’t willing to take on partners, and they acknowledge that this has slowed down their wealth creation. They made the choice consciously but they’ve missed out on great deals because they weren’t willing to work with a partner on the deal.
On the other hand, we’ve expanded our wealth rapidly thanks to great partnerships but we’ve also experienced a lot more stress, surprises and drama than we would have without partners.
People like to make partnerships more complicated than they need to be. If you keep things simple it will be easier for everyone. There are also a few other things you can do to minimize the potential pitfalls of partnerships:
1. Before you get involved communicate a lot… and just when you think you’ve communicated too much … communicate some more! And a big part of communicating is listening. Listen carefully to your prospective partner. Ask questions. Understand their objectives and their needs. Make sure you’re going to be able to meet their needs. Focus on what you’re bringing to the table. Make sure it’s at least equal to what they are bringing to the table … preferably greater than what they are bringing to the table so they feel confident that they are getting a great deal.
2. Always be accountable.Recently we almost lost two really great rental property deals because our partner had less money to contribute than we had expected. We felt we had two choices … be bitter and lose the deals or be productive and save them. It literally took 100+ hours and it pretty much consumed our summer vacation but we saved the deals. And we are fixing the leaks in our process and learning from what went wrong.
We aren’t victims of anyone’s actions. And when you don’t accept the victim role you can keep control of the situation. And that is what we did. We accepted the fact that we had not done a good job of communicating, realized that we contributed to the disaster, and took the yucky tasting medicine.
If you are always accountable for what goes wrong in a partnership, you will be able to handle just about any of the pitfalls.
3. Have a clear and fair joint venture agreement created by a lawyer: And of course, follow up that accountability with a solid and fair joint venture agreement that lays everything out clearly for all parties involved. There’s nothing wrong with covering your butt!
Published on September 18, 2009