Clint Coons shares some critical information that you NEED to know if you’re considering, or are currently in, a joint venture.
Make sure to protect yourself and your assets by taking special precautions before entering into a joint venture.
Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Clint: Hi, everyone, it’s Clint Coons of Anderson Business Advisors and host of the REI Classroom. Today, I’m going to be talking about joint ventures and what not to do.
Mike: This REI Classroom real estate lesson is sponsored by uglyopportunities.com.
Clint: I work with a lot of real estate investors now who are interested in putting together a joint venture, either they’re the developer or they’re the gap funder. Now, one thing I keep finding over and over again is that these individuals come to me with this joint venture agreement that they either pulled down off the Internet, or somebody gave to them as the deal sponsor, and said, “Hey, invest some money into this deal, and here’s going to be your rate of return.”
I could tell you so many times that when I review these documents, it’s not a document I’d ever recommend you sign. And the reason is that most people don’t understand what a joint venture is. That is if I am going to get involved with someone to put together a real estate deal, be it flip a house or a greater project, and we’re going to put together a written joint venture agreement, essentially what we’re becoming is general partners. That is if one of us does something wrong, the other person can be 100% liable for all the claims of the other person’s creditor.
This could be a huge problem because you think you’re just loaning money to a venture with an expected rate of return, but the problem often is that, by law, you’ve actually become a partner. And the reason is that most people who enter into a joint venture agreement, let’s say as a gap funder, are looking for more than just interest, they’re actually looking for a piece when the property sells.
Well, that instance, you’ve become actually an investor, you’re invested in the partnership itself, in the endeavor. So your return is based upon the outcome that looks like a general partnership to the courts. So the problem you run into when you enter into these agreements is that, again, if something happens, you could be left holding the bag.
So what should you do if you want to look to get into a joint venture with another party? First and foremost, never do it in your own name. Always enter into it either in a corporation or a limited liability company so you limit your personal liability exposure. Number two, the entity you use to enter into that joint venture agreement make sure that it doesn’t have a lot of assets because if something does go wrong, you don’t want to be left holding the bag.
Number three, if you absolutely want to enter into a joint venture, and there’s plenty of opportunity to be made here from a financial standpoint, set up a limited liability company. Don’t try to operate with a standard joint venture agreement between the parties, because you leave too much room for error when you use a written joint venture agreement. An LLC clearly defines the outcome of what’s to happen when the asset is sold, it provides asset protection to you, and so from this standpoint, as an investor, you want a shield around that asset.
More importantly, if you were funding a joint venture, many times you’re coming in as a second. And maybe the first position lender won’t allow there to be a second on the property so you’re unsecured. Well, if you set up an LLC between you and the developer, or if you’re the developer and the gap funder, then both parties have an ownership interest in the underlying asset. So this idea that “I need to have a second” is no longer a concern. So you have security through the LLC.
The fact of the matter is joint ventures can be complicated and they can be traps for the unwary. Make sure you’re setting it up right, seek advice ahead of time before you sign a document, and then go out there and make some money. My name is Clinton Coons with Anderson Business Advisors and I hope to catch you on the next go-around.
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