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50/50 JVM Worst Case Scenario

JBagorio

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Being so new in the concept and trying to implement and learn more on how the 50/50 JVA works, what happen in the situation when the investment fails in the worst case scenario? For instance a disaster that the bank has taken over etc… In this case would the money partner losses more given that they are the only one that put in money? … Would this be a question that deter the potential $$$$$ partners to jump into the game? Why would they partner with you if they carry more risk? How do most of you address this before hand and how you would handle it if it ever happens?
 
QUOTE (JNB @ Sep 24 2009, 07:27 PM) Being so new in the concept and trying to implement and learn more on how the 50/50 JVM works, what happen in the situation when the investment fails in the worst case scenario? For instance a disaster that the bank has taken over etc… In this case would the money partner losses more given that they are the only one that put in money? … Would this be a question that deter the potential $$$$$ partners to jump into the game? Why would they partner with you if they carry more risk? How do most of you address this before hand and how you would handle it if it ever happens?


The idea with a JVA is that both parties share in the upside AND the risk. If it is 50/50 spilt on profit, it is 50/50 on loss.
 
QUOTE (SteffanWatson @ Sep 24 2009, 06:43 PM) The idea with a JVA is that both parties share in the upside AND the risk. If it is 50/50 spilt on profit, it is 50/50 on loss.


Sorry for my ignorance on the topic. So please bare with me…I never did this before. I have always been buying on my own in the past 4 years and trying to learn the JV process! Given that the liabilities are based on the agreed percentage split how could you say, or what does the 50/50 on lost mean? Would this mean that I have to return 50% of the money partner’s initial investment when the given worst case scenario?
 
QUOTE (JNB @ Sep 25 2009, 11:21 AM) Sorry for my ignorance on the topic. So please bare with me…I never did this before. I have always been buying on my own in the past 4 years and trying to learn the JV process! Given that the liabilities are based on the agreed percentage split how could you say, or what does the 50/50 on lost mean? Would this mean that I have to return 50% of the money partner`s initial investment when the given worst case scenario?


This would depend on what you have outlined in your actual JV agreement. The key is to plan ahead before you get into your JV AND have it in writing!
 
QUOTE (SteffanWatson @ Sep 24 2009, 06:43 PM) The idea with a JVA is that both parties share in the upside AND the risk. If it is 50/50 split on profit, it is 50/50 on loss.
not necessarily .. and NOT USUALLY !!

You do what is agreed on.

It is common that the JV money partner takes all the losses up to the mortgage value. So, if property drops 10% and he wants out, but the value still exceeds the mortgage he would lose and the RE expert makes no money. This is "the normal JV"

The RE expert usually carries the risk of not making any money, the risk of tarnishing his name/future RE career and he is usually responsible for any mortgage shortfall as there is potential loss. Thus, usually, the worst case for JV partner is full loss of capital, whereas the expert could lose his marriage and possibly even file for personal bankruptcy if he is called on a large mortgage.

Add`l thoughts here on 50/50 – is this fair ?
http://myreinspace.com/public_forums/Real_Estate_Discussion/62-2015-5050__is_this_fair_.html
 
QUOTE (thomasbeyer2000 @ Sep 25 2009, 09:53 AM) It is common that the JV money partner takes all the losses up to the mortgage value. So, if property drops 10% and he wants out, but the value still exceeds the mortgage he would lose and the RE expert makes no money. This is "the normal JV"....

First of all thanks Thomas for your insightful reply! This is exactly the biggest question I get from people I talk to. They emphasise the fact that in the worst case they are loosing more than the expert given that the expert is only providing the work or the sweat equity. They the $$ partners don’t really see the value of the amount of work we put in to make the investment work.
 
QUOTE (JNB @ Sep 25 2009, 12:23 PM) First of all thanks Thomas for your insightful reply! This is exactly the biggest question I get from people I talk to. They emphasise the fact that in the worst case they are loosing more than the expert given that the expert is only providing the work or the sweat equity. They the $$ partners don’t really see the value of the amount of work we put in to make the investment work.person A: invest ONLY his money .. and 1/2 h of his time for due diligence (perhaps more ..)

Person B: invests EFFORT, TIME, and EXPERTISE required and the execution of this LONG LIST of tasks here that someone has to do .. and get compensated for:

Investigate location/area of North America to invest in

Investigate location once city or metroplex is selected

(we like "B" areas where value can be created fast... as opposed to "A" locations that are often too pricey or "C" locations where rent increases are tough to realize due to bad tenant profiles and management problems).

Screen/filter potential investment properties using realistic rents and/or expenses.

Write offer on selected property (this may involve multiple offers and multiple iterations since typically not all offers will be accepted).

Negotiate terms and conditions of offer.

Finalize offer.

Set up the legal structure/corporation, and co-investor structure usually via a joint venture or limited partnership agreement.

Select property manager, onsite manager and other professionals (such as tax advisors, inspectors, appraisers, bankers, engineers, roof experts, boiler mechanics) that may be required to inspect the property initially and operate the property on a day-today basis.

Will market, rent, fix up, repair, paint, landscape and/ or enhance said property to standards that expert sees fit to achieve appropriate rent and/or resale value.

Will keep a record of such fixtures, repair material and/or landscaping material expenditures and/or of all other expenses, such as property management fees, subcontractors , onsite managers, taxes, insurance, realtor, legal, advertising and/or related expenses to market, upgrade, rent and later sell said property.

Set up WCB (Worker`s Compensation Board), contractor, Rona, Home Depot or supplier accounts.

Negotiate and set up preferred vendor, supplier and contractor list.

Negotiate with financial institution to obtain, initially and/or later, re-finance using 1st, 2nd and/or CMHC or FannieMae insured mortgages.

Manage all relationships with banks, realtors and/or 3rd parties.

Set up reporting and e-payment mechanism to investor.

Act as the primary interface to property manager, or may manage properties inhouse.

Adjust rents frequently with market realities.

Invest frequently (but not always) personally into the venture.

Sign all necessary legal documents.

File annual or quarterly statements/documents that may be required by various jurisdictions.

Sign required personal guarantees for required mortgage(s).

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is this worth 50% .. yes .. more or less .. maybe 40% .. maybe 60% .. depends on the deal .. but certainly about 50% !!

I have done deals with 1/3 for me/us (I have a team now .. and they all want a share ..) and 2/3 for investors and ALL of them I gave away way too much profit (but of course now cannot change it in hindsight ..)

So, it depends on YOUR perception of the expert`s value / time ! It has to be win/win !

not: win / WIN
 
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