A No Paperwork JV Deal is Turning Sour...Uh Oh!

[UTCVenturesLtd]

A renovator investor and a "family" related investor look at doing a new house flip. They sign the joint paperwork together obtaining the lot and then decide maybe it is best to have 2 jv investors and everyone gets 25% of the profits taking financial stress off the project. As the project is delayed waiting for the cement, investor 4 backs out and the renovator/builder takes his position so he now has 50%. He has a lot in the community and the other two investors also have a lot to build on with a two year building commitment. The idea is that they build, flip and reinvest the profits into their own properties. All done with a handshake...no written joint venture agreement. Deal is that builder does the house for $100k and the house is completed in the fall of 2008 and listed for spring of the following year.
Now here is what happens...

The house is in need of an additional $20k... Everyone chips in. (Now in fall of 2009, builder says that he told everyone it might go as high as $120k in the beginning... although investors don`t have anything on paper and their memories seem a little foggy.)
Next, the house did not get the small loose ends finished, nor was it listed as it should have been as per original agreement to sell in the spring so that all could proceed with their own projects. There was a small for sale sign in the window that was taken down as the builder thought we should hold this til the market improved. All three lots were suppose to be built on in 2009 although the community relaxed the stipulation as they saw the flip built and then the "family" related investor`s house was on it`s way for 2009. Incidently, that project was now quoted at being another almost 20% above the original quote...hmmm... plus an additional amount for upgrades if desired. This builder sure has a problem doing estimations. Family investor fired him from the job and will finish it himself.

Then the builder is complaining about his "friend" investor not helping with building the house? Family investor thought this was a cash deal and builder took it to the finish with his helpers??? Now what gives?

Lately, this builder says that he has paid an additional $13,000 to cover costs. Also said that he was taking out some wages that he did not collect from last fall??? The two investors do not have funds to add and probably will not at this point anyways. "Family" related investor says, let`s all 3 sit down with the original budget and bring an accountant`s statement, give us each a copy and show us why this project is sooooo overbudget and let`s get loans to get this to where it should be. Builder refused to "disclose" the paperwork on the project. Now tells Family related investor for all to just keep your money, that he will just take it out as shares in the project since he owns more than 50%... Isn`t that fair he states? Okay, so now we have a control freak trying to run the show and dictate the profits to the investors. This looks like a job for a good lawyer upon closing to put the house in order!

Seems to me, any overruns the 3rd time should be eaten by the builder since his estimate is now off the richter scale and at the very least, hold the amount owing til the property is sold and then deducted off the total and the rest divided 50 25 25.

Currently, the property is going up to be listed shortly as it must get sold so that the builder and his friend can get their houses started for 2010. The deadline is past due already.

Upon sale, it seems that the selling lawyer will have to get the accountant`s statement, examine it very carefully and probably will have to draw up the joint venture agreements so that they are in place and the "friend" investor will have some paperwork to justify him getting his 25%. My guess is that the funds might end up sitting in the lawyer`s trust account for some time if the builder refuses to disclose the lawyer.

Any ideas as to what else the Friend and Family related investor could do in the meantime? Sign a jv between themselves perhaps since the Family related investor`s name is already on the property paperwork? Sure appreciate the thoughts about this venture!

 

[UTCVenturesLtd]

I sat with another renovator last night who speculates that this builder is doing three things:

1. He never put in his 50%, but is putting it in as labor.

2. He is trying to claim the property is his principle residence by delaying the sale to keep all of his profits.

3. Since he is putting in time but no cash, so he is running up the bill trying to charge his two investors much more since he is making no actual wage while spending a lot of time and expense on the project. The carrying costs are now biting.

He cannot produce any accountant`s statement since it would show he did not follow through and be above board on the project and that the additional overruns are bogus!

 

[Thomas Beyer]

I have been in a similar situation before with a builder. I was the JV partner with money. Initially 60K and 6 months maximum .. then another 40 .. then another 40K .. then another 60K .. we finally were able to re-fi and reduce my cash down significantly .. and in the end sold (2 years later !!) for a small profit allowing me to get all my money back plus a tiny tiny profit ..

So, lesson learned: some people BS you because they can or because they don`t honestly know any better ! Others are notorious liers that don`t give a damn about you .. and then go about their own business as if nothing happened .. this seems to be the case here !

Depending on what contract, if any, you have the option is to
a) file a caveat on title (highly recommended !!!)
b) send more money if you think the deal makes sense, and get things in writing
c) sue him
d) do nothing

If nothing is written down there is a good chance that you will NOT win in a court case .. so find a solution that is amicable such as: i) pay me my money back when you sell and I will remove my caveat, or
ii) call CRA and tell them about possible non payment of GST (i.e. GST fraud, a theft from the crown !!) .. they will be upon him in a hurry, or
iii) file a caveat and wait

 

[windsorlancer]

QUOTE (ThomasBeyer @ Nov 8 2009, 06:05 PM) I have been in a similar situation before with a builder. I was the JV partner with money. Initially 60K and 6 months maximum .. then another 40 .. then another 40K .. then another 60K .. we finally were able to re-fi and reduce my cash down significantly .. and in the end sold (2 years later !!) for a small profit allowing me to get all my money back plus a tiny tiny profit ..

So, lesson learned: some people BS you because they can or because they don`t honestly know any better ! Others are notorious liers that don`t give a damn about you .. and then go about their own business as if nothing happened .. this seems to be the case here !

Depending on what contract, if any, you have the option is to
a) file a caveat on title (highly recommended !!!)
b) send more money if you think the deal makes sense, and get things in writing
c) sue him
d) do nothing

If nothing is written down there is a good chance that you will NOT win in a court case .. so find a solution that is amicable such as: i) pay me my money back when you sell and I will remove my caveat, or
ii) call CRA and tell them about possible non payment of GST (i.e. GST fraud, a theft from the crown !!) .. they will be upon him in a hurry, or
iii) file a caveat and wait


Thomas, love your posts. You add so much insight to the forum. As a newbie, can you please explain how putting a caveat on the title works. I realize that it is some sort legal notice to prevent the sale or provide caution to future buyers; but if the caveat has no merit or can`t really be supported by paperwork such as in this case, would it really serve its purpose?

 

[Thomas Beyer]

QUOTE (windsorlancer @ Nov 8 2009, 08:28 PM) Thomas, love your posts. You add so much insight to the forum. As a newbie, can you please explain how putting a caveat on the title works. I realize that it is some sort legal notice to prevent the sale or provide caution to future buyers; but if the caveat has no merit or can`t really be supported by paperwork such as in this case, would it really serve its purpose?
a caveat is a "notice" .. a "flag" to a lawyer or buyer that someone else has an interest in this property.

Usually a JV contract allows such a caveat .. our you can show some paperwork to a clerk at the property registry that yours is legit ..

usually a lawyer does it for you for a small fee ..

A document signed by TWO people (but not the builder/owner) saying that builder X agreed to ABC % profit share if we invested XYZ $s might suffice .. but I don`t know .. ask a lawyer ..

 

[UTCVenturesLtd]

QUOTE (ThomasBeyer @ Nov 8 2009, 09:11 PM) a caveat is a "notice" .. a "flag" to a lawyer or buyer that someone else has an interest in this property.

Usually a JV contract allows such a caveat .. our you can show some paperwork to a clerk at the property registry that yours is legit ..

usually a lawyer does it for you for a small fee ..

A document signed by TWO people (but not the builder/owner) saying that builder X agreed to ABC % profit share if we invested XYZ $s might suffice .. but I don`t know .. ask a lawyer ..


"A renovator investor and a "family" related investor look at doing a new house flip.
They sign the joint paperwork together obtaining the lot..."

In this case the builder has signed jointly with the "family" investor so both names are already on that document giving them both access to the land to build. Since the builder owns 50%, would it be a good move for the "family related" investor who is sharing his 50% with the "friend of the builder" on half of the project to draw up their own jv agreement so it is worded in such a way that will make the builder have to come clean in order to exit the venture upon sale of the property.

Here are the two key problems:
1. The builder refuses to do up jv agreements for the project. The "friend of the builder" has nothing with his name on any paperwork, except for his returned cheques of his investment in the builder`s corporation.
2. The builder refuses to give both investors any accounting paperwork to the two investors to show how the money was spent. He is claiming a $13,000 shortfall, not backing up the claim. So he can claim whatever number he wants and pay his two investors their money back with tiny tiny profits as in the case that you have been through.

Part of the solution is:
If a jv agreement can be made between the "family" and "friend" investor, then the "friend" now has his name on a document showing that he owns 25% of the "family" related investor`s half.

The builder and "family related investor are already joint titled on the land paperwork. I believe a lawyer would look at that as being 50 50 unless otherwise shown on a document that it is not so. So in the end, the money from the sale of the house will be split 50 50 between the builder and the "family" related investor and with a jv agreement with the 3rd investor on his half, then the split is 25 25 with the "friend" investor.

The real snag is the actual "cost base" which determines how much profits there really is in the end. The builder is left to say whatever the costs really are and his claim to how much is left owing his corporation and the two investors to say they have not been given any paperwork. Maybe the builder is out to return the original investments with a few thousand dollars profit and then keep the rest in bogus bills to the project??? Maybe this would be a good time for CRA to do an audit on his corporation if things are not kosher by then??? I could see two complaints being filed easily.