JV Question

[SteffanWatson]

A potential Joint Venture investor asked the question, "What are you on the hook for if things don`t work out?"

After furthur discussion here were some questions.

1) If the properties expenses exceed the rents, who covers the shortfall?

2) If the property were to go into foreclosure (worst case scenario), what would be at stake for the RE expert who contributed time and expertise, but no money? The Money partner would lose their cash and the Expert loses...what?

This investor has had a bad experience with previous investments and has valid concerns.

Any suggestions as far as responding?

Thanks

 

[thejules]

Find another investor!

 

[Dejavu]

QUOTE (thejules @ Oct 18 2008, 09:46 PM) Find another investor!


Why not answer his questions?

 

[Thomas Beyer]

QUOTE (RobWatson @ Oct 18 2008, 05:39 PM) A potential Joint Venture investor asked the question, "What are you on the hook for if things don`t work out?"

After further discussion here were some questions.

1) If the properties expenses exceed the rents, who covers the shortfall?
This should be covered in the JV agreement. Usually you need a reserve fund (from the money partner) PLUS this clause
"If add`l funds are required, either party or a 3rd party will have the option to inject funds at 18% interest." You may also have a clause that allows the sale of property if funds required exceed XX,XXX $s."

QUOTE (RobWatson @ Oct 18 2008, 05:39 PM) 2) If the property were to go into foreclosure (worst case scenario), what would be at stake for the RE expert who contributed time and expertise, but no money? The Money partner would lose their cash and the Expert loses...what?
RE expert loses his reputation with new partners and banks. His RE career will be severly limited.

 

[Thomas Beyer]

QUOTE (thejules @ Oct 18 2008, 07:46 PM) Find another investor!
I think those are valid questions !

 

[GSI]

QUOTE (RobWatson @ Oct 18 2008, 05:39 PM) A potential Joint Venture investor asked the question, "What are you on the hook for if things don`t work out?"

After furthur discussion here were some questions.

1) If the properties expenses exceed the rents, who covers the shortfall?

2) If the property were to go into foreclosure (worst case scenario), what would be at stake for the RE expert who contributed time and expertise, but no money? The Money partner would lose their cash and the Expert loses...what?

This investor has had a bad experience with previous investments and has valid concerns.

Any suggestions as far as responding?

Thanks

Those are very valid JV questions. I would prefer a JV who learns and understands both the upside and downside of the investment. I find that the best JV partners I have understand both sides of the equation and are confident moving forward with that knowledge.

So, what are you on the hook for? In my case I am often `on the hook` for the mortgage and any losses of the investment are split 50/50. I have also covered the costs of condo levies (try a sudden $12K levy) for my partners. This loss will be shared against the profit at time of sale - but I covered it upfront.

I would suggest getting a policy in place for what you are prepared and capable of covering. It`s fun to be an `expert real estate investor`, but the true experts have a plan and cash in place to protect their partners.

Evaluate what you`re comfortable covering and go back and tell your JV partner honestly what it is. Hopefully he will see the value in what you offer and understand how you have mitigated risk.

Good luck and
Kind regards,

 

[SteffanWatson]

Thanks for the responses.

I think they are very valid questions and the more knowledge and information you have for your investors the more deals you will get.

Is it possible to lose title of the property to the money partner if the investor fails to meet their requirements as outlined in the JV agreement? Is this the worst case scenario?

 

[Thomas Beyer]

QUOTE (RobWatson @ Oct 20 2008, 06:45 PM) Is it possible to lose title of the property to the money partner if the investor fails to meet their requirements as outlined in the JV agreement? Is this the worst case scenario?
not usually .. only if
a) the investor has a 1st mortgage on the property .. and then forecloses on it .. or
b) investor has a 2nd mortgage behind the 1st on it .. forecloses on property and pays 1st mortgage payments or pays out 1st mortgage, or
c) you sign a transfer of land UPFRONT and the investor gets it and can execute on it when a certain scenario happens (as described in a JV agreement)

Either 3 scenarios are unusual for equity investors. They are more common for debt lenders.