Need advice on negotiating a fair deal in joint venture...

[Dustin Racine]

Hello,
I own a plumbing and general contracting company, so I have some business experience. However, I have never paired up on a joint venture and do not have experience in real estate investments. I have personal properties and a couple lots I have purchased in the past, but that's it,so my knowledge is limited.
A past client of mine whom we general contracted a legal basement suite for, wishes to partner up. Our goal is too buy, renovate, and flip (or hold and rent out) homes. I have a few concerns:

1. I am more inclined to hold and rent out for the time being, well having the property appraised and pulling out the equity to tread forward. Especially given the current housing market in Edmonton, I believe it is a good time to acquire and assume real estate thru distress sales and things of that nature but not a good time to flip. He on the other hand is more keen to flip, make some money and move on. He wants the final say, he's the realtor and investor and it would be his capital so I can see why, on the flip side, I have a steak in the homes too .

2. He will be supplying all the money, I do have the ability to access some funds, but it would involve pulling equity of a lot which I have already paid for. I am not willing to do this. Therefore, he invests all the money for the property and I would look after the general contracting duties. Well he would find the properties, crunch the numbers, deal with financing, monitor the budget, sell and market the property. On a side note, I would still need to put a personal guarantee on the mortgage I believe, so we split the percentages down the middle on that.

3. The initial deal he offered me was a 90/10 split which I declined as politely as I could. It actually insulted me. I believe my time, resources, and knowledge is worth far more than that. I responded with a proposal of 75/25. Here is how the deal would shake down:

other party / myself
Capital 50% / 0
Mortgage 10% / 10%
Asset Management 5% / 5%
Real Estate Expertise 10% / 0
Construction Expertise 0 / 10%
total 75% / 25%

I want to ensure that the deal is fair for both sides and that transparency and trust are always present. However, the initial deal he proposed has already given me serious doubts. Any and all feedback would be appreciated. How are these deals normally structured? Am I asking for too much/too little? How should the contract be written? What steps should I take to protect my best interests?

 

[Thomas Beyer]

Asset Management is worth more, say 15-25% PLUS asset acquisition knowledge/work. Assuming both parties qualify for mortgage 40/60 is more equitable in this situation.

Don't sell yourself short or partner with anybody. Maybe do one deal 40/60 and see how it goes, then re-evaluate.

Goals have to be aligned. So if he wants to flip ( as you stated not great right now in AB , better in BC) and you buy and hold then likely not a good partnership.

Also ask: Why does he need you ? Why does he not do his own deals ?

 

[TrevorW]

A note regarding the appraisal. Make sure you commission your own appraisal first and do not rely on the bank. Trust me. If the appraiser is commissioned by the bank they feel compelled to appraise the property more conservatively (in the favour of the bank). When purchasing a property, how many times does the appraisal come back close to or at the asking price? Often, in my experience.

I like to have an appraisal done by an appraiser that I know and trust. I then provide this appraisal to the bank. They will need to commission their own appraisal; however, often I am able to convince them to use my appraiser or at least provide the appraisal to the banks appraiser.

Getting an accurate appraisal is critical to accessing equity after a renovation. A bad appraisal can be a real issue, particularly in small towns where there are only a few appraisers! It is well worth your time to make sure you stack the odds in your favour.

Trevor

 

[TrevorW]

Sorry I typed this on my phone and it jumped onto the wrong thread! Hopefully useful advice regardless

 

[Matt Crowley]

^^ The flip definitely makes more sense in places other than AB. Edmonton is a falling market. You will need to buy a real dog with a huge margin to make this worthwhile.

A note on the whole GC-flip... make sure that you agree on a wage / crew cost before the profit split. Just like a good Realtor who markets effectively or an asset manager who picks the right asset, a GC can add tremendous value through their trade knowledge. There is no profit until cost of labour and materials is repaid. Maybe agree to no margin on materials. Taking weeks off to do a large scale reno is literally food off the table for you whereas a Realtor putting up another sign on another property is just business as usual waiting for a commission. (That is how I would present it in your shoes)

In Edmonton, I see the buying opportunity from investors nervous about the market who want to exit. There are houses on the market unlike what you would have seen even a year ago: professionally and legally developed at reasonable rents. It doesn't make sense to me today to be developing. Investors in Edmonton are nervous about falling rents, rising vacancy, and low oil prices (and rightly so) and are reacting by lowering their portfolio leverage. They are selling some great properties out there.

Consider drafting a mock purchase and flip pro forma based on a real property. Take a look at how much profit is available after paying for your crew labour (and yourself). Is there sufficient margin to risk not being paid for 5 months? 8 months? 2 years? You can take a look at the profit split if the project proceeds optimally, expected, or worst case. I think that putting some actual gross numbers on the deal is very important. A big challenge with SFH flips is that since the gross profit is relatively small (<$50k) some folks get so caught up in the percentages they don't see that even 50% of the deal sometimes isn't worth their time. I'm just saying to make sure that it is.

 

[Thomas Beyer]

related posts here: http://www.donrcampbell.com/is-a-5050-joint-venture-fair

and here: http://myreinspace.com/threads/blue...expert-deserves-to-make-some-money-too.29091/

 

[SVS]

A question: as it seems like your going to the construction expert and are going to leverage your skills. Are you going to bill the work at a regular rate to both of you and split the cost or do they expect a deal on the labour and material?

 

[Dustin Racine]

Thank you for the valuable responses. We did a case study on the typical sort of property we would be taking on. There just isn't enough of a profit margin to justify a JV. And as stated by "sweet zone" there are a lot of turn key, upgraded, rentals that are out there and can bring in instant cash flow. We both decided it just isn't worth it at this time. Thanks again for all your expertise and advice. I'm new but can already see the value in REIN. There's a strong support system made up of informed, smart business people here.

 

[Dustin Racine]

A question: as it seems like your going to the construction expert and are going to leverage your skills. Are you going to bill the work at a regular rate to both of you and split the cost or do they expect a deal on the labour and material?

Hey SVS,
I was going to bill out at cost for subcontracted trades. No pay cheque for site superintendent, no markup. Just my split of the profit at the end.

 

[Tina Myrvang]

We are currently having a sale on our Home Study products. We have a Joint Venture home study on sale now.
Here is the link: http://info.reincanada.com/blowout-sale-2015
To read about the product visit: http://s.reincanada.com/www/store/detail/Joint-Venture-Secrets