Episode 22: Joint Ventures: The Good, The Bad And The Ugly
On today’s episode,
Bernadette discusses how joint ventures are a great way to fill the gaps in your resources when you are renovating. She gives us the details of the good, the bad and the ugly aspects when you are planning on taking joint ventures as a means of doing a renovation project.
Listen to Episode 22: Joint Ventures: The Good, The Bad And The Ugly
Podcast: Download (Duration: 15:42 — 28.73 MB)
- What are joint ventures and why you should get into one
- The ideal traits you should look for in a joint venture partner
- How to make the right goals with your partner in your joint venture project
- Identifying both of your strengths and assigning the jobs that compliment each other's skills
- What are the what if's of the project and how you can address them properly
- Why having independent professional advice is critical to creating the contract of the project
- Choosing to work with people who are aligned with your values
- Who are the professionals you need to be working with on your joint venture
- How to manage the money
- Getting clear as to what constitutes a project cost
- The most important attribute in a joint venture partner
01:17 - A joint venture is a great way to fill in the gaps
01:39 - The Good, The Bad and The Ugly
02:06 - A high level of trust involved
02:28 - You really want to team up with someone that does have similar values
03:09 - Be mindful of the fact that property is fickle
04:15 - Get someone that balances out your skills
04:40 - Thrash out all the what if's
06:40 - The next step is to go and get a lawyer to draw up a contract
07:52 - How are you going to split the workload, the profit, and the loss
09:15 - Have a means of resolving differences
09:36 - Professionals that you need
10:05 - In terms of the money in a joint venture agreement
11:19 - That extra level of due diligence and eyes over the deal
13:05 - A joint venture is an incredible opportunity
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"In terms of values you really want to team up with someone that does have similar values. Someone that has a similar level of integrity and trustworthiness. Because while you can protect yourself with a well thought through and drawn up legal contract no contract is ever waterproof. And usually if things go pear shaped and it ends up in court, the person who wins although no one ever truly wins. But the person who comes out on top will be the person with the deepest pockets."
Hello! It's Bernadette and I'm back with an episode on Joint Ventures. Joint ventures are a great way to fill the gaps in your resources. Most of the people who make a decision to improve their financial situation through renovating and property don't have all the resources they need to do a project. They may not have enough time or may not have enough money or may not have the skill to do it. And rather than waiting around to get all those things together, often a joint venture is a great way to fill in the gaps.
Now it sounds easy and it is in principle, however a joint venture will add a level of complexity and risk to your project and you really need to go into it with your eyes open. So today I am going to draw back the covers on joint ventures and talk about: The Good, The Bad and The Ugly.
So the first thing to note about our joint venture is that you need to take on a partner, sometimes more than one partner. And I look on a joint venture as being very similar to a marriage. You are going to be joined at the hip for at least the time that it takes to do the project and you need to make time for the relationship. Because there's a high level of trust involved.
And you need to be compatible. It doesn't mean that you need to think exactly the same, in fact it's good if you don't. But you do need to have some congruencies. And in other areas it's good if there is some difference.
Firstly, in terms of values you really want to team up with someone that does have similar values. Someone that has a similar level of integrity and trustworthiness. Because while you can protect yourself with a well thought through and drawn up legal contract no contract is ever waterproof. And usually if things go pear shaped and it ends up in court, the person who wins although no one ever truly wins. But the person who comes out on top will be the person with the deepest pockets. So you just don't want to go there. You want to make sure that your joint venture partner is someone that you can work with through thick and thin.
In terms of goals, you need to be mindful of the fact that property is fickle. Timing is everything. Things go wrong all the time. And if your timing blows out and then when you come to sell the property it's not the right time. You need to both be happy to wait. Well maybe not happy, but willing to wait, for the timing to be right. And if one person really desperately needs their money back that can become problematic. So you need to actually be devil's advocate and look at what things that could go wrong and what will we do if they did go wrong and how we manage that.
The other thing that you want to look at is really that you have complementary strengths. So if you're both, say great renovators and really love, as women, we really love the interior designing and styling aspect of it. But nobody is any good on spreadsheets, then you're going to be fighting over the jobs that you love and nobody's going to want to do the jobs that you don't love, like the bookkeeping. If you can get someone that balances out your skills. So if you can find someone that's say, you're the renovator the creative one and you can find someone that's more analytical. Then that's a really great mix, because it means you're both happy in what you're doing and presumably the project will go well.
Before you get to actually drawing up the contract, you need to really thrash out all the what if's. And the first step is, who does what? For example, who's responsible for the design? And it really does need to be one person and obviously the person with the most skill in that area. So for instance the very first joint venture I ever did, I did with my builder who is a fantastic builder. But also fancied himself as a designer and I just did not want him to be making the decisions. I had that written into the contract, so that we could keep control of the design. Because it's a really important part of the project. Any time, but particularly when you're selling something for profit. So really document in your contract who does what.
You also need to address the what if's. What if someone dies mid project? Like I know, I said I was going to cover the ugly. So I know that seems terribly dramatic, but it happens and you don't want the partner to go down with you. So you need to put in a contingency. What happens if one partner dies? What happens if one partner gets divorced during the project, because that will impact the financial situation. What happens if one partner loses their job and can't service the loan?
So as an example, that last scenario, how I'd like to get around that is to make sure that the cash component of the project covers the repayments. If there's a loan, covers the holding costs, so that if something untoward happened to that other partner, that the project could be completed. Because if you're forced to sell an incomplete project, you're highly likely to make loss and you don't want that to happen.
Okay. So once you've thrashed out all the what if's the next step is to go and get a lawyer to draw up a contract. Now generally the lawyer will only work with one of you. So the way you deal with this, is that you agree upfront before you go to get legal help. For a couple of reasons, but one of them is, if you need to engage a lawyer to help you thrash this out, it's going to cost you a lot more. If you can make these decisions before you get there, then that will save you on your legal costs. So basically one person goes and gets the contract. The second person once that contract comes to them, presumably it will be a contract that reflects the decisions you've made. Then the second person will take it to their legal representative and have it reviewed with the view of protecting their interests.
So there may be a bit of to in and from in, but having independent advice is critical. As I mentioned, no contract is watertight and I'm sure you've heard of people saying that they do have watertight contracts. The other thing that you need to agree is how are you going to split the workload, the profit, and the loss. Or I should say or the loss. You also need to be devil's advocate, in really looking at what happens if there is a loss.
I always think Murphy's law if you prepare for it, it won't happen but sure as eggs if you don't, then you don't want to be doing that on the fly. And of course any decent solicitor or lawyer would ensure that you have considered that. But I have a belief that whatever you accept in profit, you should also accept the same proportion of loss. And I know it's very clever to get a contract written that protects your interests to the hilt and if you offload the risk to the other party. But that's where it comes to working with people who are aligned in their values. So you can agree whatever split you like. There is no hard and fast rule on how you apportion the profit or the loss. It just comes down to what you can agree out of your discussions and personal preference really.
We have a formula that I like to work to. Others have different formulas. It's really up to you. You also need to have a means of resolving differences, especially if you've only got two joint venture partners, you can easily get into a stalemate. So that's something else that needs to be written into the contract. It may mean that you need to bring in a third party as if there are any disagreements that can't be resolved, to be the casting vote.
In terms of the professionals that you need. You definitely need a lawyer, but you also need a good property accountant. So that you're able to pre-empt the tax burden and minimise the tax on the project. It's likely that you'll be utilizing a company structure or a trust structure or both and you'll need the best legal structure to minimize your risk and maximize your profits.
In terms of the money in a joint venture agreement. There's a lot of different ways that, that can be handled. The easiest way to manage a joint venture agreement is, if the money is all in cash obviously. Because it's a very liquid but more importantly, because banks aren't involved. If you have to involve borrowing, then of course the bank holds all the cards.
I really don't like being the cash partner in a joint venture where there's been finance. Because it leaves the cash partner very exposed if the other partner hasn't put any cash in, the cash partner has cash in and then there is a loan. It sort of tips the balance a bit. So you need to really weigh that up in terms of if you're the cash partner, where that leaves you. Of course whoever has the loan their name goes on the title. So yeah, lots of things to think about before you head down that path.
Another professional that you might consider using in your joint venture project is a buyer's advocate or a property strategist. We do this, because that extra level of due diligence and eyes over the deal, I think helps to reduce the risk and you want to make sure you don't just go to any buyer's agent. You need to get someone who is familiar with the types of deals or deal that you're going to be doing. Particularly if you're not overly experienced in property deals, then that's an added factor in reducing your risk and also minimising the workload. Because they will do a lot of the preparation work leading up to your purchasing the property.
All my joint venture projects are bought through a buyer's agent. In the early days I didn't use buyer's agents, but because I now have a team of really skilled buyers agents, then of course that's the way that I approach them.
But the last thing I want to talk about is, coming into the joint venture with an open heart. When you're in the early stages of a joint venture everything's rosy. Everyone's excited with anticipation, finally getting into a project that they've been wanting to do for ages and nothing's a problem. And so as time goes on and it becomes hard, often joint venture partners will have sort of misgivings about it. And think, well you know I'm working so hard I should be getting more of the profit than I am. And a little bit of resentment creeps in, and it's really really important that you really keep your feelings in check.
The thing is, that being able to do a joint venture is an incredible opportunity. So I always say, look at it as the gift that it is. If you weren't able to do a project without a joint venture partner and now you are, because you have a partner. Then that's an opportunity that you wouldn't have had. If you're now not feeling so excited about your terms in the agreement, honor your word. That's all you need to do, get the project finished and reassess at the end of the project and then you need to get clear about what constitutes a project cost.
Sometimes there's some disagreement around what financing costs should be included, whose legal costs and so on. So I am of the view that all financing costs and all legal costs that relate to the project should be covered and some things that can become a bit ambiguous are travel and accommodation costs. If the project is remote or like a distance from where you are. You want to get clear about what gets paid from the project and what doesn't.
And also whether the person supervising the project, the onsite person is actually paid for their work. While often their contribution will be their work, they may have some cash in it and that's why I like to really split up the project management of the project, on an off site. So I can get a really nice clean 50/50 split, doesn't always work. But every deal is different, so there's never a hard and fast rule for this. And I've realised I've been talking about a joint venture contract, it's actually a joint venture agreement.
Okay well it to further add value to this conversation. I've included a checklist of discussion points, to help you if you are wanting to flesh out a joint venture agreement with a potential partner. So you can download that with the show notes and other than that I'd love to see you over on the She Renovates free Facebook group to continue the discussion. As always I would be very grateful if you make the time to go over and leave us a review and other than that I'll see you next week.