6 Things to Discuss Before Entering Into A Partnership Agreement
A real estate partnership is one of the best ways to grow your investing business. In areas where you may be lacking a partner can help pick up the slack. Not only can a partner directly lead to more deals but they can also make your life that much easier. As beneficial as a partner may be not all partnerships are created equally. Prior to entering into any agreement you need to know exactly what you are getting into. Without this in place you will end up arguing about work allocation, profit splits and general responsibilities. What started out as a positive will quickly turn into a situation you regret. Here are six things you and your partner should iron out before entering into an agreement.
- Responsibilities. This sounds basic enough but too many partnerships are thrown together without much thought. The very first thing you need to do is discuss who is responsible for what. You never want to be in the middle of a deal and start pointing fingers. You should take the time to discuss roles, work allocation and time commitment. If you are not comfortable with the split you need to speak up before you get very far. You don’t want to end up doing more than what you conceive is your fair share of work. This leads to resentment that ultimately ends the partnership after one transaction.
- Capital Contributions. What is arguably as important as deal responsibility is capital contribution. There are several items that need to be paid for along the way. You don’t want to start pointing fingers when a title search needs to be pulled or a fee needs to be paid at town hall. When you get to the bigger items in the financing there has to be an agreement for who is going to contribute what. This contribution has a direct impact on the percentage of ownership which will determine profit splits. Don’t wait until it is time to make an offer to discuss who is going to contribute what.
- Profit Allocation. How are the profits going to be allocated? Are you working off of a 50/50 split or some other predetermined percentage? Whatever the allocation is it needs to be discussed before you get very far. There are many partnerships with uneven splits based on what they bring to the table. There is nothing wrong with doing most of the legwork on the deal for 20% of the profits as long as you agree to this before you start. What you should never do is assume that a partner will accept a split based on what you may have done with someone else. Closing a deal and making money is nice but the goal is to make a profit. However the profits are broken up they need to be set in stone before you get too far.
- Exit Strategies. In a perfect world things will go smoothly from start to finish and you will sell your property at the highest price. In the real estate world things don’t always go as planned. You need to have contingency plans for what you will do in different scenarios. What will you do if your home doesn’t sell at your desired price? Are you will to accept a lowball offer? What is the lowest acceptable price? Would you consider renting? There are several different exit strategies that should be discussed before you even make an offer. In the midst of a deal when tensions are high is the worst time to make a decision that will impact your bottom line.
- Communication. How frequently do you plan on communicating with your partner? Are you going to plan on meeting on a certain day every week? Do you need to stay in touch every day? Which method of communication works best for you? Are you available to talk during the day? Too much communication can lead to frustration and annoyance. Too little communication will leave you wondering where you stand. Something as little as the level of communication can make or break a partnership.
- Disputes. No partnership is void of a little disagreement. One could make the case that disputes can be healthy from time to time if handled the right way. When entering an agreement with a partner you need to accept that disputes will eventually happen. You also need to have a plan in place for resolving them. You can do this by discussing general ideas and strategies that are related to the property. You should also have a plan in place for breaking ties. This could boil down to whoever contributes more capital or who knows the market best. However you decide to resolve disputes you need to have a plan in place before they happen.
A business partner should make your life easier and not the opposite. This doesn’t mean you have to get along all the time on agree fully on business philosophy. It does mean you should know exactly what you are getting out of the partnership. By doing this you have no regrets once your agreement is signed. It is also important to keep an open mind moving forward. The agreement you enter into today doesn’t have to be good for as long as you work together. The right partner should change your business for the better.