Either Commit to TRULY Understanding Real Estate Investing – or STOP Trying To Create Joint Venturesby Russell Westcott on September 26, 2012 in blog with No comments
Your ability to attract capital is NOT flashy brochures and websites – it is all in your language…
Like most people, you may have entered a meeting with a potential joint venture partner and left there with the feeling they are not too thrilled about the perceived risk involved, or had a current partner bring up a concern that you really had no immediate answer to.
It’s time to understand that it happens to all of us – even the best ‘money magnets’ get pushed away once in a while. This is becoming even more frequent now with the uncertainty in the world and most prevalent if the potential JV partner is about to enter their first venture into the real estate market. As the sophisticated investor on the team, it’s your job to put your partner at ease when something comes up that makes them a little queasy. What you will learn as you progress along the real estate investing paradigm is that it is even more effective if you pro-actively address potential issues in advance of your partner even bringing them up. It proves to them that they are in good hands.
But what do you do if you’re not comfortable answering their question, or you want to ensure you are providing the confidence they are looking for before taking the plunge?
Below is a list of four of the most common objections real estate investors hear from potential joint venture partners, followed by words and angles you can take to shed a positive light on each and every one of them. Your job is to take these responses and work them into your language so that you are armed and ready when your joint venture partner raises their eyebrow:
Objection #1: I have heard of people losing money in real estate…
“Of course, no one can control what will happen in the future, however the best way to protect ourselves is to NOT get caught speculating in a market. I continually keep a watchful eye on our local market, I watch for the subtle signs of shifting cycles so we can be pro-active before others even see it happening. The trick in it all is to buy positive cash flow property in an economically sound region. This will not only provide both of us with a good return on our investment, and if the market does not perform as well as anticipated, we will be protected by our cash flow and mortgage pay down…”
“In reality, people make money and lose money by investing poorly and non-strategically in all types of investments. Our goal here, in this partnership, is to mitigate the risks by being pro-active in managing the ‘business’ we have formed and to maximize the return on the investment.”
Objection #2: What happens if our tenant trashes our property?
“A tenant can trash our unit, but the best way to ensure this does not happen is to properly screen and select the tenant from the beginning. Providing top notch properties to tenants is my business and I have a five-step check system to screen tenants including: job verification, previous two landlord checks, professional credit and background check… five people have to approve this tenant before they move into our hundred thousand dollar asset.
The second way I protect our investment is by having a very special insurance policy I am able to get exclusively as a REIN Member that covers us for tenant vandalism. This coverage really allows us to sleep well at night. So far, in all my years of investing I have not had to use it due to our tenant screening process, but it is sure nice to have as a back-up. ”
Objection #3: What happens if you die?
“Great question – and an important one that goes both ways. This is just one of the reasons we ensure that we have a well written, professional legal joint venture agreement that clearly protects you and your estate. You will continue to own your 50% of the deal and my executor or heir will take care of my 50%. There are options we can put into place that make it even better for you. Optionally we can:
- Buy insurance on each other (paid for by the property cash flow) that covers the underlying mortgage and potential taxes so it keeps the property clean for the surviving parties, OR
- We put a clause in that instructs the executor to get an appraisal and offers to sell you the 50% automatically, OR
- We can put in a clause that kicks in upon either of our deaths that forces the property to be sold and the monies distributed. I am not a big fan of this option as it just might be the exact wrong time to sell (according to the market fundamentals).
So as you can see, we can design it however we want to ensure that there is no confusion if this ever happens.”
Objection #4: What happens if I need to sell and get my money out quickly?
The first question you would ask a potential partner at this point (as it is a red flag) is, “Do you see something in your life right now that may force this situation? Is there something I need to know about now?” You want to find out sooner rather than later if they suspect they might need the money for something else.
They may respond with a ‘yes’ or ‘no’.
By this point you have already explained to them in your initial presentation that this is a minimum five year commitment. When this comes up I always take it as a bit of a flag (and an opportunity for clarity).
If there is nothing they can identify on their horizon then it is either an automatic defense mechanism they have (which has kept them out of many deals before) or it is a sign that they are not committed to the long term length of a real estate investment.
You may hear something like: “Well, what if something happens?”
“I know, life happens. But with real estate, you have to know that selling at the wrong time of the cycle can cost us both money and even if we decide that you need to get out, that is a process that takes time. For example, three options we might consider are:
- You or I find a different partner who would buy out your portion based on net market value, OR
- We could list the property and hope for a fast sale (without hurting either of us financially), OR
- We would sit down together and walk through the reason you need your capital back and brainstorm a solution that might save you from dumping a good property. Together, as partners, we would determine the best course of action.”
It is important to remind them that this is a true partnership, where both parties are responsible for the outcome of the investment and within partnerships there will be changing priorities, life changes and speed bumps that all have to be negotiated.
There are many more objections you might hear…
Let’s be realistic – you are raising capital from your circle of friends and contacts. They have worked hard for their money and if they haven’t asked you some probing questions, I would ask if they really understand what they are getting in to.
A BAD sign is if they are not asking questions. It isn’t an indication that you did a great job in your presentation; it is often an indication that you have spoken over their head or confused them but they are afraid to admit it out of fear of embarrassment. You MUST do all that you can to ensure they know what they are getting into because if you don’t, it will come back and bite you years (or months) down the road when they plead ignorance and accuse you of not explaining the whole deal.
Being armed with the right answers to the tough questions is just another way of showing your expertise and commitment to success. It is not an opportunity to make them feel bad, or to dismiss their concern. Your job as the ‘real estate expert’ in the relationship is to provide them answers and to make sure they understand the deal properly. The more dismissive or evasive you are to answer questions at the beginning, the higher risk you run of that relationship souring in the first couple of years… and you being blamed for it.
I trust these first few answers to potential objections have helped. The key take away is that you must be prepared for inevitable questions – embrace them as they are a sign of engagement. Think about what types of questions you would be asking, then answer them in advance. Be prepared, but be OK with saying:
“That’s a good question, to which I don’t have the answer. Let me get you that answer!”
Be a professional investor rather than always trying to push and sell… you will do so much better over the long haul.
About the Author
Russell Westcott: Canadian Real Estate Investor, Educator, Researcher, & Best-Selling Author. He is the Vice President for the Real Estate Investment Network™ (REIN™), Canada's leading Real Estate Education program. Visit www.jvsectets.ca for more information