Before we rage against the fact that people don’t always do what they say they will do, we need to take an honest look at the fact that JV partners may want to leave a real estate investment before the planned exit strategy can be executed. And many of the reasons this occurs have absolutely nothing to do with the deals themselves. In fact, your partner may love the deal he or she initiated with you—and still need out.
Medical crises, marital issues and financial problems related to other business ventures probably top the list of unpredictable reasons why a co-venturer may need out of the deal. Regardless of the specifics, savvy investors do not panic—because they have a plan!
The legal issue
Most property owners agree that good fences make good neighbours. Smart real estate investors would take that concept a step farther by arguing that solid (and legally-binding) JV Agreements make good JVs.
The details of what constitutes a “good” JV Agreement are the meat and potatoes of Real Estate Joint Ventures: The Canadian Investor’s Guide to Raising Money and Getting Deals Done. In particular, I recommend a close reading of Tutorial 7: Study a Joint-Venture Agreement. It walks readers through the fundamentals of a JV Agreement and why that agreement should cover the transfer/sale of JV interests, the specifics regarding the termination of an agreement, as well as defaults, rights and remedies. It also directs you to a JV Agreement template you can download from REIN >> click here
A lot of investors will read this tutorial or download that template and still feel overwhelmed. That’s okay. You will need an experienced real estate lawyer to guide you through the details. I simply want you to understand that due diligence includes a legal plan that protects your interests should a JV partner need out of a deal. You may not need to understand how a compulsory sale or partial interest sale might work. You do need to make sure those concepts are detailed in your JV Agreement—and available if you need them.
The REIN™ program, JV Secrets, also details the value of a solid JV Agreement. While few sophisticated real estate investors ever need to pull out their agreements to see what will happen if a partner needs out, they always have a solid JV Agreement in place, just in case.
That’s it for now, leave your comments below… and stay focused on moving your JV deals forward! Tune into the next entry for tips on how to add a partner to an existing JV.
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