Partnering is an incredibly valuable tool that can produce tremendous downstream results when done correctly. Many real estate deals are fraught with complexities that, together, fall outside the expertise of a single investor or developer. However, by assembling a group of specialists who contribute deep knowledge in a particular area, you improve the chances of a successful outcome. All too often, we hear our friends and colleagues talking about partnerships that began with all the excitement of a newfound love interest and ended in fiery wreckage at the bottom of nightmareville (I think we coined a new term!).
The sad truth is that 99.9% of these outcomes are completely avoidable. The problems usually arise from short decision-making timeframes, departures from S.O.P. (more on that later), unclear communication protocols and last but certainly not least, greed. What went wrong and how can you avoid repeating the same mistakes? We’re here to help you navigate the winding roads leading up to a partnership so that your real estate investing career can step on the gas and hit the open road.
S.O.P (aka standard operating procedure)
Whether it’s a formal step-by-step checklist, or a simple collection of basic key principles, it is absolutely critical to develop a framework before discussing opportunities or crunching numbers. Potential deals often pop up unexpectedly and from multiple sources – time is always of the essence and it is very, very easy to get caught in the emotional rollercoaster that accompanies the deal origination process.
A framework is the bedrock that allows us to decouple our emotional and rational systems for evaluating a deal and its perceived value. At a minimum, this framework should address:
- Rate of return: How much money do you hope to earn and how quickly do you expect to earn it.
- Control: Who is driving the partnership and what roles are each group playing.
- Risk Tolerance: Are you a “slow and steady” group or a “go big or go home” group
- Downside: What happens if a project fails to perform or, worst case, you lose money on a deal.
- Exit strategy: You should have more than one in case of downside.
Lack of alignment invites the unexpected and breeds losses
- Does everyone agree that this is the right place to invest based on current or projected market demand, costs, growth potential, etc.?
- Do all parties share a set of expectations for potential returns?
- Is there a common sense of morality and emotional intelligence among all team members? If the group is pursuing a deal that could produce 3X profit but requires the displacement of several young families who are paying below market rents, does that work for you?
Roles and Responsibilities
- Choose a leader and think through all of the functional aspects of a deal/project – are duties/requirements distributed evenly so that one person is clearly responsible for any given task? This is not to say that one person must solely execute all aspects of a task for which they are responsible – it simply means that it is up to him/her to ensure the task is accomplished by the team.
- Create accountability for all involved. It encourages people to keep agreements and perform duties as promised. Without it, schedules lag, deadlines slip, deals suffer and returns evaporate. A quick internet search for “accountability system” will produce dozens of results to evaluate and consider – choose the framework that is appropriate for your team and process. Your LLC/Partnership has legal/financial obligations that are non-negotiable.
- How often should partners connect to discuss the state of affairs or important developments during a project cycle?
- Should these conversations run concurrent with discussions about internal (i.e. corporate) matters?
- How do you create accountability for all members? This pertains to attending meetings and completing individual tasks.
- Are ownership percentages consistent with roles and responsibilities, capital at risk, and expertise?
- Will each partner be comfortable with the return on his/her time and effort if a project is successful?
- Can each partner comfortably absorb the associated losses if a project falls apart?