How to Partner up on your Real Estate Deals
1.Similiar Goals
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Same religion / Camp
It is important to establish the same goals of why you are getting into real estate. Fix and Flip? Buy and Hold? The reason being is that you want to have aligned goals for the most favorable outcome in your dealings
My preference:
I am in the buy and hold real estate. Purchasing property for the purpose of the passive monthly rental income it will generate.
2. Sample Deal
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you like what i like?
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Are we seeing the same thing?
After you have talked to a few people that have the same general goal as you may think that everything is great and lets start looking at deals to do?! Not so fast. Let me save you a lot of time but more importantly energy. If one of you have done a deal in the past take advantage of that experience and present that same facts and figures you had before you made the deal. Share that to your potential future partner(s). If they agree that they also would have pulled the trigger and done the deal well now you are another step closer in confirming you interests and definition of a good deal are the same.
my latest deal:
Address: 5505 Wabash Ave Kansas City, MO 64130
Purchase Price: $20,000
Monthly Rent: $654
Yearly Revenue (11months): $7,194
Yearly Cost: $3,142
Taxes: $800
Hazard Insurance: $546
Property Management: $596
1% Maintenance Rule Reserves: $200
Capitol Expenditures (Major Repairs): $1,000
Yearly Profit: $4,052
3. Agreed bylaws
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Agreed rules to the game we want to play
You may think that this is jumping the gun, that you are ready to find a deal and do it already. SLOW DOWN. When you find a deal and are starting the process there are a lot of things going on. The last thing you want to have to do is think and negotiate about rules of the company or partnership. Having a set of bylaws that are agreed before identifying a deal will go very far when the process gets further down the road.
My General Bylaw Term Sheet:
LLC will have a maximum of 100 shares
Profits will be distributed monthly and according to percentage ownership
X% (based on deal) ownership will goto finding the deal
X% (based on deal) ownership will goto the party that finances the deal via lending if needed
X% (based on deal) ownership will goto the the parties that make the capital investments
Purchasing and selling of ownership shares are permitted to outside parties but “inside” parties have first right of refusal
Decision to sell the property and end the partnership requires a 51% ownership vote if the sale price does not cover the outstanding loan amount then the party that is held liable for the financing has to also agree.
When the property is sold, the profits are distributed via ownership percentage
All owners are signers on the account
Majority owner will be handling the day-to-day operations
Will open up 2 accounts
Checking account – operating account
Savings account – reserve maintenance account
Operating account will start ~3 months of costs and will distribute profit when there is a balance over the amount.
Hashimoto Estate LLC and the majority owner will be the two signers on the account.
When there is a repair that needs to be made:
Take funds from the reserve maintenance account
Take from the operating account
Owners will contribute in proportion to their ownership
If an owner does not contribute their portion of the capitol needed for the repair, they forfeit their ownership percentage and their shares will be divided evenly among the other owners
Improvements are allowed to be made to the property only with the amount of funds over 10% of the purchase price in the reserve maintenance account.
4. Financing
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Prep (80% of the battle)
When looking for a real estate deal you want to come back to your partnership or group with a deal that the seller has agreed to. Meaning you have presented an offer and they have accepted. This save a lot of what I call “crying wolf”. Part of the value you are providing is finding the deal but also being in contract. You will be presenting a lot of offers and they will get rejected or just plain do not work out. Another value to presenting a deal with an offer that is accepted is you have security in sharing all the details and feeling confident that your partners can not go around your back and present a competing offer around your back. This allows for making partnerships over the internet easier and able to do business with people you might have not the highest level of trust yet with.
The biggest road block in presenting an offer is your financing. Does not matter what kind of deal you are looking for, or who is the “money guy” or not, you will need some proof of funds, pre-approval letter, or something for an agent to submit an offer and for the selling agent to take your offer seriously.
Bottom line, get your financing in order so that you can make serious offers and get your offer accepted.
5. Offer Accepted
Might seem like a lot of work to get up to this point but trust me it has been well worth it. Everyone has put in enough effort to really take this potential partnership seriously and also you feel like the time you spend finding a deal is worth it.
As you are submitting offers and dreaming of great outcomes you will be met with a healthy amount of rejection. Sell already accepted another offer, offer declined, sell counters your offer and you realize you both are not going to see eye to eye on this, or any number of things. Again, the value the person who is finding the deal is this process. It is not just identifying a good deal but also negotiating and getting an offer accepted. You are not in competition with others for this property, the sell heard your offer and has made a decision to accept and start the escrow dance with you!! Now you have something.
Variation:
I would like to add that sometimes a good variation of this is already depositing the escrow funds, performing the property inspections, and finished the new adjusted price / terms off the deal after the inspections. A lot of times a deal falls apart during these stages so being able to go through these motions is great.
My preference
Normally I prefer that the party finding the deal has: a accepted offer letter, deposited the escrow funds, performed the inspections, and have the new accepted price after inspections.
6. Through the Motions
Now the dance starts. Any number of items are going to be needed (Forming a company entity, providing the paperwork for financing, signing disclosures and amendments, and any number of items needed to complete the transaction) from a number of directions (real estate agent, title agent, financing rep, and so on) on what seems like a ASAP time line. This is natural, everyone involved just wants to do through the process with the least amount of resistance. All the prep work you have done up until this point will come in handy. When forming your company you will tell yourself “good thing we figured out our bylaws ahead of time” or “good thing my partner(s) are on the same page so we can move through this process easier”.