Real estate investor partners: Is your word good enough?
With prices appreciating, and loan rates and inventory low, there is an increased willingness to own real property by two or more investors who need to combine their capital and/or credit to participate in buying, and flipping or renting the property. Often, the investors’ focus is on selecting the property or raising the down payment, with little or no consideration for what happens if co-owners disagree, one wants out, or the optimistic expectations are not realized.
A popular formula in the current flipping frenzy is for one investor to obtain the loan because of a superior credit rating and taking title, while the silent investor contributes funds for the down payment, and perhaps occupies the property as a de facto tenant paying “rent” as the monthly mortgage payment, and sharing the insurance, taxes, and other costs of the property. This allows the purchase and investment by investors who could not otherwise participate by themselves, and increases the number of players in the market.
Many times such arrangements are done orally, with a handshake, and disputes and disagreements are inevitable because of the normal instinct to recall the “deal points” in a manner that is favorable to the separate perspectives of the investors. If they cannot confirm their deal points at the inception of the arrangement, they will not be able to after they begin to view the transaction, in hindsight, from their own self-interest.
Getting it in writing may save investor partners a whole lot of grief.
A written agreement setting forth certain essential terms is essential to enable the transaction to evolve and succeed with a minimum of disputes and lawsuits, including:
- Names of participants and nature of their interests (e.g., 50-50, or 70-30)
- Respective obligations to contribute funds to the maintenance of the property, including the mortgage, insurance and taxes
- Respective roles of investors in the daily management of the property and who is responsible to pay the monthly bills
- Provisions for renting of the property by one of the investors or a third party in a written lease incorporated into the agreement
- Right of first option to purchase and method to determine property value and buy-out price if one investor defaults or decides to terminate his involvment
- A dispute resolution method such as mediation or arbitration
These are only a few of the terms useful in a co-ownership agreement, and any document should be custom prepared for the specific nature of the transaction and the goals of the particular investors. If they can agree at the beginning on the deal points in a comprehensive writing, the investors have the best chance to complete the transaction to their mutual satisfaction and benefit. Otherwise, disagreements and hard feelings should be expected, sooner or later.