IC Elesson: Never, never, never get a Partner. And if You Do, Get This…
If you’ve been to one of my Hands-On Wholesaling Academies (and if you haven’t, ‘sup?), you know that I spend a solid 20 minutes explaining (some might say railing against) why you don’t want or need a partner in your real estate business.
For those of you who haven’t had the pleasure, or who don’t remember every single word you’ve ever heard me say, let me remind you why I am so anti-partnership.
- Most real estate partnerships aren’t “real” partnerships. A real partnership, in my book, is one where each partner brings something that is both unique and hard to replace with an employee. In other words, something like experience, or skill, or cash or credit. You can’t hire an employee to bring years of real estate experience into your business, or to qualify for loans on your behalf—but you can have partner who brings thee thing to the table.
Most real estate partnerships are “split the work” partnerships between two EQUALLY INEXPERIENCED people who are convinced that 2 people who don’t know what they’re doing can do it better than just 1.
Or, alternatively, they’re “Handholding partnerships” between two scared newbies; you hope that since you and your partner are both frightened, you’ll be less so if you hold hands and jump off the cliff together. In fact, the opposite is typically true; you end up talking each other OUT of doing what you need to do.
If you’re looking for someone to do work you don’t have time to do, it will be a lot cheaper to hire an employee than to split your profits; if you want someone to encourage you and hold you accountable, get a mentor, a mastermind group, or an accountability partner. It’s way cheaper and more effective than giving away half your hard-earned money.
- You won’t be happy with the partnership. If I had a dollar for every time I listened to a real estate investor rattle off a litany of complaints about how their partner didn’t hold up his end of the agreement, was throwing off the whole business, was more trouble than help, I’d have enough dollars to make up for all the dollars I’ve given away to my own partner.
It’s just never the case, even with (maybe especially with) members of your family, friends you’ve known forever, former colleagues, etc. that you’re really on the same page about whose job it is to do what, or that both people are equally ambitious, skilled, or able to contribute. This leads to a lot of unhappiness and ugliness, and…
- It’s super-hard to fire a partner. Remember that episode of Will and Grace where Grace was trying to break it off with Gregory Hines, and he just said, “No”? The only reason that Drew and I are still together is because of a WHOLE BUNCH of scenes like that over the last 25 years.
Me: “You’re not even coming to the office anymore. I’m doing all of my work and most of your work and taking all the monetary risk. It’s not right and I’m going out on my own.”
Of COURSE the lazier partner isn’t going to go away more easily, and even if you do agree to go your separate ways, there’s the matter of who gets what.
In a real estate business that owns properties, the pitfalls are massive: if your partner takes a property that you guaranteed the mortgage on, then doesn’t make payments, you can’t get the property back and can’t save your credit without paying for an asset you don’t own anymore.
And in a wholesaling business, there are assets, too: the website, the buyer’s list, the marketing…
Which brings us to a super-important concept…that of the buy-sell agreement.
The idea here is that, if you insist upon having a partner after all of this, you should plan ahead of time for your eventual discovery of 1 and 2, above, so that 3 doesn’t become a total mess.
This agreement (the legal language is below, thanks to James the Grouchy Attorney for that) is usually inserted into the LLC operating agreement or whatever paperwork you’ve used to formalize the partnership (if you have no such paperwork, you’ve really just proven my whole point about how these partnerships aren’t “real”, haven’t you?).
If you read it carefully, it basically says “We agree right now while everyone is happy that if anyone gets UNhappy, that person can make an offer for his half of the business under which he will EITHER buy or sell.”
In other words, the partner who wants to leave has to be willing to either take the other half of the business for himself under the terms he names, or give up his half under the same terms.
The exact wording would depend in part on the nature of the agreement; what you see below is obviously for an LLC and would need to be modified slightly for a joint venture or similar agreement. Consult your own grouchy or non-grouchy attorney for details.
This is, in my mind, the ONLY fair way to negotiate the dissolution of an up-and-running real estate business without pain and carnage.
Trust me when I say this: I don’t care WHO you’re going into business with, you need to assume at the beginning that the partnership will “go bad” at the end. This will make it a lot easier when it does. Use it.
8.2. (a) In the event that a Member shall desire to end their relationship with the other members, that Member (“Withdrawing Member”) shall have the right to either 1. state a price per Ownership Unit, and terms for payment, for the Company in a written communication to the Manager and all other Members (“Remaining Members”) or 2. ask the Remaining Members to jointly arrive at a price per Ownership Unit, and terms for payment for the Company in a written communication to the Manager and all Remaining Members.
(b) If the Withdrawing Member elects to state a price, the Remaining Members shall have 30 days, from the date that the Manager receives the writing stating the price, to decide whether to purchase the interest of the Withdrawing Member at that price or to sell to the withdrawing Member at that price, and to notify the Withdrawing Member of their decision in writing.
(c) If the Remaining Members elect to Buy, then the Remaining Members shall have an additional 60 days, from the date that they notify Withdrawing Member of their decision, to complete the purchase by making payment in full or by executing such documents as are necessary to fulfill the terms set out in the initial communication.
(d) If the Remaining Members elect to Sell, then the Withdrawing Member shall have 90 days from the date that the Manager receives the initial writing stating the price, to complete the purchase by making payment in full or by executing such documents as are necessary to fulfill the terms set out in the initial communication.
(e) If the Withdrawing Member asked the Remaining Members to jointly arrive at a price, the Remaining Members shall have 60 days to state a price and terms of payment by a written communication with the Withdrawing Member. Upon receipt of the communication stating the price and terms the Withdrawing Member shall have 30 days to decide whether to purchase the interest of the Remaining Members at that price, or to sell his or her own interest at that price, and to notify the Remaining Members of his or her decision in writing.
(f) If the Withdrawing Member elects to Purchase then the Withdrawing Member shall have an additional 45 days from the date that he or she notifies Remaining Members of his or her decision, to complete the purchase by making payment in full or by executing such documents as are necessary to fulfill the terms set out in the initial communication.
(g) If the Withdrawing Member elects to Sell then the Remaining Members shall have 60 days from the date that the Withdrawing Member notifies them of his or her decision, to complete the purchase by making payment in full or by executing such documents as are necessary to fulfill the terms set out in the initial communication.
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