By Simon Misiewicz
I have decided to write a blog series that captures my experience of dealing with over 1,000 property investor clients over the past 10 years. My discussions with clients along the way have enriched my knowledge and understanding of what makes a successful property investor.
I am going to cover the following subjects with you:
- Part 1 of 9: Why mortgages are the thing of the past
- Part 2 of 9: The end of buying properties in your own name and why Limited Companies are the only way forward
- Part 3 of 9: Lose it all, the risk of holding residential property investments
- Part 4 of 9: You are immortal and do not need to worry about legacy planning. Really?
- Part 5 of 9: The problem with your Joint Venture partners screwing you over
- Part 6 of 9: Why the heck are you doing all this anyway?
- Part 7 of 9: Why you will be poor at retirement
- Part 8 of 9: Why not just buy another poorly-performing asset
- Part 9 of 9: Why commercial properties are the new black
Why do people use Joint Ventures (JV) partners
There are many good reasons why people choose to work with others. I have identified a few reasons why I have used JVs myself below:
- Access to money as funds were tied up elsewhere
- Access to expertise in a specialism that I did not have experience or knowledge
- Access to time as I was running a business that absorbed all of my time
There are many other good reasons why people will work with JV partners. I am sure you can think of a lot more good reasons.
A successful Joint Venture partnership
There is a saying that I like, namely ‘The harder you work, the luckier you become’.
I like this saying, as I am lucky in business. This has been made possible with the very good people that I surround myself with. Most of the JV partners I had the joy to work with have provided so much benefit to me, my property portfolio and business.
I believe that knowing a person in great detail establishes trust, and is one of the most important ingredients in forming a successful partnership/JV arrangement.
As Stephen Covey once said: “What you reap, you sow. If you want a harvest, you have to plant seeds. Each day the plants must be cared for – watered, fertilized, weeded. Everything counts, everything matters — what you don’t do now you always have to deal with later. The garden must be weeded each day. The longer you wait to weed, the harder it is to get rid of the weed and the more the weeds are entangled with the good plants. The must be time for rest as well as time for work. You can’t forget to seed, plant, and nurture and then think you can “cram” it all at the time of harvest”.
JV relationship needs care, attention and time. It is not a computer transaction and time needs to be made for open communication to ensure that you know what each other wants, what issues arise, and how they will be addressed, with clear assigned actions and deadlines.
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When things go wrong with JV agreements
Sadly, I have also been involved in too many conversations whereby clients have lost significant amounts of money through JV arrangement that have gone wrong.
There are various reasons for a breakdown in JVs which I have observed in recent times, including:
- A JV partner was too optimistic with the refurbishment costs and went over budget by 2.5 times the original estimate. In one example, I have seen a refurbishment cost that was originally budgeted for £50,000 but actually cost £125,000, mainly because one builder messed up and a second builder had to rectify their mistakes. Additionally, the job was not specified properly and jobs that should have been obvious were ignored. Additional cost was also then due from a lack of care.
- A JV partner was over-optimistic in the re-valuation. I saw a project where the original cost of a three-bedroomed building was valued at 20% Below Market Value (BMV) at £150,000, which needed to be taken right back to the original brick work. The refurb costs were £35,000 and the JV partner was expecting an end value of £220,000. Sadly, the valuers suggested that the property was worth £180,000. As you can see, the value was significantly different and meant that the project failed because money was left in the deal when it was intended to pull all the money back out.
- A JV partner promised to buy and refurb a property to flip. Sadly, there was no property but a nice holiday the con artist who simply took the money and emigrated. We are talking about someone that took over £300,000 from the property investor.
- A JV partner that was so ambitious attended plenty of networking events and got involved in many business deals. Unfortunately, he promised people a 1% per month return on their money. Sadly for the JV partner, most of the deals were bogus and did not come off. He was ripped off by others, he lost money but worst still, so did the JV partners.
As you can see, there are many ways in which clients have lost money. It is not the first time and it certainly will not be the last.
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How is a successful JV partnership started and maintained?
Whatever JV arrangement you enter into, please ensure that you take your time to review below first:
- Due diligence: One of the most common mistakes I see is the speed at which one person will trust another. I have seen someone literally hand over their money to someone they met a few times at a networking event. At the very least, you ought to run a credit check to ensure that they do not have financial problems they’re looking for you to finance. Experian provides a business credit check service here and provides another check for individuals here. You can also ask for their tax returns and accounts to ensure that when they state on their shiny marketing brochures that they are a millionaire, which you can validate if this is the case.
- Outcomes approach: Clearly identify and document each others objectives and outcomes. Once you clearly identify a goal and both can re-state it to the other persons satisfaction then clarity is obtained. The identified outcomes can then be monitored to ensure its delivery and discussed at regular intervals to ensure that nothing has changed.
- Strengths and weaknesses: We all have strengths and weaknesses. Thinking anything else is delusional. I believe that you should always work to peoples strengths and remove activities altogether where they are weaker than you. You can use all sorts of tools such as Wealth Dynamics to help you identify one another strengths and weaknesses. You can then openly discuss these and allocate tasks to the right person. It should also identify what the remaining gaps are in your skill set, and hire in those specialisms. More can be read in a separate article here.
- Communication: One of the most important aspects of human relationship is communication. It is critical to ensure that both parties are open and transparent in their communication, which should take place at least weekly if a business arrangement has been entered into. One of the most successful JVs I had involved weekly meetings. We reviewed the actions from the previous meeting and then asked an open question “how I have felt since the last meeting?” It is amazing what insights can be obtained from this question.
- Performance reporting: I love the saying ‘What gets measured gets done’. If a target has been set it is vitally important that it is monitored. Let’s say that a refurbishment project is underway and valued at £30,000 over a three-month period. Most JV partnerships do not regularly monitor the work being done or the review of the costs involved. I used to do weekly visits on all building projects to discuss the original budget. If overspends were being identified, changes could be made to bring the overall budget back on track. It is no surprise that most of my projects used to be within just 15% of the original budget. One of the reasons for this is that I was realistic not optimistic with the original budget that was formed. I also utilised experts such as Quantity Surveyors or independent builders.
I appreciate that paying solicitors is a cost that no one really wants to pay. In my experience, a solicitor will ask commanding questions that will ensure that each individual in the JV arrangement is protected, and that their needs are considered.
They will ask good questions about the partnership, and what will need to happen in a number of situations, such as:
- One of the JV partners passing away
- A JV partner that gets into financial difficulty
- A JV partner does not do what they said they would
- The JV partnership runs out of money
- The JV projects makes a loss and needs to be paid for
As you can see, there are many benefits of having a JV partner – but you need to take your time.
Before you jump into a partnership remember the farming approach, nurture the relationship, and do not rush. I have written another article here that provides additional questions that you can ask yourself and JV partner before you go into business.
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