Thinking of doing a joint venture with a builder? Sounds like a great idea in theory.

Who wouldn’t want to leverage these combined skill sets to achieve a cracking outcome? In the world of property development, forging successful partnerships can significantly enhance your project's chances of success.

As the developer, you’ve got the know-how to find a site, negotiate settlement terms and work out what buyers in that area are looking for. The builder brings their years of experience to the deal, including how to cost the project and how to overcome common building challenges.

But let me tell you, most people don't give enough thought to the contributions each party brings, and the consequences can be bad news for us as the developer.

The usual approach is this:

The developer takes charge, runs the project until a certain stage, and then the builder swoops in to do the construction at cost price, followed by a profit split.

But I've got a real problem with this setup. In this scenario, the developer ends up shouldering 100% of the risk, while the builder takes none.

The builder gets cashflowed through the developer's borrowings, and their only risk is their builder’s margin, which they put on the line in exchange for a 50% profit split.

The risk is firmly parked with the developer, while the builder reaps the rewards. Not a fair exchange in my opinion.

So, let's flip the script and consider a better equation.

Picture this:

The developer funds the acquisition, navigates the approval process, and gets the project shovel-ready.

The builder foots the bill for the construction phase, eliminating the need for the developer to cashflow the build. Now both parties are taking an equal share of the risk.

You’ll still want the builder to build at cost. So how do you know what cost is, given that’s not your area of expertise?

We've got to be vigilant folks. We can't just take the builder's cost price at face value. It's all too easy for a crafty builder to have a side agreement with some of the subbies to get a kickback and you’d be none the wiser.

That's where a quantity surveyor comes into play, scrutinising the build quote to ensure it's fair dinkum and keeping an eye on the invoices to verify they align with the actual work done.

Now, overall, I'm a big advocate for JVs with builders.

But let's be real here, folks.

Most builders don't have the cash flow to support this kind of deal.

BUT if you do find a builder that can wait until the sale of a project for payday, then the next thing you need to do is see if you share the same vision for your project.

It’s important for you and the builder to be on the same page. This lays the foundation for an effective collaboration and means both parties are committed to achieving common goals.

Start by engaging in open and honest discussions with the builder to understand their aspirations, expertise, and long-term objectives. See if their vision aligns with yours to figure out if a JV can work.

If you decide to move forward, you’ll want to keep everything crystal clear with a formal JV agreement.

This agreement should lay out the roles and responsibilities of each party, clearly defining who's doing what, who's calling the shots, and how any disputes that arise will be resolved.

Identify who will be responsible for securing finance, acquiring land, obtaining permits, overseeing construction, choosing materials, managing subcontractors, marketing, and ultimately, selling the completed project.

Make sure the agreement includes clear exit strategies for both parties. I can’t emphasise enough the importance of planning for different scenarios, such as project delays, changes in market conditions, or disputes between partners. If you establish mechanisms for resolving conflicts, set guidelines for termination and define exit strategies to safeguard the interests of all stakeholders involved, you’re far less likely to run into serious trouble halfway through your project.

Assigning roles and responsibilities upfront prevents confusion and streamlines decision-making throughout the development process.

It's all about understanding the part you’re expected to play, setting expectations, and having a robust plan in place. Once you’ve got the agreement written up, you’ll want to get your legal and financial team to look over it to make sure the chosen structure meets legal requirements and minimises potential risks.

At the Property Developer Network we get plenty of folks who toy with the idea of a JV with a builder, but very few take the plunge once they weigh up the risks against the rewards.

It’s yet another occasion when doing your due diligence and crunching those numbers is super important.
Ultimately, any joint venture should represent a win-win for all parties.

Trust me, when you land a win-win deal, it's worth the effort!