I regularly talk about expanding your capacity as a Property Developer by getting money partners involved in your development deals. Once you stop restricting yourself to deals you can fund yourself, your options magically expand to include bigger and more expensive deals.
Theoretically, your ability to do property development deals is only limited by your skill at finding sites that stack up.
Once you start venturing out into the wilderness of money partners, you need to be prepared for some awkward and uncomfortable conversations. And if you're the partner with the money, you're going to be part of those conversations too.
So let's take a look at what those conversations will be about, and how best to be ready for them.
Let's start by briefly looking at the ways in which a money partner gets involved in a deal.
There are three main times money or serviceability is required in a deal:
Depending on the Property Developer's circumstances, a money partner can pick up one, two or all three of these money requirements.
The option/s chosen and the level of money involved will likely dictate which of the two main types of legal arrangements are required:
Apart from the paperwork, the other major difference between these is that for a private loan, the lender is generally paid interest on the loan. For a joint venture, there's likely to be some form of profit share arrangement. Realistically, the parties involved can negotiate anything they choose, including a mix of both, but these are the usual rules of thumb.
The level to which a money partner is likely to be involved in the day-to-day running of the deal also varies. A private lender is unlikely to be involved, apart from receiving regular updates. A joint venture partner can be involved to whatever level is agreed between the parties. This is a much closer relationship, and so requires you to put some of the following suggestions on steroids to ensure a positive experience working together.
Do You Trust Them?
For any partnership to work, there has to be a level of trust. Now, if your money partner is someone you already know and trust, and they feel the same way about you, then this step has potentially already been completed.
But if you've going out into your network or cyberspace to find a partner on either side of the deal, then you need to spend some time getting to know them. And it's probably going to be every bit as awkward as any blind date can be!
How much time you need to spend on this step will depend on the deal. If it's a straight equity loan from a professional investor, then their focus is going to be on the numbers and your ability to complete the deal successfully.
For a joint venture partner you will be working with closely, you move to a level beyond trust, where you have to actually get along well, and feel that you can work together successfully.
So you need to adjust the amount of time spent on this stage accordingly. And if you have a friend in common, it might even be worth including them in the first meeting, to help break the ice. The fact that they know, like and trust both of you will automatically make it easier for the two of you to develop that connection.
Security
When you think about security, your first thought is probably about the Property Developer.
And those questions are important. But this is actually a two-way street. As a Property Developer, you also need to ask questions of the Money Partner:
It's around this point the conversation starts to feel uncomfortable, as most of us have grown up in environments where talking openly about money is not the done thing! Recognise, though, that both parties need to have a thorough understanding of each other so everyone has full transparency.
And once you've managed to navigate that fun part of the conversation, you can move on to an even more enjoyable bit!
What If Things Go Wrong?
While it's lovely to sit and have a chat about what a great deal it is, and how you're both going to make lots of money from developing the site (and I certainly hope you do!!), too often the bit that gets missed is a chat about things going wrong.
Look, we all like to think that the deal will go smoothly, the feasibility will be correct, and that if things go wrong it will only cause a small blip in the deal and not affect the overall outcome. But what happens if the development project loses money?
And although all of that is important, there's a bigger conversation to have here, over and above the mechanics of the deal.
How about you? Take the money partner, for example. If they're funding the deal on an ongoing basis, what happens if they lose their job? How will that impact their ability to keep funding the deal?
And an even bigger elephant in the room - death. This is one of the most awkward things you can possibly talk about, but let's be real here. It happens. How will your partnership and deal be affected if one of you dies?
Now, if you've got a good lawyer, chances are their documentation will address these issues. A really good lawyer will probably even have a list of topics that you need to discuss around the "things going wrong" side of the agreement before even reaching the paperwork stage.
Every situation is different, though, so rather than accept the standard wording in your legal agreement, you need to be clear that both parties are happy with what's stated there.
Because if there's one thing I know very, very well, it's far too easy to assume things will go smoothly, and that partners will act in a sensible and rational way. Then when the proverbial hits the fan, the lack of any relevant agreement turns a bad situation into a total nightmare.
It may not make people happy to accept things have to be a certain way because that's what your agreement says, but it's a heck of a lot better than having no agreement at all. The only people making money in that scenario are the lawyers.
Although this article has been fairly high level, and there are plenty more things I could include, I want you to take away this one concept. Have the awkward conversations, so you have a better chance of keeping money in your own pocket, rather than losing it or paying it to lawyers. I hope you never end up in a situation where it matters, but if you do, you'll be really glad you got outside your comfort zone.
Theoretically, your ability to do property development deals is only limited by your skill at finding sites that stack up.
Once you start venturing out into the wilderness of money partners, you need to be prepared for some awkward and uncomfortable conversations. And if you're the partner with the money, you're going to be part of those conversations too.
So let's take a look at what those conversations will be about, and how best to be ready for them.
Let's start by briefly looking at the ways in which a money partner gets involved in a deal.
There are three main times money or serviceability is required in a deal:
- Equity to purchase the deal
- Serviceability to purchase the deal
- Equity to run the deal
Depending on the Property Developer's circumstances, a money partner can pick up one, two or all three of these money requirements.
The option/s chosen and the level of money involved will likely dictate which of the two main types of legal arrangements are required:
- Private Loan
- Joint Venture
Apart from the paperwork, the other major difference between these is that for a private loan, the lender is generally paid interest on the loan. For a joint venture, there's likely to be some form of profit share arrangement. Realistically, the parties involved can negotiate anything they choose, including a mix of both, but these are the usual rules of thumb.The level to which a money partner is likely to be involved in the day-to-day running of the deal also varies. A private lender is unlikely to be involved, apart from receiving regular updates. A joint venture partner can be involved to whatever level is agreed between the parties. This is a much closer relationship, and so requires you to put some of the following suggestions on steroids to ensure a positive experience working together.
Do You Trust Them?
For any partnership to work, there has to be a level of trust. Now, if your money partner is someone you already know and trust, and they feel the same way about you, then this step has potentially already been completed.
But if you've going out into your network or cyberspace to find a partner on either side of the deal, then you need to spend some time getting to know them. And it's probably going to be every bit as awkward as any blind date can be!
How much time you need to spend on this step will depend on the deal. If it's a straight equity loan from a professional investor, then their focus is going to be on the numbers and your ability to complete the deal successfully.
For a joint venture partner you will be working with closely, you move to a level beyond trust, where you have to actually get along well, and feel that you can work together successfully.
So you need to adjust the amount of time spent on this stage accordingly. And if you have a friend in common, it might even be worth including them in the first meeting, to help break the ice. The fact that they know, like and trust both of you will automatically make it easier for the two of you to develop that connection.
Security
When you think about security, your first thought is probably about the Property Developer.
- What experience do they have?
- What past deals have you completed - show me the numbers!
- Do they have any skin in the game?
And those questions are important. But this is actually a two-way street. As a Property Developer, you also need to ask questions of the Money Partner:
- What amount of funds do you have?
- Is it ready now or do you need to sort out structures and loans?
- Will you have the capacity to maintain ongoing funding if required?
It's around this point the conversation starts to feel uncomfortable, as most of us have grown up in environments where talking openly about money is not the done thing! Recognise, though, that both parties need to have a thorough understanding of each other so everyone has full transparency.
And once you've managed to navigate that fun part of the conversation, you can move on to an even more enjoyable bit!
What If Things Go Wrong?
While it's lovely to sit and have a chat about what a great deal it is, and how you're both going to make lots of money from developing the site (and I certainly hope you do!!), too often the bit that gets missed is a chat about things going wrong.
Look, we all like to think that the deal will go smoothly, the feasibility will be correct, and that if things go wrong it will only cause a small blip in the deal and not affect the overall outcome. But what happens if the development project loses money?
And although all of that is important, there's a bigger conversation to have here, over and above the mechanics of the deal.
How about you? Take the money partner, for example. If they're funding the deal on an ongoing basis, what happens if they lose their job? How will that impact their ability to keep funding the deal?And an even bigger elephant in the room - death. This is one of the most awkward things you can possibly talk about, but let's be real here. It happens. How will your partnership and deal be affected if one of you dies?
Now, if you've got a good lawyer, chances are their documentation will address these issues. A really good lawyer will probably even have a list of topics that you need to discuss around the "things going wrong" side of the agreement before even reaching the paperwork stage.
Every situation is different, though, so rather than accept the standard wording in your legal agreement, you need to be clear that both parties are happy with what's stated there.
Because if there's one thing I know very, very well, it's far too easy to assume things will go smoothly, and that partners will act in a sensible and rational way. Then when the proverbial hits the fan, the lack of any relevant agreement turns a bad situation into a total nightmare.
It may not make people happy to accept things have to be a certain way because that's what your agreement says, but it's a heck of a lot better than having no agreement at all. The only people making money in that scenario are the lawyers.
Although this article has been fairly high level, and there are plenty more things I could include, I want you to take away this one concept. Have the awkward conversations, so you have a better chance of keeping money in your own pocket, rather than losing it or paying it to lawyers. I hope you never end up in a situation where it matters, but if you do, you'll be really glad you got outside your comfort zone.
