We all know that down markets can offer great opportunities for investors looking to pick up properties at rock-bottom prices.
But they can also be troublesome for investors who bring in friends and relatives to buy properties through partnerships without thinking through all the potential issues.
Robert Jenson, founder of the Jenson Group in Las Vegas, sees the fallout all the time: Friends or business associates spot a foreclosure with a low price, good location and solid prospects for rental cash flow and appreciation -- or so they believe.
They put together a loose partnership to buy the place. Then things start to unravel. Up front repairs, remodeling and pre-rental capital costs run thousands of dollars higher -- and take longer to complete - than the partners anticipated.
The local rental market turns out to be softer than they expected, so the house or condo sits empty for months, further bleeding the partners' cash. Worse yet, real estate values in the area continue to tank, and the property is now worth less than the partners paid. There's no end in sight.
Soon the negative cash flows get so intense that one of the partners wants out - fast - but the other partner can't handle the going expenses. And the partnership agreement has no provisions for a situation like this.
Jenson, who brokers high-end Las Vegas condos and houses to investors and owner-occupants, told Realty Times in an interview last week: "Too many investors are going into these (foreclosure and short-sale) deals using partnerships that are poorly thought out."
"If your partnership agreement doesn't deal with an extensive list of 'what-ifs'," he says, "you're putting yourself at serious risk."
Jenson says partnerships or LLC (Limited Liability Corporation) agreements need to cover real-life problems such as:
- Provisions for a buyout of one partner's share by the other.
- Who's primarily responsible for management issues related to the property, or as Jenson puts it, "who gets the call?"
- What's the exit strategy? How are the partners supposed to get back their money over time?
- How do disputes between or among partners get resolved? What if one partner wants to sell and the other wants to hold, but can't afford to buy the whole property?
Jenson says good agreements aren't solely about drafting legal language. "You've got to sit down first with a knowledgeable real estate professional and go over the practical issues and long-term objectives point by point."
"Then go to a lawyer and get the agreement drafted to fit your strategies and needs," he says.
Author: Kenneth R. Harney
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