One way to better ensure a successful business venture is to avoid common mistakes. When it comes to real estate joint ventures, some common mistakes that can result in serious headaches include:
- Failure to clarify responsibilities. It is wise to clearly state each partner’s rights and responsibilities within the LLC operating agreement or shareholder agreement. This should include steps that would be taken in the event one partner steps away from the venture or is unable to provide services. Clear expectations and communication can mitigate future issues.
- An uneven stake in the deal. It is often best for active partners to all have a significant stake in the deal. A partner with significantly less to gain may not strive to ensure that goals of the partners are in alignment. But, equal 50/50 shares can lead to deadlocks. If no one will have control over major decisions, it’s critical to include a mechanism for breaking a deadlock.
- Not addressing potential conflicts of interest. As noted in a recent piece by Forbes, a failure to eliminate conflicts of interest in a real estate joint venture can result in serious issues. These deals often involve use of property management or construction firms to complete the transaction. A conflict of interest in these and other areas may impact a partner’s decisions such as when and at what price to sel.
These are just a few of the issues to discuss prior to moving forward with a real estate joint venture. Those who are considering such a venture are wise to seek legal counsel to draft appropriate documents for these and other issues to reduce the risk of unresolvable conflicts during the business relationship.