In the last 16+ years, I’ve worked with many investors. Occasionally, I am asked about two or more people pooling their resources to buy properties. This can work, but there is a potential pitfall: assumptions.
For example, suppose two friends decide to pool resources and invest together. They have known each other for many years, so no issues are anticipated.
A few months later, the refrigerator dies at one of their properties, and one partner wants to install a used refrigerator to save money. The other wants to install a new refrigerator with a warranty. While this seems trivial, I have seen friends argue over less.
What to Put in an Agreement
How do you minimize such future problems? By writing down and signing an agreement that covers as many potential issues as possible.
I am not an attorney, but below are some items I’ve seen on teaming agreements.
Ownership interest
Clearly define the percentage of ownership each party has in the property. Usually, this is based on the proportion of the down payment, mortgage payments, and other costs each party contributes.
Financing details
Define who will pay for what. This includes the mortgage, who will be named on the mortgage, and how you’ll split the mortgage payments. Also, define how you’ll share the acquisition costs, like the down payment, renovation, and closing costs.
Payment responsibilities
Define how to divide and pay for regular costs like the mortgage, property taxes, insurance, homeowners association fees (if applicable), and upkeep expenses.
Management and maintenance
Agree on how property maintenance, repairs, and improvements will be handled, including decision-making processes, funding for such activities, and responsibilities for performing or managing the work.
Single decision point
As mentioned, I’ve seen situations where one person agreed to replace an appliance while another strongly opposed it. The result was the tenant was without a refrigerator for days and refused to pay rent. This kind of indecision is detrimental when running a business. There needs to be one individual making the final decisions.
Dispute resolution
Define and agree upon a method for resolving disputes that may arise, such as mediation or arbitration, to avoid litigation.
Change in marital status
What happens to the ownership if a party gets married? It’s important to work this out in advance.
Succession
Define what happens if one of the owners dies or if there is a divorce, etc.
Exit strategy
Include provisions for what happens if one party wants to sell their interest in the property. This could involve a right of first refusal for the other party, buyout terms, and a method for determining the sale price.
Rental and use
Define the rules for renting out the property or parts of it, including how income and expenses will be divided. Also, agree on how the property will be used, who can live there, and under what conditions.
Contribution reconciliation
Implement a process for handling situations where one party cannot meet their financial obligations or if there are significant discrepancies in contributions toward expenses.
Legal and professional fees
Decide how legal and other professional fees related to the purchase and management of the property will be shared.
Signatures and legal advice
All parties must sign the agreement, and each party is advised to seek independent legal advice to understand their rights and obligations under the agreement fully.
Final Thoughts
The hours you spend creating the agreement will likely save both your friendship and potential legal fees. Take the time and make sure you cover these important points.
Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
