experts: real estate column Wednesday, August 21, 2002

Spelling out details: Make sure partnership responsibilities are clear

All partnerships that do not have a clear, clean itemized agreement of all possibilities have a good chance to fail or at least create a lot of unhappiness.

By Ozzie Jurock

This article appeared in The Vancouver Sun on August 17, 2002

So you go on a holiday with Mary and Joe and you get along splendiferously. Long Island Tea and Okanagan Spring Ale and being with good ole' Joe and good ole' Mary starts looking real good. Wouldn't it be nice if we partnered up and bought a holiday home together? Or, Joe is handy and I have some cash, why not buy a property together and get rich?

This is usually how small partnerships start. Yes, the can work, but problems that happen in ANY partnership come from not spelling out who does what. Say, you buy a holiday condo with Joe and Mary has the understanding that we'll "use it together." But what does that mean? Who gets Christmas, Easter? Who cuts the grass does the dishes, beds, and vacuums? What if one family is sloppy and the other isn't? What about pets? What about subleasing to outsiders? Expensive insurance or basic? How do I get out, can I sell my share or does my partner get it back at the original price? Are partnerships bad? No, but whether it is Mary and Joe or you partner with or a stranger to buy investment property with ... you need something urgent: QUESTIONS, QUESTIONS!

A hundred questions asked beforehand will make for a smooth partnership. All partnerships that do not have a clear, clean itemized agreement of all possibilities have a good chance to fail or at least create a lot of unhappiness. All who cover the tough questions ahead of time have a good chance.

I once owned a large motor yacht with 3 other partners. Everyone said you couldn't make it work, but we did. But our agreement covered EVERYTHING. We all knew what the expectations, the rewards and the recourse for non-compliance were. Thus, we were able to afford a much larger yacht and get in as much boating, as we would have had we owned it by ourselves at a much lower price.

This applies to any partnership or joint venture, but particularly a real estate partnership. Things change, so get the eventualities covered.

Remember that the definition of an investment is a financial involvement in something that you have a good chance of selling for a profit at some point in the future. If there isn't a 'good chance' of this happening but there is 'some kind of a chance' then we slip from an 'investment' to a 'gamble'. If there is absolutely 'no chance' then I don't know what to call it - maybe we could describe this as 'a tax loss that isn't complicated by the possibility of profit'.

All deals that go sour have this in common: investors/partners did not have a clear understanding of what they were buying. They didn't think through the potential downside and the implications of that and how they are going to be able to deal with it.

In a small partnership, the staying power of the other party is vital. Will he or she have the nerve to hang on, or decide to bail out, if the market gets volatile? All too often one person goes in with one set of expectations; the other goes in with another. While they've spent hours crunching the hard data, they've often not spent the heart-to-heart time analyzing the deal from their mutual point of view.

A single purpose partnership is a joint contribution of money; property, assets, knowledge, expertise or other contributions come together for a specific project ... the condo, that holiday home or the small 4-plex in Burnaby.

Before entering into any partnership you should know:

  1. Draw up a partnership agreement that spells out each partner's rights and responsibilities very clearly.
  2. Divide the financial and management responsibilities evenly and fairly so that neither partner feels he is doing more than his fair share. Try to avoid overlapping duties, so that each partner has total responsibility for specific jobs. Conflicts often arise when one partner feels he is doing more work than the other partner
  3. Spell out who owns what and what precisely is the percentage everybody has.
  4. Write down how much is everybody putting in and if they are putting in know-how instead of cash, how is the non-monetary contribution measured?
  5. Ask: What happens if one partner dies? What if one partner fails to perform his assigned duties?
  6. Discuss/identify: If something unexpected pops up, how will it be met?
  7. How do I get out? At what point can I sell if I want to? At what price? What if my partner does not want to sell, can I sell my share?

You have to know. In order to know you must ask. Don't be shy. Ask direct questions and make your own inquiries.

Partnerships sometimes provide a false sense of security for investors who are afraid to go it alone. The problem is that each partner assumes the other will carry the ball, and sometimes neither one does the job.

Personally, in my experience partnerships work ONLY if you spell it ALL out. ALL, including window washing, garbage detail and who replaces the scotch and what if he doesn't? In the smaller partnerships it is the little aggravating things that sour the experience.

Treat this strictly as a business venture. ...Even if it is your brother and particularly if it is good ole' Joe and Mary. If you wouldn't work under the same partnership terms and conditions with a complete stranger, do not accept those terms and conditions a friend or relative either.

Ozzie Jurock is the publisher of Jurock's Real Estate Insider an independent real estate advisory service. You can reach him at 604-683-1111 or e-mail ozzie@jurock.com




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