by Dan Trivedi
14:35 PM, 20th March 2017, About 4 years ago 3
If you are involved in property you will know that things do go wrong! You can plan, plan, plan, and check, check, check, but in property things DO and WILL go wrong. We are dealing with bricks and mortar at the end of the day.
We are also in an industry which requires multiple skilled trades people, who you rely on.
I personally am an advocate for joint ventures and my business is built around multiple JVs. Some people think they’re great and have excellent experiences and returns to match with different people and companies. Some, however have bad experiences and some take a view/opinion based on hearsay or their own perceptions.
What’s clear is there are different forms of deals and companies for JVs passed around our community.
When things go bad (not wrong) these are highlighted exponentially across multiple forums (usually by the effected party IE JV partner)
What doesn’t seem to get highlighted is the many successful and over delivered JVs and individual property deals post completing. I am by no means an expert in property or JVs, but I do have experience in both.
I can 100% say no 2 JVs are the same! Every investor and their circumstances are as different as 2 properties.
This is what makes JVs both exciting and dangerous if not done correctly.
Agreeing and documenting as much as foreseeable at the start of the JV is crucial! Discussing all the ‘what ifs’ always highlights different assumptions of what happens in a ‘what if’ situation.
JVs allow people who are time or knowledge poor to team up with someone or a company who has proven ability and experience to deliver.
However, anyone considering a JV should speak to as many people as possible who have worked with the said person or company, reviewing as many deals presented as possible opportunities and scrutinise these JVs the next one and next one, see 5/10/20/50 before making a decision. And NEVER feel rushed or pushed into a deal as this rings alarms bells.
There’s one thing I can promise, there will always be another deal!
We have many JV deals complete each month and pretty much all are either above or in line with expectation. Just last week we sold a deal 9 months after buying it. The investor got his money out plus a NET 80% return on that investment.
Despite this, I want to highlight a JV that did go wrong, very wrong, and the importance of following your values as a JV partner when things do/will go wrong. What’s not important is what goes wrong, but how it is dealt with.
My personal view is if you are JVing no fees should be charged, it’s not a client and service provider relationship, but a partnership into a property venture. Thus meaning both parties share the same commercial interest in the deal (the profit).
We agreed to buy 2 terraced houses. Both were very cheap and both needed complete renovation. The properties were in a slightly different market than we normally target.
An existing partner was hungry for another deal, had cash and wasn’t keen on a mortgage. We showed him the properties and agreed a JV on one.
We instructed a main contractor to complete the works on both houses for a fixed price, we’d worked with this trades person before, and the experience was good.
We allowed 10 weeks for the first house and 9 weeks for the second.
The contractor was paid a small amount upfront and further amounts post staged works being completed.
When the rip out stage was finished they quickly erected stud work etc.
However, things started to really slow down and by week 5 I started to have real concerns about the excuses and quality of work. The contractor asked to bring in some other people for help, to get the job done to which I agreed. After another week I sent some more money over to pay for these contractors. At week 7 it was clear that things still weren’t moving and the other people bought in weren’t the professional trades people I’d been promised.
In a meeting the main contractor said he didn’t want the job any more, was walking off and started to ask for more money for the works he’d done, to which I said no, things were poorly done, a mess and not worth the funds I’d already paid.
I agreed with him that I’d bring in another set of builders and he’d do some more work under them for the cash I’d already paid. Given the work he’d done, I wanted him supervised by my other builders and only completing plumbing work (plumber by trade).
By week 9 he still hadn’t done anything. I’d bought in another team on site & the mess was 1000% worse than I had thought. Not only did the house need more work than I’d originally planned (post strip out stage) the works that been done had to all be pulled out and started again.
Now I of course won’t and can’t go into details on the numbers, but I went back to the investor to update further. I apologised and explained the plan of action to take this forward.
We share a percentage of the profit and carry the same percentage of liability in any deal. If an over spend happens (which it does in some cases) we fund it 100% putting our own funds into the deal. Like the original investment, we then get paid back from the profit.
However, I was personally responsible and accountable for instructing the first contractor who had done a poor job, lied about materials ordered and not used for this job and the people who were working for him etc.
I took a view that this was our error not the JV partners, our part of the deal was to instruct and oversee the refurb, which had now gone wrong. I decided I would right off personally the money we’d paid him as a company and remove it from the JV deal, meaning the money would not be paid back to us from the deal and we would pursue the contractor via the courts. This was in total £7,000.
We were now faced with a house which needed more work than planned with the original budget and when our new builders started work it was clear, the amount of work was going to 1) exceed the budget and 2) mean we’d have another large time delay.
I ensured the investor that we are in this together and the job would get finished.
We funded another £15k from our own funds to get the job completed, never once going back to the investor for more funds. We work on a very simple principle, after the original funds, if any more are required they come from us!
Another 10 weeks later after running into more and more hurdles than I’ve EVER encountered on a project, we got the job finished. It was over the original budget and was by far one of the most problematic sites I’ve ever encounter, simply put we’d got it wrong!
We never once even asked or went back to the investor for more funds and we are in a JV partnership together and this was our responsibility.
I’m not ashamed, but I’m sorry to say we did get it wrong, not only did the house have issues beyond what we could see before purchase, but we were well and truly let down by contractors.
The investor wasn’t happy with what happened, but was happy with our actions and how we dealt with the problem when it went wrong and because of this, things never went bad.
The deal had cost us in total £25k, but I’m pleased to say we’ve now sold the property at auction. However, the fun didn’t stop there (it would seem the property was cursed).
We sold the property in the room and exchanged under auction rules. The buyer hadn’t seen the property or read the legal pack.
When he saw the property he attempted to withdraw from the sale (we believe he thought he didn’t get a good deal).
The buyer clearly didn’t understand his obligation.
I decided to meet with the buyer and chat through his reasons for wanting out of the deal. He had simply not read the legal pack or seen the property and just wanted out. Now I could have said tough luck, but I believe in Karma, reputation trying to treat others how I’d like to be treated.
Now because of the problems and time lapsed, to increase the original investors return, we’d already offered to pay the auction fees and our profit was non-existent.
I offered the buyer a small reduction and I’d send in my own builders to remove a stud wall which he didn’t want up to create a larger reception room. I know I didn’t have to, and this would send the deal for us into loss making, but we wanted to sell, withdraw the funds out and at the same time try and appease the new buyer.
We finally completed on the sale.
The investor got all his money out and a small NET 7% return in a total time of 10 months, we made zero profit, but recouped some of our costs. The buyer had made an error himself, but we went that extra mile for him and his experience with us has been good.
This is an example of our most horrific JV to date in terms of result and things going wrong. It highlights that even with experienced partners, things WILL go wrong. I plead with anyone looking to get into JVs to consider ‘what happens if’.
How things are dealt with means that you can come out the other side, with your head held high and a good result.
JVs do get a lot of bad press, and sometimes it’s warranted. We hear less of successful JVs, but we do hear about them. What I want to highlight is that ownership and profit share is equal to liability. I’m very pleased with how we handled an extremely problematic property and any new investor I talk to I now mention this project.
Deals will come and go and so does money, but your reputation and integrity is reflected on the actions you take when the chips are down. That’s why our investor has gone into another project with us again straight away.
Remember anyone considering entering into a JV always ask the questions ‘what if’.
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