Kangaroo Kronicles – 9 – Won’t Ya Be My Partner?

By

Stu Silver / “Uncle Zally” Zalman Velvel

 

It’s 6:00 AM on the third Sunday in May, and I’m back at Ocala. I’m trying something different this morning – I’m staying home in the doublewide and drinking Lipton tea.

 Please let me know if you sense any change in this blog for the worse, because it was written without the help of the Kangaroo Convenience Store, Peruvian coffee, and a cheese muffin.

 I thought I would discuss partnerships between investors, because many of you have partners. However, one of the people I trained had a bad experience with a partner, so it bears discussion. Personally, I have had more than 100 partners on real estate deals, the majority of which were flips, or quick turns. This resulted in short term relationships on different properties, but long term business and personal relationships with the partners. I only had one partnership that went bad, and even then, we quadrupled our money. (Perhaps you’re thinking – send me one of those lousy partnerships where I can make 400%.)

 The truth is the overwhelming majority of my partnerships were fantastic, and I recommend them highly, AFTER you conduct you due diligence on your partners, and sign the appropriate agreements.

Partner selection can be MORE important than property selection, because even when you have a great investment together, if you are having partner problems, you’re in deep doo-doo. Partner problems can be WORSE than marital problems, because sometimes you’ll spend MORE time with a business partner, than your spouse.

 Just like a marriage, the first thing you need to have when you contemplate a partnership, is a pre-nup. Yes, that’s right, you need an agreement that spells out how you will split up the assets if you and your partners are not getting along. This agreement needs to be reasonable, simple, and fast. When you have partner problems, tensions escalate rapidly, making you feel like a married couple going through a nasty divorce.

 In all my partnerships, the partners signed an agreement BEFORE we bought the property, which defined the following:

1-    The percent of ownership

2-   Who gets what money and when

3-   Who has what responsibility

4-   What we will do when we want to dissolve the partnership

This can be a separate agreement, or part of the operating agreement in an LLC, the articles of incorporation in a corporation, the partnership agreement in a partnership, or the trust agreement in a land trust.

 In the next blog, I will discuss what makes a good partnership. In this blog, I am going to discuss how we dissolve a partnership when it is no longer good, or needed, because this is the ultimate security blanket.

In all my partnership agreements, the breakup begins when one partner is dissatisfied.  That partner approaches the other partners and states he or she wants to split up. Then that partner names a price for the property. The other partners have the choice of buying, or SELLING at the price the dissatisfied partner names.

 You will find this is a dramatic moment, and the dissatisfied partner must choose the buyout price well. He may pick a price that is low because he wants to wind up owning the property after the partnership is dissolved. However, the other partners can do an about-face on him, and instead of selling to him, they will buy him out. The dissatisfied partner better be sure he is naming a fair price, not a low one, or it may backfire, and he will give his other partners a great bargain.

This also holds true if the dissatisfied partner wants to sell out to the other partners. The dissatisfied partner may pick a price that he feels represents a bargain, only to find the other partners want to sell to him at that price.

Once the price is stated, and it is decided which parties are buying, and which are selling, a contract is drawn up with a 60 or 90 day closing (or whatever is comfortable to everyone) a 10% escrow deposit, and NO CONTINGENCIES.

What if the partner who is buying out the others cannot perform at the end of 60 or 90 days? Then the property is advertised for absolute public auction, where every partner may bid under the same terms as the general public: 10% non-refundable deposit, 60 day close, NO CONTINGENCIES. If, for some reason, the property still does not have a closing, it is put out again for absolute auction until it is sold.

This process is fair. It is the same the method used by the courts in order to divide up estates when the heirs cannot agree on who gets what. The judge orders a PARTITION SALE on the courthouse steps, where the public may bid, along with the heirs, at an absolute auction. The terms of the partition sale are similar to what I already described: 10% non-refundable deposit, quick closing, NO CONTINGENCIES. The property is sold to the highest bidder, and the proceeds from the sale is then divided up between the heirs, or owners, according to the ownership percentage.

 You will find that if you and your partners cannot agree on how to dissolve your  partnership, and decide to sue each other, this process is what you will wind up with, after spending a lot of money on legal fees.

 

In the next article, I am going to discuss how to choose a good partner right from the beginning, so you don’t have to execute your pre-nup. I never have had to execute mine. It was created over 20 years ago, and my partner then, Rick, is still my partner now, on deals where it makes sense to be partners. We have always made money together, and there is strong mutual respect and admiration.

Every time we do a new deal, I  pull out the agreement, we sign it, and then Rick turns to me and says, like he did on the very first deal, “I hope we never need this, but I sleep better knowing it’s there.”

 Cheers, mate!

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