Creating Joint Ventures
"No matter much money you have or how much experience you have under your belt, there will come a point in your property journey where you either have insufficient funds or don’t have the knowledge or experience for the next deal."
Similarly you may have one great property deal going through, but then another comes along that you will miss out on because your money is tied up in the first one.
By working together in joint venture partnerships, savvy investors can leverage other people’s time, money or experience to do more, bigger and better deals.
Perhaps you have the money but not the time to find deals? Maybe you can find deals but don’t have the development experience? Maybe you have found a fantastic deal but lack the funds with which to buy and renovate it?
Each month in Your Property Network we profile case studies where different investors have teamed up and brought different resources or skill sets to make a deal happen.
Naturally it’s imperative that all parties understand the risks involved and what they will both gain by the joint venture (having a common goal) but there can be no doubting that through joint ventures, investors can achieve far more than they could by simply working alone.
Check out this article by YPN reader and guest columnist Prab Paul detailing some of the innovative joint ventures he has undertaken to leverage his time to make more money in property.
Until a couple of years ago, I had a very independent approach to my business and property career – then I realised that leverage is the name of the game. You get to a point where you appreciate that teamwork is what really makes the numbers work; joining forces with others who complement your skills by way of time, money or expertise means you can do deals that you never would on your own.
Joint ventures (JV’s) are a powerful way of bringing people together, BUT it is important to understand how they work and how to structure them.
For a long time I had been working on my weaknesses, but you can get further by focusing on your strengths and finding people who complement you. An individual can “fit” into a deal in many ways, and different people bring different energies and strategies, creating a new dynamic. To create a win/win for everyone, be genuine and sincere, and find out what your potential partner wants first before working out how you can complement that.
How Much Experience?
Some worry about a lack of experience in people who are looking for JV partners. That’s an understandable concern but it comes down to each party being clear about their objectives. One might have the will and time to pursue a deal but not enough money; another may not have the will or time, but has funds. It’s a meeting of minds, but don’t jump into bed sooner than you need to. It took over six months to establish one of my JV relationships because we consciously made an effort to get to know each other. Creating a powerful win/win partnership demands an understanding of both your own and others’ strengths and weaknesses.
Be prepared to be vulnerable and authentic. Challenges arise when people are not open and honest – it might not be ‘normal’ to put forward our weaker points but being open about what we’re good and not so good at is essential to creating a foundation of understanding, integrity and transparency.
I have an open book policy. When considering a JV, I invite potential partners to my office where they can open any file or even my bank statements and ask any question. I want people who work with me to know everything about me and my business.
If you learn to walk before you run, entering into a JV can be powerful even for those new to property. It provides an opportunity to join forces with people who complement your skills and you can grow a lot faster than you would independently.
Specialist Knowledge, Experience and Skills
There are times when you need to bring in professional or specialist expertise. More complex deals involve several parties with a variety of skills – in Case Study #1 , for example, we used an option agreement.
Different individuals bring different skills. The key to working with others is to know what you want to achieve then identify who you can work with. Starting out can be daunting, but experienced, genuine people will usually help with advice and support. When you’ve been through the trenches yourself then meet someone at the beginning of their journey, you feel a sense of empathy and understanding. From that perspective, JV’s can be created.
Don’t limit yourself to certain types of people. I am working with someone completely new to property at the moment; I guide him on what to look for and he brings deals that we can discuss. We have all needed support at some point in our lives and this way, he’s learning and I’m giving back.
Case Study #2 was a challenge and a test of negotiation skills but more than anything, it required commitment to find a solution. Anyone can do that, it’s not a specialised skill. You just need to listen: in this case we had to listen to both seller and tenant to find out what each wanted. Then find a win/win solution. Then ‘let go’ of the deal and any emotion attached to it – it will either happen or it won’t.
Being independent has advantages, but you need to create teams to win. I’m a people person and could see the potential in meeting people with different energies. However, not everyone is naturally inclined this way – you might need to break out of your comfort zone. Vulnerability and openness is not common in our society, but being genuinely candid will often attract the help you need.
I have recently started working with Thierry Lemaire and Tim Hodges: we have formed a company called Vincit Developments Ltd. We each have different skillsets and energies, and now meet regularly to discuss and analyse deals.
Projects vary and demand different skills. Case Study #3 , for example, involves a planning application. I am no planning expert, but Thierry has an engineering background and sees things on the plans that Tim and I (and our architect) might have missed. Our diverse backgrounds and experiences are one of the reasons that we have come together.
Successful partnerships don’t happen overnight, but do happen with a commitment to grow. When you have the desire, aspiration, sincerity and are committed to creating solutions that work for everybody, you will attract the right people.
Working with others might mean extending your geographical investment boundary. Not knowing local property values and dynamics, or what constitutes a good deal in that area, puts many people off. There is no right or wrong, and it depends on your own appetite for risk and venture.
Some like to stick to a certain patch, which has huge benefits because you get to know that area and become an expert. However, working with people who have different strategies,energies and ideas will lead to opportunities elsewhere.
We did not intend to hold the properties in Case Studies #1 and #2 so geography was not really a challenge. When buying and selling, you may need to make a couple of trips to the property – which can make for a pleasant outing! – but the risk is limited as long as you rely on expert advice from local estate agents, do due diligence on the comparables and are comfortable with the margin. Plenty of people do deals outside of their geographical zone. Sticking to a certain area is more limiting; by working with others in different areas, you cast a wider net.
When holding properties though, I prefer not to venture outside areas where I already invest. Staying within your rental patch makes sense and brings economies of scale.
Don’t Ignore the Bread and Butter
It can be tempting to ignore smaller deals in favour of “landing the big one”. In my view a profit of even £5,000 or £10,000 can be worthwhile, because the value sometimes comes fromexperience as much as money. There’s no easy way to make money – there will always be challenges and it is those challenges that help you grow and learn.
You never know where a deal might come from, how big it might be, or where a conversation might lead. Several smaller transactions can add up to a lot of experience and profit. You can measure time and money but not value. That can be priceless at a later stage.
If you would like to discuss potential ways of working with us, please call Harinder on 07973 641917 for further information.
This 2-bedroom bungalow, worth £200,000, was owned by an elderly lady who wanted to move to Ireland. Ideally, she wanted to move out, put her belongings in storage then live with a friend in Ireland while she searched for a home over there. She had no mortgage – she was asset rich, cash poor and didn’t have enough money to move.
Thierry brought the deal, I brought the finance, and we put our heads together to find a solution.
We came up with the following:
- We funded her moving costs.
- We took an option on the bungalow.
- Her budget to buy in Ireland was £100,000; if she found a property before we sold, we would give her £100,000 towards that.
- It needed a light refurbishment to make it presentable, marketable and bring it up to date. Our plan was to sell it on the open market, preferably before she bought in Ireland (which we did)
Agreed purchase price on option agreement: £170,000
Option length: 10 years
Option price: £10,000
Legal fees: £2,560
Other miscellaneous costs: £2,978
Resale costs: £2,841
Total cash in: £22,748
Sale price: £224,500
Option agreement date: 6 December 2013
Date on open market: 29 January 2014
Sale completion date: 17 April 2014
ROCE (over 4 months): 171%
A particularly interesting deal, and an example of perseverance and detachment working to your advantage. Becoming attached to making something happen creates rigidity – and that might break a deal. In this case, we had to “let go and trust the universe” as they say, while continuing to put everything in place.
This also came from Thierry. It was a huge, 5-bedroom detached house that the seller had bought for just under £350,000 a few years ago.
I had never seen anything like this before.
Most tenancies are an assured shorthold tenancy (AST). In this case, the seller had made a big mistake in letting the property to a “friend”, allowing the friend/tenant to draft up the agreement.
That turned out to be a one-sided document that created an assured tenancy; the tenant had given himself a 30-year term at £650 pm rent (the market rent was £1,000pm).
The seller wanted his house back; the tenant would not give it back; they were at loggerheads. By the time the seller contacted Thierry, he desperately needed to sell. The property was unencumbered but he needed the cash. The tenant was causing problems and refused to let anyone view or visit.
The seller had already received an offer: £280,000 for vacant possession or £210,000 with the sitting tenant. We referred the agreement to our solicitor and the Residential Landlords Association (RLA), who promptly replied that the tenancy could not be broken. Legally, the tenant had every right to stay. We were not prepared to take a punt with the tenant in situ – we like a clear exit route.
We asked the seller’s permission to speak with the tenant, to try and create a relationship so we could find a win/win for everyone. The tenant would only consider vacating if we could find him another 5-bedroom house for £650 pm and pay him a significant sum as well. Finally, we offered him a random figure of £18,650 to move out. We then let it go, accepting that the vendor might sell to the company who had made the offer.
Two months later, the tenant called and we eventually agreed the following with him:
- We would pay him £25,000 to leave the property in six months’ time.
- The old tenancy agreement would be destroyed immediately.
- A new AST would be drawn up and signed.
- He could live there rent free for six months after signing the AST, which was valid until 31 July 2014.
When we sent in builders and agents, we discovered the house was like a zoo – the tenant was keeping snakes, lizards, fish, dogs and goodness knows what else. It was in a very poor state.
At the same time as negotiating with the tenant, we agreed a 2-year option with the seller for a purchase price of £190,000, the low figure reflecting the condition of the property. We paid him £50,000 up front, and also paid everyone’s legal fees.
Things rarely go to plan! The tenant left his wife during the 6-month AST period. She couldn’t leave on 31st July as she didn’t have anywhere to go; the local council would not rehouse her until she had an eviction notice. The legal eviction process took a few more months but on the plus side, we saved £18,000 because they hadn’t vacated on the agreed date.
Agreed purchase price on option agreement: £190,000
Option length: 2 years
Option price: £50,000
Paid to tenant: £7,700
Legal fees: £4,840
Other miscellaneous costs: £4,446
Resale costs: £5,250
Total cash in: £96,986
Sale price: £350,000
Option agreement date: 24 January 2014
Date on open market: 15 December 2014
Sale completion due date: 24 April 2015
ROCE (over 15 months): 110%
This came from another sourcer. Finding deals is not one of my fortés so we rely on sourcers who enjoy doing that. In turn they like to know they can rely on us and that we will get back to them within a certain timeframe. That in itself is a JV agreement.
Negotiation took almost nine months, and the three of us working together paid off. Several times we thought it would go nowhere – even the sourcer had forgotten about it and was delighted to unexpectedly get his fee nine months later when we finally completed.
The property is a hair salon on Roehampton High Street with two flats above and a basement set up as a beauty parlour. We saw potential to create a flat by converting the basement, and also to add another flat behind the salon.
We used NatWest Commercial to finance the deal and they issued a ‘Red Book’ valuation of over £700,000 – we were buying it for a lot less than it was worth. We got 60% funding, and used our own funds for the rest.
At time of writing (March 2015), we have submitted a planning application after doing an initial pre-planning application to elicit an informal opinion from the council.
Purchase price: £500,000
Purchase date: 10 November 2014
Commercial loan for purchase: £350,000
Deposit (own cash): £150,000
Fees (valuation, finder’s fee, legal, etc): £14,600
Stamp duty: £15,000
Total cash in for purchase: £179,600
Building quote: £131,000
Development interest: £9,170
Furniture for show flat: £5,000
Resale costs: £14,000
Bank finance: £23,000
Projected total resale value (individual sales of 4 flats and salon): £1,180,000
Estimated resale date: 30 September 2015
Total cash in: £338,600
ROCE (over 10 months): 138%
Return on own cash: 261%