Four of us are in the biz and hang out a lot together. We are all in about the same points in our lives. We each have a bit of investment $ – some more than others – and are thinking of buying a vacation house together.
It will be a fixer-upper. We each have a different Trade to contribute. As a “joint venture”, the condition of the house, and cost of the house – I do not think getting a loan will be easy. The RE Agent told me that no bank would finance one of the houses we are considering ($45K) due to it’s value and condition. Afetr we fix it up – well that might be a different story.
Anyways – what I am thinking for the fundemental spirit of the place:
a) Each of us will have our name on the Deed as an equal Shareholder.
b) We are all equally responsible for the cost of house, expenses and improvements. This is the out-of-pocket costs.
c) We are responsible for an equal number of hours devoted to the house. For the first 6 months (year?) each investor must contribute 24 hrs/mo as a mechanic and 16hrs/ mo as a laborer/ helper.
d) Everything (materials, rentals and time) invested must be approved by the group. This could get sticky. What about ties? What about work done off-site (ie: cabinet making)? For this thing to work Trust will be an important component. Estimates of off-site hours work will discussed be pre-approved.
e) On the First Monday of each month there will be a group meeting to monitor progress, financial and sweat-equity obligations and to approve new projects and pay the privious months accounts.
f) One weekend/ mo 3 of the 4 of us must be at the house. Somehow I think this will be unavoidable.
I think we need to determine the value of a unit time of a laborers value to a mechainics value. I was thinking 2L=1M. Time can be traded down but NOT up – in other words, you cannot trade your Labor Time for Mechanics Time but you can trade Mechanic’s Time for Laborer’s Time. This way we avoid the Diva Syndrome.
g) Everyone gets equal access to the house for fun. If you are there to do work, it must be scheduled and work takes priority during the first 6 mos/ year.
h) We will each have our own rooms and a locked storage closet in the basement.
My questions:
What is the recourse if someone stops paying their mothly obligation? I would like to run this as a zero monthly balance. Each of us will own 25% whatever is there at the end of each month.
If someone is late paying, who picks up the slack? Is the penalty/ interest charged better as $ or Time?
Furnishings – Is this all personal donations or do we buy everything? If I get a range or a ref. off a jobsite – does this get assigned a value? Coffee tables? Sofas? Pottery Barn Rules will be in effect.
Someone has to be the House Manager/ Banker. Who? and How is this time calculated? M? L?
Do we set up a House account at a local bank? Would like to set up an account at athe local lumber yard but then for the month an individual will be responsable for an expense. I would like to keep this to a minimum. Maybe we all ante-up $1K into a checking acct and use a debit card tied to that account.
Anyone have any ideas of other things which we need to consider? How about alternate ideas?
Frankie
Replies
I have been involved in a few small partnerships with property investments. Usualy relatives but twice with friends. Here is what I did or what I would do.
1) LLC would be a great way to have four partners and still define percentage of ownership. The deed in the LLC name and then with each one owning a share they could sell out etc. The bylaws can be drawn up, agreed upon and signed by each member or any new members in the future. And it is cheap to set up. Don't forget a buy or be bought clause for serious disputes and a right to approve buyer in case someone gets mad and wants to sell to Bin Lauden.
2) I always set up the partnership with its own checkbook and credit card. Each member can have a copy with a predetermined limit. This way everyone can use credit as needed, wherever and the LLC always has a record that is traceable to settle disputes if needed. Have a monthly or bi-monthly meeting to allow each memeber to read the checkbook registar. Simple way to determine where the money is going. All reciepts should have what they were working on printed on them when turned in.
3) I like the determined amount of hours etc. You could also break it into units if you feel people working at home aren't contributing as much etc. But a set amount is good.
4) 0 Balance is a bad idea. Someone doesn't pay and bang, someone is cousin Vini trying to get money out of someone else before the payment is due. Have everyone chip in $600. Write it out of the check book as though it is not there. Then if it happens the member doing the bookwork isn't stuck with calling Bill who failed to pay on time again. Leave that conversation to the group, not the book keeper. He will feel pooped on enough. Then everyone chips in monthly and hopefully all is happy. Plus you will get free checking with a decent balance.
5) I have never had a problem getting a loan with enough potential, a good plan and enough income/net worth. And you have 4 of you. Go through a mortage broker. They can often find a source that will go for lower loans and often can find no qualifier loans. Once the place is fixed up you can work on a refi if you wish to cash out of it or simply lower the overhead.
6) Expenses will be an issue. Determine if each member covers their own or the group pays for fuel, food etc.
7) Determine use guidelines up front.
8) Have everyone keep a log of what they did and maybe spent to be reviewd by the group. Everyone gets log book on day one.
9) I think the guidlines are up to you. Whatever agreement all signs would be the standard. Back to my buy or be bought clause.
10) Determine who is the best qualified to be the banker. Give him a certain amount of labor for the job. Once organized it is a 3-4 hour a month deal with another 4 or so with the accountant at tax time. Use a seperate accountant so all is on the up and up and again review the checking account, CC bill, each month. You are your own best defense against getting screwed. In my case I always control the money but insist on having my books looked at by the partner and the accountant regularly. Thus I have friends who trust me with their money anytime. (maybe not wives and daughters but money lol)
I have done this 4 times and what I have described worked well. But of course others may have good idea to you may want to incorperate. But do it in writing, have it reviewed by an attourney and use an accountant. The more formal and organized it is the less disputes will arise. DanT
Good points.EVERYTHING will be in writing.I like the "Out" clause idea. Don't know how it will work in practice. Then again, there are no guarrentees in life. How what goals we have now will be affected when we, if any (ha!), get married is unpredictable.LLC - Brilliant!Loading the checking account each month regardless of expenses is a good idea too rather than playing catch-up.Thank you for the compliments and suggestions.Frankie
There he goes—one of God's own prototypes—a high powered mutant of some kind never even considered for mass production. Too weird to live and too rare to die.
—Hunter S. Thompson
from Fear And Loathing In Las Vegas
sounds like a marraige. hope you can all talk and get along, or somebody is going to be very unhappy. Putting everything in paper is helpful, though you'll likely find that you missed something or somebody misunderstood something. And if somebody can't, or won't, hold up there end of the bargain, you still have to deal with it.
SHGFor every complex problem, there is a solution that is clear, simple, and wrong.
-H.L. Mencken
yer a smart fella ever now and then ...
Jeff Buck Construction
Artistry In Carpentry
Pittsburgh Pa
It's those once a year moments that fool people. DanT
Frankie, Dan's suggestions are as good as gold if your really going to go through with this. I see this as a four headed monster though...
I'm thinking more along the line of SHG....you guys really better love one another....and love the spouses too, several of which won't be too happy about this project!
I've went through a similar process witn a good friend and I learned a very important lesson: I won't ever give up 50% of my creative authority again. I certainly wouldn't enter into a four way and have to deal with a heatman's creative ideas!
That's not meant as a slam against heat guys....I'm just trying to make a point.
Let's say for instance, I'm a carpenter and I'm hanging the doors. Sounds simple right? Well, think again. We have flush doors, panel doors, solid cores, hollow cores, clear jambs, paint grade jambs, fingerjoint jambs, wide casings, regular casings, fj casings, etc, etc, etc. Then you get into colors! LOL!
All of these decisions are excruciating when a man and wife are making them. Now, you have to take into account three other couples! It's impossible. There WILL be a lot of unhappy campers.
I'm speaking from experience. We spent way too much time discussing and agonizing over every small detail. Every step of the way because painful. I hate semi gloss, he hates flat paint. I love whites, he likes darker shades. I like blended grout lines, he wants contrasting grout lines yadda, yadda, yadda.
I'm still not happy because I had a beautiful 16" white marble tile picked out and that would have influenced the rest of the decor. We ended up with a mauve tinted 12 x12. We went from glam to neutral. I learned to compromise, but I also learned that I won't do it again. It's my vision, not someone elses.
Your four way will only work if there is only one captain. Look at how many pro teams self destruct because they can't agree with one another. You are forming a pro team and you better be sure all the bulls are willing to leave their egos at home.
Frankly, I don't think it will work, but I don't know how close you guys are. After the construction phase, how will you decide who gets the choice weekends; 4th of July, Christmas, Labor Day?
I'm very open to doing joint ventures and forming llcs. I'm involved in several different ones right now, but I wouldn't give this one a second thought. It wouldn't fit my personality. Don't let the joy of the end product blind you to the realities of getting there.
blue
First of all, a joint venture is generally treated legally as a general partnership, albeit for a single project. That means that each of you is obligated for 100% of the debts of the venture, and that means recourse to personal assets, not just project assets. Imagine you, me and Bill Gates are the three joint venturers. If the project goes bad, the creditors will all look to Bill for all of the money owed. Bill then has recourse to you and me, if we have any money.
An LLC or LLP might be better, but spend a few bucks on a lawyer familiar with the law in your state and get his/her opinion on how to structure your venture to minimize your risk.
Whether the project makes any business sense is a different story and I'll leave that to others more wise than me.
Great responses from all.
I have to say that it all sounds pretty complicated and is likely to get more so.
I am involved in two partnerships, one for over 25 years. Both have written agreements but are primarily based on trust. What you need to worry about the most is how you will disolve your partnership.
We have lost two partners in our contracting business over the years and been able to part amicably. We were able to do this in part because we had a lot of liquidity in our company and could cash out the departing partner. We could buy out any remaining partner tomorrow.
The second partnership is a commercial real estate venture that is mostly just a business investment with one partner doing most of the work and making most of the decisions. This is fine for the rest of us since it is only part of our assets. The main partner needs our money and our support/judgement; we need his knowledge, energy and on the ground commitment. And his money as well. This partnership would be hard to leave quickly. It would take time to raise the cash to buy anyone out. Fortunately we have a ten to fifteen year time line.
If you are able to trust others, appreciate their good qualities and have patience with their faults, maybe you can make it happen. If you like to be in control of your destiny, look to another opportunity.
Well sounds like a headache, but it can work if you can all be civil about it. How do you handle who gets what weekend? Three of you want to vacation there on the 4th of July and don't want the other partners there what happens? Someone already stated make sure you have it set in the rules what to do if a partner wants out. If the house is 45K and then the $$ for fix up you shouldn't have too much into it. So if one guy wants to leave after two years and the house is all done how will you determine his cut? Property assessment or RE market value? It is always easy to get into these things but getting out cleanly without hurting someone's feeling is the hard thing.
The way I imagine it - NO ONE would have ANY weekend or day. The house belongs to everyone. We share. If someone abuses this by always bringing friends or relatives every weekend, we'll have a "sit-down."Cashing out Is what I see as the biggest issue, when one person decide he wants out. I figure the most any of us will have in it is $20K + our labor. It is not a lot but it is enough.Maybe, from the beginning, we agree that the house venture will last 30 months. Once you are in, you're in for the full 30 - kinda like a T-bill. If you want out sooner there are no penalties - because you CANNOT get out. We sell at 30 mos. asap. If one of us wants to buy it then, he has to buy it at market value, less realtor's commission - 4%.I am thinking out loud here. This is a work in progress.Frankie
There he goes—one of God's own prototypes—a high powered mutant of some kind never even considered for mass production. Too weird to live and too rare to die.
—Hunter S. Thompson
from Fear And Loathing In Las Vegas
Rather than assigning values of time and skill, how about assigning resonsibilities of completion? In other words, if you were going to do a set of Kitchen cabinets for a customer, you would buy them for X dollars and install them for Y making the total cost Z. Someone else is responsible for Z cost of drywall hanging and finishing. And so on.You have market values for all parts of a house set in books and computer programs. Of course there will be a few things not found in books, but you all ought to realize what they probably should cost and reach an agreement before the work is done.
The way I imagine it - NO ONE would have ANY weekend or day. The house belongs to everyone. We share. If someone abuses this by always bringing friends or relatives every weekend, we'll have a "sit-down.
See? Right away, we would be 180 degrees apart. I would not want to have all four of you guys hanging around when I was trying to enjoy myself with my family and friends. And I certainly wouldn't want you having a veto on who I could bring. I wouldn't touch that arrangement with a ten foot pole.
Those are the social issues that muck up a relationship that is bsed on finacial matters. The two rarely mix.
blue
Shucks! It won't be the same without you!I understand you completely.Frankie
There he goes—one of God's own prototypes—a high powered mutant of some kind never even considered for mass production. Too weird to live and too rare to die.
—Hunter S. Thompson
from Fear And Loathing In Las Vegas
and as soon as the guy's wife gets wind of this, all hell breaks loose.
See, even if the guys agree, there's still the wives. When it comes to telling them what they can and cannot do, that's a whole 'nother thing.
SHGFor every complex problem, there is a solution that is clear, simple, and wrong.
-H.L. Mencken
Thank you for the insight.The less rules the better.Still thinking...Frankie
There he goes—one of God's own prototypes—a high powered mutant of some kind never even considered for mass production. Too weird to live and too rare to die.
—Hunter S. Thompson
from Fear And Loathing In Las Vegas
I'm with Blueyed on this one... I'm in one of these deals and it works 90% of the time because we don't keep score there is no "equal" just as there is no "fair"...
our works for a few reasons....
because we have a bank account that we both have funds auto deposited to every month that way exceeds expenses so there is always a growing fund.... it was agreed on the front end we'd each deposit X each month... period
we don't keep track of who does what or brings what
if one of us wants to build something... go for it... but it's your puppy start to finish... the other might or might not help but... that project is your baby... you want to paint... paint...
each has one room that is theirs... the rest is common area... invite 40 people if you want just don't use the others private room unless you ask... and best not to ask...
i happen to like 40 people there i like step'n over folks sleep'n on the floor... i have my room if i want....
I do more than him... because i can... i knew that go'n into the deal so it's a non issue... he does all the bills... i hate bills and paperwork
would i do it again... nope... i didn't and don't need anyone else to be able to afford it.... why do i say this... I think i get more use out of than him... yes i do more of the upkeep and I found the deal and it was a sweet deal... but as balanced as this deal is... I just don't want to ever deal with an upset friend and these things set themself up for someone be'n upset.... I feel I lost a great friend on a partnership where everyone made out like bandits but his wife got into think'n she was boss (she came after the partnership) and I just never want to be in that situation again...
I don't know your situation but just from your post there are already way too many rules... which will inturn make someone the "rule police" if you got to have rules make the rule "what i say goes" have everyone else invest and share in the equity...
for 45k thats less than $300 a month on a bad rate unsecured loan... I wouldn't even think about deal'n with 7 other ideas and opinions for that...
but then thats why I only work for me, my projects, my design, my risk, my reward... that way i know who to thank or blame
p
Now that you mention it Pony, your right...all those rules would be another huge flag for me.
We have only one rule that isn't in the operating agreement: leave the place hotel clean.
blue
Post #18 was intended for you.Thank you again,Frankie
There he goes—one of God's own prototypes—a high powered mutant of some kind never even considered for mass production. Too weird to live and too rare to die.
—Hunter S. Thompson
from Fear And Loathing In Las Vegas