Are you itching to dip your toe in the exciting world of property development but not quite sure where to start? Maybe you have the money to invest but not the time to get any work done? A joint venture could be exactly the thing you are looking for.
What are joint ventures and how do they work?
In the most basic terms, a joint venture is an agreement between two or more people. It is a way for individuals to combine their resources, skills and knowledge in order to complete a project. The profit is then spilt between the parties, at a pre-agreed rate. This makes the project mutually beneficial for everyone involved.
For example, someone with a spare plot of land may enter a joint venture with a building contractor to build a house. In this scenario, one person is providing the resource of land and the other is providing skills, labour and knowledge.
A joint venture could be far more profitable than selling your land undeveloped.
How to set out a joint venture agreement
There isn’t a right or wrong way to set up a joint venture agreement. As long as everyone involved is comfortable and happy, pretty much anything goes. There are, however, two common categories that your agreement is likely to fall into; profit share and fixed interest.
Very simply, this arrangement splits the profits from a project between those involved at a pre-agreed percentage share. Again, there are no set rules at what the percentage should be – it’s whatever everyone is happy with. Commonly a 50/50 split is agreed upon, but if one person is contributing far more than the other, you may find a 70/30 split works better.
– Jim finds the project and manages construction
– Sophie pays for everything
– Together, they agree on a 50/50 profit split.
Imagine the total cost of the project comes to £130,000 and the property sells for £160,000. The total profit made from the project is £30,000 so both Jim and Sophie make £15,000 from the project.
If a joint venture is structured in a way where one person puts the money in and the other does all the work, you may decide on a fixed rate of interest rather than a percentage split of the profit. This means that the person who is investing the money will get their original investment back, plus an agreed upon interest payment every year until the project is completed.
– Gary finds the project and manages the construction
– Alan pays for everything
– Gary agrees to give a 10% annual rate of interest on Alan’s investment money.
In this case, if the project took one year to complete and cost £150,000 but then sold for £200,000 a £50,000 profit will have been made. Alan would get an interest payment of £15,000 (10% of the money he paid into the project). Gary would earn £35,000 in profit; the £50,000 gross profit minus the £15,000 interest paid to Alan.
Things to take into consideration
What happens if the unexpected happens?
Despite the very best of intentions, there may be times when a building project doesn’t run as planned. Unexpected problems could crop up, or the project could overrun the planned timescale. What happens to your joint venture then?
Sort a time frame
It makes sense to agree on a time frame, and also agree an outcome at the end of the project.
A sensible project length would be anywhere up to 18 months. Unless you have the time, money and inclination to allow a project to run on longer, of course.
With a timeline planned out, everyone involved knows where the project is headed and when they can expect results. In theory, it should keep everyone motivated and on task!
Discuss the worst-case scenario and the solutions
When you are ready to start your project it’s all very exciting, you’ll probably want to just crack right on with it. But, don’t neglect to talk about any worse case scenarios before you begin!
It’s important to talk about what could go wrong with a project and figure out how you would deal with any of these situations should they arise.
Questions to ask yourselves could include;
- What price would you be willing to sell the property for?
- What to do if the property is slow to sell? Would you consider renting? Who would be responsible and how would you split the rent payments?
- What happens if you go over budget?
- What would happen if one of you were to fall ill and be unable to work on the project for the foreseeable future?
Having this conversation so everyone is clear on who is responsible for what helps you not only plan for potential problems, but may help you prevent them from happening in the first place!
Finding the right person
A joint venture is a big commitment! That’s why it is so important to make sure you’re in it with the right person. I can’t stress this point enough.
Choosing the wrong partner could turn your dream project into a living nightmare. Spending time carefully considering your options could save you a lot of stress later down the line.
Here are a few pointers of what you should look out for when considering your joint venture partner:
- Do they have the same goals and expectations as you?
- Does their skillset compliment yours? They should bring something different to the venture. If you have money or land but no construction skills or knowledge, there’s no point in entering a joint venture with someone else in the same position.
- Do you get on well? This is really important as you will be working closely with each other, potentially for years.If you haven’t known the person for long, it makes sense to spend some time together before you begin anything. Whether this takes the guise of meetings, working lunches or even a few cups of coffee it’s important to get to know your partner and make sure you get on.Find out how they deal with stress and conflict and whether they seem reliable and honest. You will thank yourself later for really taking time to get to know your venture partner.
- Have they been involved in a joint venture before? This is especially important if it’s your first time. It could prove incredibly beneficial entering a joint venture with someone who already has experience of something similar.
Decide on responsibilities
Before you begin any work, decide who will be responsible for what. This will be very straight forward if you have agreed that one person contributes the funds whilst the other does all the work. But, if you’re both planning on taking on a role within the project, make sure you set clear boundaries.
Agree on what you both get out of the joint venture
This can be the trickiest hurdle to negotiate. Money can be a touchy subject at the best of times, so agreeing on a fair profit arrangement should be done with plenty of consideration for each other. Don’t agree to anything you may later regret and don’t bully your partner into accepting something they are not happy with. This could lead to the venture falling apart before it has even begun.
Deciding on an outcome that you are both happy with could lead to a successful venture and a happy working partnership in the future.
The legal stuff
The days of a handshake being a binding agreement are sadly long gone.
Once you feel confident that you have found the perfect partner to enter a joint venture with it’s time to get an agreement down in writing. Once you are both happy with the agreement, sign the papers – this makes it a legal contract.
At this point you may want to talk to a solicitor. They will take your written agreement and define terms using the precise legal meaning and could also contribute some standard terms which you may not have thought of.
Having a solicitor giving your agreement a once over isn’t a requirement. It does, however, protect the interests of everyone involved and prevents the potential for things to get nasty in the future. Once it has been signed you are good to go and begin your joint venture project.
For joint ventures we’ve worked on in the past, we get the legal paperwork signed as an options agreement. We then bare the cost of getting any planning permissions. Once this is in place, the options agreement kicks in and we either purchase the site or share a percentage of the sales value with the land owner – either has worked well in the past for both us and the land owner.
Talk to us!
If you think joint ventures could work for you, start working on them well before you think you’ll need one. By having a solid relationship already in place when the perfect opportunity arises, or the time is just right, you’ll already have a great head start.
If you are interested in or looking for a partner to enter a joint venture building project in North Norfolk, give us a call.
We would be happy to talk through the potential project and get to know each other better. We can show you examples of projects we have worked on in the past to make sure we are the perfect fit for you. After all, choosing your joint venture partner is a big deal and shouldn’t be taken lightly.