Today I want to talk about when you should really consider doing a seller JV. I know it may sound like a bit of an easy question, but there’s a little more to the scenario than you might think. Let me explain…
As most of you know, seller or vendor JVs are when you take on the seller of a property as a partner. It might be a reno and sell deal, a granny flat add-on in the back, a subdivision and build out with sale and cash flow split or whatever else you can think of. Ideally, though, the seller has other properties on the market or is willing to sell. But whatever the project happens to be, you’re taking on a JV partner in the deal.
Is there a risk in taking on a JV partner? There is, but you can minimize the risk with a well-written contract that lays out everything that each party is responsible for, including profit division, filing fees, and all the rest. But remember, the seller is also taking a risk in making you his partner, isn’t he?
A seller JV when you don’t have the cash
Now, the obvious time to do a seller JV is when you have little or no money to put up for a down payment on a property. Doing a seller JV in this situation makes perfect sense. It gets you into a property without any financial investment on your part. That’s a big deal because it puts you on the property ladder.
Once you’re on that ladder, you want to maximize the outcome of your JV deal. That doesn’t mean taking advantage of your partner and squeeze him out of his share of the profits somehow–you don’t ever want to do that. But it does mean taking full advantage of the property in question and other properties in the seller’s portfolio. Paint a picture where if you do such and such and the deal is successful, that you and your JV partner will do another deal together on a specific property.
Now, you want to make sure that whatever deal or project you arrange with the vendor, that it’s the best possible strategy for the property, and you should really look to employ more than one strategy to maximize equity and income. This means you do your due diligence regarding the area, what similar project strategies have yielded in chunk money or passive income and try to copy those strategies.
Sets yourself up for your next property—or partner
If you’ve ever heard my webinars or attended my boot camps, you know that I always say that the right deal will set you up for getting into your next property. That’s what your seller JV deal should do, too. If it’s a chunk deal, make sure the profit is there to put you into your next property. It’s the same with passive income. And as I say, your seller JV should have other properties for sale; often the properties will be cross-securitized. However you make it happen, your seller JV deal needs to push you up the ladder to your next deal.
You should be able to get your next deal with the amount of cash you make on the seller JV with your seller JV. That should be your goal when you go into your seller JV deal. If the seller has only one property to JV with you on, it’s not ideal, but if the money is there to get you into your next deal, then you should still do the deal.
Think, for a moment, about the reasons why the vendor wants to do a JV with you in the first place. Maybe he had a bad experience with an agent. Maybe the seller feels that the costs are too high working with an agent. Maybe he doesn’t want to feel like he’s given up total control to an agent who may not have his best interests at heart.
That’s why it’s very important that you deliver on what you say you’re going to deliver. When you do, you not only bring the deal to a successful conclusion, but you’re also building your reputation with the vendor. He will likely be comfortable doing more deals because of how well the first went.
It’s also quite likely that your JV partner will know other property owners. Your partner may introduce you to other deals and partners. Either way, you now have built a relationship with your vendor-partner founded on trust and competence. In doing so, you have also built yourself a professional reference you can leverage to get your next several vendor JV deals.
And by the way, whom do you think people like to do business with, anyway? People they like, they trust, and who come recommended or have great references. By doing right by your vendor partner and fulfilling your end of the bargain, you not only capture your share of the profits, but you also capture the trust and belief in your partner and build up your own reputation as a great investment partner.
Vendor JV advantage even if you have the cash
But suppose you have the cash to get into your first or next property. Just because you have the cash on hand doesn’t mean you shouldn’t consider a seller JV. All of the same advantages I mentioned above also apply to you investors with cash or access to financing.
But there are other advantages as well. For one, you avoid the holding costs associated with acquiring a property. No financing costs, no stamp duty or legal fees, either. As you may know, those costs can be considerable and make the difference between a profitable deal or not.
Another reason pertaining to costs is that the chances are pretty darn good that the seller knows the general condition of his property and knows what improvements he’s made or has yet to make on the property. Even if he doesn’t, the reno costs can be borne by the property or split between the partners, which can save you a bundle of money right up front.
Finally, by doing a seller JV even when you have the capital available, what’s stopping you from doing another deal? You can still get into another property and it might be one that you find from your JV partner. You may even be in a better negotiating position simply because you’re already partnering with him on the first property. The possibilities and potential for making another deal on very favourable terms are certainly there, especially when you’re already a partner.