Most people in real estate and home building will consider at some point whether to team with a business partner. Let’s face it, sometimes it just does not make sense to try to do things on your own. And whether you’re embarking on a large-scale development project, building a single home or investing in your first real estate venture, the right business partner in the right situation could be the key to help you improve your game and your likelihood of success.
Building partnerships can be a very broad topic (entire books and courses teach the subject), with a variety of potential structures (both formal and informal) and varied terms across industries and subject matter. While it’s a big subject, it’s not an exact science either. We’ve prepared this as a good primer to help those considering new business partnerships, with some special tips and insight related to partnerships in the real estate and home building arena.
Why you Might Need a Business Partner
- Financial investment. Clearly one of the top reasons to seek a partner in real estate: money. You may need funding for your project or want to spread your financial risk. Financial partners or investors have become even more critical in the real estate arena with the scarcity of bank lending in recent years.
- Expertise. Whether you’re venturing into a new geographic area, considering a new product type or simply a real estate newbie, it can be advantageous to partner with someone with specific experience or someone who brings another skill set that complements your strengths and weaknesses. For example, the right development partner could be a huge asset for a seasoned builder who has never spearheaded a rezoning effort and experienced the politics of such an endeavor. Likewise, you may want to partner with an experienced real estate agent who can help source new deals and that has expertise in buying or selling properties in your target market.
- Workload. Perhaps your plate is pretty full but you’ve got a great real estate opportunity. Working with a partner may allow you to take the project on together, manage it more effectively and see it through.
- Relationships. Do you need someone with the “right” connections to get that rezoning passed, or to connect with the targeted buyers? You might need a partner who is well-connected in that particular market or with a certain housing product. In some cases, you can hire consultants to help, but often a partnership is a desirable route to go. Partners will be more vested in the outcome and work for a share of the profit rather than an hourly fee.
Define your criteria for a potential partner carefully. What are your goals for this partnership and what do you want out of it ideally? How do you want your partnership arrangement to be structured? Remember that not all business partner relationships are formal legal partnerships (that’s a whole other topic) – be open-minded and willing to consider different ways of putting together your deal.
How to Find a Partner
Unfortunately, potential partners usually aren’t just listed in the Yellow Pages. Where you might find a partner depends greatly upon what type of partner you’re looking for (is it a real estate broker, builder, developer, investor, etc.?), whether geographic limits are in play (should your partner be able to be on site and accessible in person, or will he be a “silent partner” from a distance?) and whether it is someone inherently attached to the project (like the landowner, builder or investor already related to the deal) and so on. But generally, if you are seeking a partner to match your criteria, consider the following:
- Networking. Probably the best and most reliable method of finding quality business partners is through personal referrals and networking. Reach out to your network of colleagues, friends, family, mentors or leadership in the local market. Do some targeted research to find potential partners who are working on projects in your desired area and that have done work that you admire, and then determine whether you have a connection with them. In addition, you already may know some people that you want to consider for a partnership.
- Local real estate investment associations. These groups can provide a forum for networking and learning about the ins and outs of real estate investments. They’re often designed to sell you something, but still can be useful if you stay focused.
- Local industry groups & associations. If it’s a builder or developer with whom you’d like to partner, look to the local Home Builders Association and its membership for referrals and networking opportunities. Consider other industry associations and their members (like REALTORs) that may be good resources in your area.
- Land owners. Sometimes the partner you need is the neighboring land owner adjacent to your property, or the current owner of a site that you do not own yet – people you’d want to approach for a joint venture or cooperative effort of some sort. This makes the searching process much easier, but then you don’t have much of a choice either.
- Online forums and networking. Depending on your goals, there are a slew of online resources that can be tapped for networking and identifying potential partners. Depending on your goals, your options may range from LinkedIn real estate groups to even Craigslist.
Forming a Partnership the Right Way
Once you’ve identified a potential partner who may meet your criteria, it helps to first establish some sort of relationship, even if just in an online or telephone manner. Then you’ll want to plan to meet with him or her (or the key representatives of the company) to discuss the actual opportunity – in person, if possible. Be fully prepared to explain what you’re looking for, what the opportunity might be and what you’d envision his/her role – and your role – to be.
- Find the balance: The best partnerships are those that have a good balance – not that everything has to be 50/50, but if one business partner is providing more financially, the other partner may provide more of the day-to-day time and effort. Or you may be seeking a minority partner who has less involvement and a smaller share of the deal. Whatever the balance is, find it and make sure you are in agreement.
- Seek trust and respect. If it seems you’ve identified a beneficial partnership, make sure that you feel this is someone you would trust, respect and with whom you generally get along well. Depending upon the nature of the project, you could be spending a lot of time together (perhaps even more than with your spouse) and/or having to make decisions together – potentially difficult ones – and you want to be sure that this is someone with whom you believe you would feel comfortable embarking on this adventure.
- Determine roles and responsibilities. Roles may be determined by who has the most experience, who brought the deal to the other, who will have the greatest investment (whether it’s property, money or service) and so on. This may take some careful negotiation, but it’s important to get expectations for roles and responsibilities out on the table and agreed upon.
- Do the due diligence. If it seems that you’re on the same page and decide to move forward, enter into a due diligence period. Ask for references and information about prior deals or similar projects. Check those references and speak with former business partners, to make sure there aren’t any red flags and confirm that this person has the skills, relationships or expertise that you’re looking for. Don’t feel uncomfortable about asking for and checking references or proof of financial ability, because at this point in the process it should be expected and welcomed. And they may – and often should – ask the same of you. But ask for these items at the correct time, not in the first 10 minutes of meeting the potential partner; then it’s just rude.
- Get the deal in writing. No matter who the partner is, even if it’s your brother, it’s simply sound business practice to clearly spell out roles and responsibilities on paper. Resolutions should be determined should one party default or no longer be able to hold up their end of the agreement. Timelines, expectations, budgets, investment requirements, allocation of profit, control in decision making, and so forth, should be detailed as much as possible. Use an attorney; should the deal go south, you want an agreement that holds up legally. You don’t have to expect the worst case, but definitely prepare for it. Also note that some business partnerships are less formal and more of a “let’s help each other” strategic alliance relationship that may not even be appropriate for full legal documentation. Evaluate your scenario and get legal advice when its needed.
- Date before you marry. Start with one deal – don’t sign on for life. If it will be a formal partnership-type relationship, then it’s often advisable to create a separate legal entity (like an LLC) for a standalone deal with a new partner, rather than bringing them directly in as an equity holder in your main business organization. If this deal goes really well, then continue on to another…and possibly have a long, happy and prosperous relationship together.
So if you are sensing that you may need a partner to take your deals to the next level, we hope you can use some of these tips to help you think through the process, find the right partner and structure your arrangement in a way that provides success for both of you. The best way to build long-term partnerships is to make sure that both of you feel like it’s a “win-win” relationship. Ultimately, finding the right partner and developing the partnership into a successful relationship is less science, and more of an art form. Good luck!