Setting up the business with friends...Pitfalls? - Posted by Julia

Posted by SueC on July 09, 2001 at 11:14:00:

You need to first have an open discussion with your friends about the possibility that your friendship could suffer as a result of business issues. Are you willing to risk your friendship? is the question.

That out of the way, you need to clearly define roles (who manages what) and also how the risks/liabilities will be divided. Also, how will decisions be made? 100% agreement of all members before you can act? What if two of you want to go one way, and the other two disagree? You would do well to talk to a lawyer who can go through the different possible legal arrangements, because whatever you decide about who does what should be clearly written down. Good luck!

Setting up the business with friends…Pitfalls? - Posted by Julia

Posted by Julia on July 09, 2001 at 11:01:31:

For the last month or so, I have been reading all that I can get my hands on about RE investing- foreclosures, REO’s, L/O’s, subject to’s. Have been attending Sheriff sale’s and even one tax lien auction. My significant other and I decided to postpone an addition on our house to use the cash we have put aside to get into RE investing instead- we’ll build the addition when we have accumulated assets that will pay for it.

Last week, out of the blue, a good friend told me that she just started learning about foreclosures and is going to be investing in RE after the first of the year (currently alimony to an ex is consuming her cash. That ends next year). She has some experience with fixer-uppers in Australia; her significant other is a financial analyst and something of a handyman himself.

We all met in a business relationship that developed into friendship. Since we have the same RE goals and want to invest in the same area, the four of us (including our significant others) have decided to form a partnership. We are four computer professionals with good jobs, and are investigating self-directed IRA’s as a further means to fund this venture.

My question to you who work with partners/co-owners: what are the logistical & personal pitfalls that we need to be aware of in setting up the business? What are your experiences with partners- good and bad? What do we need to think about to protect ourselves and our friendship?

Any input welcomed-

Re: Setting up business Pitfalls?[long response] - Posted by Ronald * Starr

Posted by Ronald * Starr on July 09, 2001 at 20:38:50:


When a partnership is good it is very good. When it is bad it is very bad.

I would recomment not doing a partnership. If you were all experienced and in great agreement about the details of how you operate your strategies, then I might offer other advice. But as you work at real estate you will probably decide on different approaches to investing. If you are already tied together in a formal partnership this will cause a lot of strain probably.

The biggest difficulty in partnerships seems to me to be disagreement about what to do. Often this comes to a head deciding what to do with a particular property. One wants to sell the other wants to hold on. Hard with 2 partners, even harder with 4 people.

Here is an alternative that I saw a couple of real estate investors do. They each bought, owned, and managed their own properties. But they talked together often and shared ideas and encouragement. They could deliver eviction notices for each other, since they were not owners of the properties where they were delivering the notices. They even worked on each other’s properties, painting, plumbing–whatever needed doing. They kept records of the hours worked. This worked well for them. I think this could be a far better approach for you guys than co-ownership of properties.

You might get into disputes about the value of the hours. One hour doing an electrician’s work–does that equal one hour of painting ceilings? If you can work these matters out, fine. If you cannot, then what? Well, if you are in an informal work-sharing arrangement, you can agree not to do certain jobs for each other Or you can cut out working on each other’s properties entirely while still talking and discussing things. Or you can just drop the work-sharing arrangement. What if you are in a partnership and cannot agree what is equitable and fair work contribution by a person? I don’t want to predict.

My vote is NO PARTNERSHIP. Helping each other, ok.

Could I be wrong? Yeah, I could be. I don’t know you guys and how you work together. But I’ve seen lots of beginners. I’ve heard lots of “horrow stories” about partnerships. Maybe you are the exception. But what makes you think you are?

I suggest, as others have, that if you do go into a partnership, write up a very comprehensive partnership agreement which you have will have checked by an attorney. Notice, while you work out this project, how you work together. This is a sample of probable interactions in the future. Work extremently well now? Probably will work pretty well later, after the “honeymoon” stage is over. Remember, while working out the partnership agreement, this is probably the best you will ever work together, unless you guys are very good at growing and working out procedures to solve conflicts.

People like to partnership out of fear of the unknown. Most partnerships are not good. Most people, not knowing much, sense their own inadequacy and hope that the partner(s) will make up for it. Later, when they learn enough not to be inadequate, they chafe at the partnership. Look around you. Most real estate entreprenuers are individualists.

I suggest you partner up only if there are a lot of complementary strengths brought in by the different partners. And you can work together well dealing with problems and conflicts.

Now, you are all beginners. I would recommend that you not work with foreclosures. My opinion is that foreclosures are not for beginners.

Have you noticed that people post here saying that after 20 years of investing, they are still learning a lot about real estate? I feel the same way.

When you are beginners, you will be hard-pressed to learn enough to do simple deals, let alone advanced ones. Trying to learn about all that and do foreclosures also? I suggest not. Maybe three or four years downline, you want to take another look at it? Ok. Then you will know more. You may well have more money if you have been reselling properties for profit.

Four people starting a foreclosure investing business as beginners? I strongly suggest NO.

Make yourselves happy, keep separate properties. Support each other. Have dinner together. Ok. Have properties together? The kiss of unhappiness.

Good InvestingRon Starr***********

Re: Setting up the business… - Posted by Jim Locker

Posted by Jim Locker on July 09, 2001 at 11:27:10:

Never RENT to friends. Placing yourself in a superior/subordinate position WRT a friend is the fast track to losing the friend.

Never HIRE your friends. Same thing.

Going into business as partners with your friends is another matter entirely. So long as all the roles are defined, and everyone involved does his/her job, it can work out spectacularly well. Witness Gates & Allen, Jobs & Wozniak.

OTOH, if any member of the team decides to slack off, then you either grin and bear it, or lose a friend.

Re: business with friends - one more thing - Posted by SueC

Posted by SueC on July 09, 2001 at 11:15:50:

Since you are all new at this and the possiblity for problems is greater than if you were experienced, have you thought about maybe just doing a joint venture on one or two properties first, while you each go about developing your own portfolios - and experience - separately? Just a thought.