Key Elements Of A Real Estate Partnership Agreement

A real estate partnership agreement template — at least one that has all the right pieces in place — can take just about any investor’s career to the next level. If for nothing else, the only reason an entrepreneur would go into business with another investor is for help in an area they are currently ill-equipped to address. However, it is important to note that working in tandem with another investor will only benefit each party involved if they take the appropriate steps and lay the groundwork for prosperous careers together.

The nature of a real estate business partnership is inherently symbiotic. At the very least, each piece of the puzzle is just as important as the next. That said, the most successful real estate business partners are those who mind due diligence and see to it that everything is in place before moving forward.

Why You Need A Real Estate Partnership Agreement

At its core, a real estate partnership agreement shows a commitment between two business partners. It will typically outline shared goals and a mission for the business; the purpose is to ensure both partners are consistently working towards the same thing. Although, the real estate investors need a partnership agreement is not simply for formality. A partnership agreement can actually provide legal protections to both partners (and the business) if operations do not go according to plan.

While every investor enters a business partnership hoping for the best, it is still important to prepare for the worst. Sometimes, adverse circumstances occur, and it is crucial to have a framework in place before this ever happens. Partnerships are critical when income-generating assets are involved, such as real estate. The right partnership will premeditate any number of issues that could occur with a real estate business. Further, a partnership agreement will tell both parties how to act if anything ever happens. Unfortunately, many investors do not understand how important these protocols are until it is too late.

That being said, not all partnership agreements are created equally. So before you start working on yours, let’s take a look at some of the most important elements of a real estate partnership agreement:

Do You Need A Real Estate Partner?

There is no requirement to enter the real estate industry with a business partner, and many investors go their entire careers without one. However, several benefits make real estate partnerships worth considering.

The most common reason investors look for partnerships is related to funding. In many cases, investors who manage a business will team up with a business partner who can provide the capital needed to get started. Together, this partnership structure allows both investors to reap the benefits of real estate despite not starting with resources (money and time).

Even for investors with real estate financing all figured out, there are still numerous reasons to enter a partnership agreement. These include the potential to divide responsibilities, take on more properties, and essentially double their networks. Furthermore, investors also get to balance one another’s strengths and weaknesses — which can be extremely helpful during the sometimes hectic process of starting a real estate business.

Who Should Be Your Real Estate Partner?

The trickiest part of a real estate partnership agreement is finding the right investor to work with. A successful business partnership goes beyond a history of friendship or the ability to get along. When entering into a business with someone, it is crucial to find someone who balances your skillset, believes in the same mission, sets similar financial goals, and is trustworthy.

These criteria are not going to appear overnight — finding a business partner can take time. It is important not to rush into an agreement, even if things seem to line up first. Some investors even recommend working on a deal together before entering a contract agreement; that way, you can get a better understanding of one another’s working styles.

Active vs. Passive Real Estate Partnership Agreements

One of the great things about striking a partnership agreement in real estate is that you can customize it in many ways. You can customize roles and responsibilities based on each partner’s competencies, availability, or even based on the needs of the investment deal itself.

There are two main types of real estate partnership agreements: active or passive.

1. Active real estate partnership agreements are those in which each partner puts in active work into a project on a regular basis. Although their roles and activities may differ, they generally put in an equal amount of direct work and sweat equity.

2. Passive real estate partnership agreements differ from active ones because one or more partners may not put in any active work. For example, one partner may supply the capital and play a more silent role, while the other partner puts in all of the sweat equity. This can be a mutually beneficial arrangement when one partner has a specific skill set but doesn’t have any capital. The other partner may want to be financially involved but would rather take a step back and serve as an advisor. Passive partnership agreements are a great option if you’re looking for passive income opportunities in real estate.

4 Must-Haves In A Real Estate Investment Partnership Agreement

The specifics of a real estate partnership agreement will vary from business to business, much like any legal contract. That being said, there are a few criteria that should be included no matter what. These must-haves will help establish the foundation for a long-lasting, mutually beneficial business partnership. Review the following before making your partnership contract:

1. A thorough explanation of each partner’s roles and responsibilities

2. A complete breakdown of each partner’s finances

3. A written statement expressing each partner’s commitment to the business

4. An outline of how the business and each partner’s assets will be protected

Roles & Responsibilities

For a real estate business partnership to meet the expectations of those forming it, realistic roles must be assigned to each individual. If for nothing else, clearly defining each partner’s responsibilities will lay the foundation for a prosperous career in the real estate industry. What’s more, it’s vitally important to lay everything on the table before committing to something as serious as a real estate business partnership; nothing should be glossed over. At this point, every partner must have a clearly defined role in the business moving forward.

As perhaps one of the most critical junctions two real estate partners will encounter, defining the roles and responsibilities of each should account for individual characteristics, competencies, strengths and weaknesses that can be relegated to a respective role. Be sure to include the following roles in the final draft of your real estate business partnership agreement:

• Marketing

• Acquisitions

• Short Sale Acquisitions

• Finances

• Construction Management

• Property Sales

• Property Management

• Business Development

Not surprisingly, roles and responsibilities should be delegated regarding each individual’s competency level with a respective task. There is no reason the strongest marketer shouldn’t be in charge of, well, marketing campaigns. Each person in a real estate partnership should bring something unique to the table, and their specific talents will inherently place them in a position to take advantage of their strengths; just make sure those strengths are delegated appropriately.

It is important to note, however, that the evolution of your business partnership is inevitable. Not unlike the housing market itself, real estate business partnerships will constantly change; they are more of a “living” agreement than anything else. That said, any attempt to forge a real estate business partnership agreement should be contingent on future amendments. The sooner you are willing to accept that, the better.

The Financials

Financial considerations are among the first aspects of a real estate business partnership that need to be ironed out. In fact, you could very easily argue that any talks of a team environment shouldn’t move forward without at least some attempt to clarify the financial situation of an impending partnership. Who is going to make the lion’s share of the profits? Will profits be split fifty-fifty, despite the roles of each party? For what it’s worth, the best time to figure these things out is before you even go into business with one another.

The most successful real estate business partnerships will result from an inherent understanding of the underlying financials. That said, few things have such a polarizing ability to both help and hinder collaboration than capital. Instead of neglecting the financial components of a business up front, take a significant amount of time to comprehend your potential partner’s ideal “financial checklist.” You need to know not only how much they intend to make but if they are content with the price point.

Outside of each individual’s salary, you must delve into the more complicated financial considerations of the entire company. Don’t forget to iron out the following:

• Credit rating

• Initial capital contribution

• Preferred return

• Financial review

• Profit distributions

• Salary

• Outside deals

• Retirement goals

• Risk tolerance

• Financial decision making ability

• Investment philosophy

At the very least, your real estate business partnership needs to have a firm grasp on the financial situation. Every penny will need to be accounted for and allocated accordingly. Not unlike the roles and responsibilities outlined above, clarifying the company’s financials will reduce the risk of complications rearing their ugly head in the future.

The Commitment

Not surprisingly, the amount of time an investor intends to spend on their real estate endeavors can vary dramatically; it’s one of the aspects that makes investing in real estate so attractive. Real estate business partnerships can be lucrative whether they intend to work part-time or full-time; the key, however, is to make sure each partner is comfortable with the amount of time they will be expected to invest moving forward.

With that in mind, a respective investor’s time commit to a partnership can be a touchy subject. After all, most investors get into the industry to make their own schedule — which is fine. However, each partner needs to be comfortable with the other’s intended schedule. At the very least, it is a good idea to know how much your real estate business partner will be working. In deciding each’s time commitment, don’t leave out the following scenarios:

• Hours per week

• Weekend work

• Vacations

• Family commitments

• Personal commitments

• Other business commitments

With the time commitment of each business partner clearly defined before going into business together, there shouldn’t be any discrepancies in the future. While there are, of course, exceptions, the likelihood of a misunderstanding — at least as they relate to working hours — is significantly reduced.

Not unlike the other items on this list, ironing out the amount of time each person intends to work will prevent future complications. Remember, this section has less to with the amount of time each person will work and more to do with your comfort level of each’s work schedule. The last thing you want is for one real estate business partner to feel that they are working too much for the salary they are earning.

Asset Protection

I am convinced that the decision to enter into a partnership with a trusted and proven individual is one of the best an investor can make. However, the addition of a partner does come with a noteworthy caveat: risk. No matter how much you think you know someone, there is always the possibility that something goes wrong, no matter how slight it may be. It is important to note that even a small degree of risk warrants protection. If, for nothing else, it is better to have security and not need it than need it and not have it. Nonetheless, it is important to take the appropriate steps to protect yourself and your business from such an occasion.

Real estate business partnerships will also want to protect their business from malicious lawsuits as well. You and your partner should decide which type of business entity you will want to work under together. In doing so, consider the following:

• Liability Protection

• Ease of Formation

• Tax Treatment

• Business Trajectory

Free Real Estate Partnership Agreement Template

A real estate partnership agreement should address any areas that could cause confusion or conflict later on. It should be professionally written but easy to understand. A great way to make sure you accomplish these goals is by following a sample real estate partnership agreement. Check out US Legal for a downloadable sample, or walk through the real estate partnership agreement template below:

• Agreement Of Partnership: Date the contract and then list the names of all partners involved. Distinguish between managing partners and other business partners. The agreement will frame the sections to come.

• Business And Terminology Overview: The overview should essentially bring everyone up to speed on the items that will be discussed in the rest of the contract. This includes stating the purpose of the partnership, the main place of business, and each partner’s obligations. The section should then outline any terms that will be used throughout the rest of the agreement. The purpose of this is to create clarity and maintain transparency about each role within the business.

• Capital Contributions: Write out the amount of capital each partner will contribute to the business. This will not only ensure each partner is up to speed on what is being brought to the table, but it will also put those amounts in writing.

• Allocations And Distributions: Next, outline the interests of each partner in order to determine how profits and losses will be distributed. It is also a good idea to include a clause stating how unaccounted items within the agreement will be handled. Finally, this section should discuss the net cash flow from operations and sales or refinancing.

• Record Keeping: The purpose of this section is to outline who will manage the accounting information within the partnership. It should clearly state how bookkeeping, reports, and tax returns will be handled. This area should also specify that all bank accounts and finances should be managed according to the contract.

• Management Structure: This is where the agreement will specify exact responsibilities of each partner. Answer who will handle the business plan, marketing materials, accounting, and any other areas within the business. Remember to be as clear as possible when outlining each role within the company.

• Transfers Of Interest: Outline the protocol for transferring interests in the company. For example, some businesses will state that unanimous consent is required among the partners to transfer business shares successfully. Review this with your partner(s) and decide what process you would like to follow, should the situation ever arise.

• Sale Disagreements: A thorough real estate agreement contract should also outline what would happen in the event partners disagree on the sale of an asset. This will protect all partners, and the business, if there is ever a dispute within the business.

• Amendments: Chances are, at some point portions of your real estate agreement will need to be added to or changed altogether. The amendments section is your chance to state how that can happen. Write out the process for changing anything within the above real estate agreement.

• Administrative Concerns: The final section of your real estate agreement contract should cover any areas not included above. This could be any notices, further actions, or execution information. The only thing you need to include after this will be the signatures of all business partners.

Be sure to meet with an attorney with any questions you have about what to include in a legally binding agreement, especially when adapting a real estate partnership agreement template. They will be well-equipped to walk you and your business partner through the legality of any potential contracts.

Do I Need An Attorney to Draft A Real Estate Partnership Agreement?

Whoever drafts a real estate partnership agreement will need to be well versed and experienced in the legal language the contract included, which may mean that relying on an attorney to do so will be your best option. Regardless, it would be best if you met with an attorney with any questions you have about what to include in a legally binding agreement, especially when adapting a real estate partnership agreement template. They will be well-equipped to walk you and your business partner through the legality of any potential contracts. You may need to rely on your partnership agreement in a legal situation in the future, so you will want to ensure that it is well written and will hold up in a court setting.

How To Dissolve A Real Estate Partnership

Unfortunately, in certain situations dissolving a real estate partnership will become necessary. Maybe a partner wants to leave the business to pursue other ventures, or maybe you decided you simply don’t work so well together. Either way the route to dissolve the partnership will depend on the initial partnership agreement.

Typically when negotiating a business partnership, attention will be paid to possible dissolution. This means specifying how assets or debts will be divided. In these cases, typically the first step is to request an appraisal of the business from an outside provider. Then you can proceed with the agreed upon terms in the initial document. This typically involves buying one partner out from said assets, or transferring properties over.

If there was not a partnership agreement, or terms for potential dissolution, the path forward will be a little more unique. You and your business partner will need to determine the best way to divide the existing business. In some cases, third-party legal help can be useful to everything is properly handled. In other cases, you may be able to use the valuation to simply buy another partner out or vice versa. From there, you can dissolve the LLC or business enterprise and move forward on your own. Again, lawyers can be a great help during this process.

Associated Documents

Creating a real estate partnership agreement will require you, and your business partner, to address other legal scenarios. For example, how would the partnership be dissolved should one of you want to leave the business? Or, how would you add someone to the business as a partner? It is crucial to understand how additional legal documents can be used to formalize changes made to the original agreement. Here are a few examples to familiarize yourself with:

• Partnership Amending Agreement: An amending agreement allows you to slightly modify your original business partnership agreement.

• Business Plan: A business plan establishes the mission statement, marketing strategy, and financials for the company. To learn more about how to create a business plan read our guide.

• Joint Venture Agreement: A joint venture agreement is used by investors to combine resources for a shared investment. These agreements are often used when working together on a single project, rather than a long-term partnership.

• Notice Of Withdrawal From Partnership: If you or your business partner were to leave the company, this legal document could be used to alert the other.

• Assignment Of Partnership Interest: An assignment can then be used by the exiting partner to transfer ownership to the remaining partner.

Summary

It’s worth noting that these are not the only factors that warrant your consideration when drafting a real estate partnership agreement template, but they are certainly the most heavily weighted. Your real estate business partnership agreement should reflect the things that are most important to you for what it’s worth. Feel free to add more, but don’t forget those that I outlined above.

Have you ever written a partnership agreement? Share your experiences in the comments below.

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