Property Life Lessons 2

1

Joint Ventures

My partner and I had been building, renovating, and renting properties for about five years. We had the experience to take things to the next level. We worked hard, educated ourselves, and got our Builders License, and the idea of the Joint Venture was always in the back of our minds. I found some land in two areas around Hobart, within 30 minutes from where we lived, we couldn’t afford to put up all the cash and build 4 to 8 houses on these properties ourselves. The property market was booming and the figures on these properties all stacked up. We thought we had the experience and knowledge, in what was needed for Joint Ventures. Don’t pick family. Have a written contract. Do a company and trust. All parties put in the same amount of money. The profits get split evenly. What was to happen after that gave us the biggest life lesson of all. We picked people that were strangers, but we thought they were motivated and had the same type of mindset as us. Were we wrong? When we first talked to them, all those traits seemed to be there, this looks good. We all looked at the potential properties. I worked out the budget and scenarios of the two blocks of land. I went back to them, and we decided on land at Claremont, four blocks, that would fit eight houses. Now all I had to do was put in a proposal to the owner. I sent an email to the Real Estate Agent asking them to submit a proposal for the purchase of the four blocks on an option contract. What I didn’t do was ask the Joint Venture people the correct questions or enough questions? What I didn’t do was look at the length of time it would take to deal with Banks, Designers, and Councils. I had a very unrealistic expectation that this project would take around 12 to 18 months? How I was very wrong.

What’s an option contract

One you give a deposit, you may add the Finance Approval Clause, then an additional installment amount within a specific time frame of Council Approval may be added, depending on the type of purchase you are doing (if you don’t have Council Approval, you would need to ask for an extension or approve this clause without the Council Approval being done). Then after the Council Approval, you would make additional installment amounts, again within specific time frames. This contract may go on for 6, 12, or 18 months, depending on the size of the development. The owner of the land accepted the Option Contract. We signed this contract in August 2008. All Directors (three groups), put in $50,000, which was used for deposits of land 20%, plus it should have been enough to pay for getting the plans completed and loan interest. We settled on the first two blocks within around six months of the Option Contract being signed. It was still going through Council Approval. We had to waive this clause. We purchased the third block around nine months and the last block after 12 months. What was supposed to happen was we get council approval and start building the first two houses, which we would sell one or both of them, buy the next land, build one house and sell, buy the last lot of land build the next house and so and so on until we sold all 8 homes. What I didn’t realise or expect was:

The bank then decided that they wouldn’t give us a new Construction Loan for the second piece of land that we sub-divided. We had by this time wasted lots of time and had to go to another bank. To make matters more complicated, One Director that was supposed to be helping build these houses, wasn’t interested in helping, he worked for himself, but wouldn’t take the time, except for weekends to build the houses. The excavator cost for the first house was overpriced. Then the Director decided he would go and work for someone. It was all left up to us. The other Director was a worrier and wasn’t interested in helping with the smaller jobs. We eventually started on the second house in early 2010. Then we thought our luck had changed, this house we were building was sold, at the Footings Stage.

At this stage my partner and I had to put more of our own money in, the other parties didn’t have any to put in, this happened because of the extra costs of building and the loan repayments. The progress on House 2 was coming along fast, the new potential owners wanted some changes inside, which we did contract variations and everyone was happy. It was up to, and the new owners came to us and said we don’t want to buy it anymore. What a shock! This was complicated and costly for us, the potential owners, took us to the Supreme Court for the deposit return.

My expected time frame of building eight houses being 12 to 18 months was not looking good at all. We completed the house and sold it in 2010. We then moved onto House 3. We were still working on Council Approvals and fixing the Designers problems. At one stage, our Surveyor had to design one of the houses from scratch because the designer had it all wrong. We were still working with the banks for construction loan approvals.

Here we were with a $2 million-plus project and partners that were hopeless, we were working our butt off to make them money, and we weren’t getting any extra for our efforts. We negotiated at the beginning that profits would be split evenly and any work that Directors did was to be paid at $20.00 hour. My partner and I were worth a lot more than that. We thought this was going to be fair because everyone would be motivated to help, no way. We were the professionals and the organizers. I had the company and trusted all done, picked the partners, done the budgets, worked out the payouts. We had just realized, we didn’t take into account all the things that could go wrong? We completed House 3 in 2010 and sold it. When we started this house, the designer had made errors in the design, the heights, and the set-out, we had to make changes, more costs, and more time.

We went back to the bank for the next stage – 2 Strata, 2 Story Houses on the one title. The bank that had the land loan decided ours was too complicated and said no. We are currently looking at another bank. We started this new Construction Loan search back in October 2010, and it’s now March 2011… I will keep you posted on the progress and the outcome of Profit or Loss at the completion! Don’t get me wrong with Joint Ventures. They are great if you look at everything that can go wrong before you start, you can make money and move along very quickly if you do properties with Joint Venture people. They help you step up a lot faster.

Lessons learnt:

Don’t go in two big on your first project, test the waters, do smaller Joint Venture projects, until you learn the ropes. Are the partners going to be helpers or sideliners, if so, who is doing all the work? What percentage or rate will they get over partners that are doing nothing? Do you trust these partners with your own money? If you can’t say a definite YES, don’t go into a partnership with them. What happens if you’re over time on the project and need more money? Does everyone need to be able to put in the same amount to help out? Can they do this? If there are problems with Designers, Councils, Banks, what are your processes? What happens if Directors want to get out? What happens if you have conflicts? Who is your specialist Team – Lawyers, Accountants, Bankers, Designers, etc. Do your research, what are the “what if’s”? Take into account changes in economics – Banks tightened up on lending because of the US Market Crash in 2008, and the Housing Boom slowed down. If you have done your homework, these types of changes won’t affect you much.

Author: Clarissa Leary

Tasmanian Properties provides information to the Tasmanian and Investing community with products, services, professionals, and sales. Our vision is “property for everyone,” come join and ask us questions at www.tasmanian.properties

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