Working with Family
Most new foreclosure investors rely on family members to launch their new venture. Relying on family for expertise or capital can be a huge undertaking, and a major problem.
As long as everything is working and no problems develop, working with family can be rewarding. It's also a way to get started quickly and easily in real-estate foreclosure investing. But when problems occur and things do not go as planned, having family members as partners can become a nightmare. The problem is the family dynamic. Families can be destroyed when money and business are involved. Family members can blindly enter into haphazardly constructed business deals that turn sour. When that happens, the families are never the same.
Resist the temptation to forget the formalities of a regular business relationship with a relative. In fact, because you are working with a relative, and you want to preserve that familial relationship for the rest of your life, you need a solid, well-thought-out business plan and partnership agreement. Handshakes are great, but not for partnership agreements.
The only way to avoid family issues clashing with a business venture is to have a well-thought-out plan before starting. The plan should include not only how to form the partnership but also how to dissolve it. Putting together a business is always more fun than dissolving the enterprise. When it becomes necessary to take a business apart, the enthusiasm is often gone, and there could be bitterness and resentment. The family dynamic makes this even more difficult. It is for this reason that starting a partnership with a family member should be done only with caution and a well-designed plan to dissolve amicably should it become necessary.
How important is a partnership agreement?
It may help to think of your partnership agreement as a sort of prenuptial agreement between you and your partners. At the beginning you will certainly want to believe that your partnership will last as long as you live. But things can and often do change, and the written agreement determines what will happen if things don't go exactly as everyone has planned.
Any agreement with a relative should be put in writing. The agreement should also be reviewed by attorneys. All parties need to understand their duties and obligations. Just because you are working with a relative, do not overlook the basics of good business practices. Of course you know the family member, but it only makes sense to reduce any business activity to writing.
Your partnership agreement, whether with a relative or a nonfamily member, is not complete without a buyout provision. This part of the agreement clearly states what will happen when a partner leaves the enterprise. Many new partners, inexperienced with partnership agreements, neglect to make a buyout or buy-sell agreement. This is a critical part of the relationship and is important to protect your investment in a partnership. When you create buyout provisions within your partnership agreement, you and your partner(s) are prepared if one partner wants or needs to leave the business. Things can happen to partners, from disabling illnesses or injuries to death, bankruptcy from other business dealings, divorce, and other life-changing events.
Your attorney will certainly be able to produce a well-crafted and binding written agreement. It is important that everyone understand and agree to it. To get the best agreement from the attorney, be sure to explain your goals and issues that you want solved. Formal partnership agreements can be as short as several pages to hundreds of pages in length. Some are very complex documents.
Partnership arrangements can vary in profit splits. Most people think partners always get equal splits. This is not always the case. An agreement could be a 35–65 split between the partners. Another variation is one partner gets 100 percent of the profit until a specific level is reached. For example, partner A takes 100 percent of the first $50,000 profit, then partner B takes the next $50,000, and any profit beyond $100,000 is split 50-50. Anything that is agreeable to the partners can be created and protected in a partnership agreement.
This should not be an adversarial situation but rather one where you and your relative(s) are working hard to make sure everything is up front, proper, and clearly defined. And when working with relatives, it is also good to take extra effort to keep both the business and family relationships healthy.
