You should talk about the investment opportunity in realistic terms, which includes three possible outcomes of investing in the property: (1) the best case scenario - if everything goes as planned; (2) the most likely scenario - what you can expect under reasonable circumstances; and, (3) the worst case scenario - how bad it will be if your projections are inaccurate.Your discussion should include your budgets for acquisition, improvement, operations, and marketing and sales.
All potential partners should have a clear understanding of your contributions and what they will be expected to add to the venture. If there are surprises - like additional cash requirements - who will supply them and under what circumstances? Additional cash, for example, might be supplied by one partner injecting more money into the deal but taking a larger share of the profits or taking a promissory note. Alternatively, the partner might arrange outside financing and put a second mortgage on the investment property. These things must be discussed in advance.
Finally, you should discuss something called exit strategy. What happens if one or more partners wants to withdraw from the investment? You will need some sort of a buy-sell agreement so that the remaining partners can buy out the exiting one at a fair price to all.
In the absence of a buy-sell agreement, your former partner might sell his or her interest to someone you find objectionable, or someone who does not bring any value to the relationship. It is also common for a partner's departure to trigger huge accounting and legal fees as everyone squabbles over what the partnership interest was worth.
With some preplanning, you will not have to liquidate your investments simply because one partner wants or needs to exit. That preplanning consists of a buy-sell agreement.
A buy-sell agreement will require the services of an attorney, but it will be money well spent. You can spend a little money on the front end for the agreement, or you can potentially spend thousands of dollars on the back end, fighting with your former partner. At a minimum, the buy-sell agreement should cover how to value each partner's share, payment terms for buying out a partner, whether an exiting partner will be relieved of any responsibilities, and the circumstances under which a partner can be forced out.
Your buy-sell agreement can specify that the partner who wants to exit can set the price for his or her share. Then, the other partner can decide whether he or she wants to buy or sell at that price. If the price is too high, the exiting partner could be forced to buy and end up owning the entire investment. He or she could then try to sell the entire investment to a third party.
Buy-sell agreements only work if both partners have the ability to buy out the other. If one partner is financially strong and knows the other partner is not, then abuse may occur. The wealthier partner could claim a desire to exit and set a very low price for his or her shares, fairly confident that the other partner could not afford to buy even at the low price.
The partner who could not afford to buy would have no choice but to sell his or her share of the business at the artificially low price. This is just one example of why it is a good idea to have a lawyer draft such documents or at least look over one that you have drafted on your own.
Our website is not responsible for the information contained by this article. Webworldarticles.com is a free articles resource thus practically any visitor can submit an article. However if you notice any copyrighted material, please contact us and we will remove the article(s) in discussion right away.
This article was sent to us by:
Andrew Nidder at
06272010
1. Cancun Real Estate Investing
All articles in this directory are property of their respective authors. Additionally, read our Privacy Policy
© 2010 WebWorldarticles.com - All Rights Reserved.