Whenever two or more people partner in a real estate transaction, they must have a partnership agreement. The document may be very simple, but it is very important if there is a disagreement when the property is sold and the profit is distributed.
The real estate investment partnership can include everything from ugly homes to multi-million dollar commercial properties. If there is more than one investor, or someone who finances the property and is a partner in the proceeds of the sale, there is a critical need for a partnership agreement. The reason is that somewhere one partner will interpret something in their verbal agreement differently than the other partner, if not everything is in writing.
These disagreements can result in loss of money, loss of friendships, and profit from the sale of the property. If attorneys have to get involved, there may be a total loss of earnings and more than just attorneys’ fees. The simple resolution is to make a partnership agreement before purchasing the property.
A partnership agreement is a legal document that stipulates the following basic information:
1. The parties to the agreement (Whether they are two or twenty, they must be designated and if it is an entity, the party responsible as signatory)
2. The property covered by the agreement (I prefer to use the address, legal description, and tax or folio identification number so there is no doubt, especially when multiple properties have been developed from a parcel of raw land)
3. The amount of the profit divided between partners (ie 50% / 50%, 60% / 40%, etc.) The division can also be a function of the amount of the final profit or a fixed amount such as fee of search. to a real estate agent who brings in a buyer for the property.
4. The date of the agreement (when the agreement is signed by all parties to the agreement, even if all parties do not sign on the same day)
5. What constitutes expenses (the term “usual and customary” does not fit into this agreement and expenses should be itemized to everyone’s satisfaction). Management fees are pre-profit expenses, unless the parties to the agreement agree otherwise.
6. Who will pay for any litigation arising from the settlement (generally, the winning party will receive the other party’s attorney’s fees)?
7. Who will be responsible for the actual distribution of the net proceeds (profits) from the sale of the property?
8. What responsibility will each partner have if there is a loss that must be reinvested in the association? If a partner doesn’t put money in, what happens to his partnership?
While these are some of the more important issues that need to be addressed before the partnership agreement is drafted and signed, it is suggested that the parties have an attorney who is familiar with partnership agreements and draft the document to ensure that it is legal and binding for all. parts.