admin 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 basically strangers, but we thought they were motivated and had the same type of mindset as us. We were 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 scenario's of the two blocks of land. I went back to them and we decided on land at Claremont, four blocks, that would fit 8 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 very wrong.
What's an option contract
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 6 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 9 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 houses. What I didn't realise or expect was:
- The designer would not meet the deadlines or have the expertise to do the plans to council regulations and this caused problem after problem.
- Then there were changes to Councils and a new Government Department was started for Water and Sewer, which caused large time delays and additional costs.
- The Council did not make the previous developer put in the correct sizes, water mains etc, which added more costs.
- The Bond that would be required by Council and Water, it was three times more than what we were quoted by Hydraulics Engineer.
- That council would want to approve plans on the new title not the old title, because we had to do some boundary adjustments to be able to fit the houses in the way we wanted to do them. Three houses on separate blocks, two strata houses and then three strata houses. This extended the planning, building and plumbing approvals by months and months. So, plans had to be placed in Planning for approval, instead of just going to Building and Plumbing. More time and more costs.
- Then the biggest problem of all – FINANCE. The banks, we went to three different banks for approvals for the land and construction loans. What a nightmare! Because the Joint Venture was in a Hybrid Trust, which was recommended by the Accountant, it limited us to the Bank we used. These loan approvals would take us anywhere from 3 to 6 months to get approved.
Because of the length of time already gone, money was running out fast. We eventually managed to get two houses approved by Council on the old titles, four months after our expected approval time. We now owned three blocks, no money and was waiting on the construction loan approval. It took from 2008 to middle of 2009 to get one house approved by Council and a Construction Loan. We finished building this house and sold it in late September 2009. This house was sold before completion and we had a very tight time frame to complete the house before settlement. My partner and I worked our butt off to finish the house, the weather was holding us up – rain, rain, rain. The only jobs left to do before he moved in where some minor internal and fencing and retaining wall outside. We were happy with the outcome and the new owner was happy, we completed the minor outside projects a few weeks later. We could only get the Construction Loan to build the one house at this stage. The bank then decided that they wouldn't give us a new Construction Loan for the second piece of land that we subdivided. 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 really 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 done contract variations and everyone was happy. It was up to Lock up 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 8 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 where 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 done 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 organisers. I had the company and trust 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 Storey Houses on the one title. The bank that had the land loan, decided ours was too complicated and said no. We are now currently looking at another bank. We started this new Construction Loan search back in October 2010, 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 more quickly.
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 side liners, 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? Everyone needs 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.
Be market ready.
