Flips that flopped may seem like a thing of the past in this market with fast appreciation. But what happens when you gotta dig into your own pocket to sell a flip? This week’s horror story with James Ledbetter is an expensive lesson in partnerships, flipping, understanding the market, and contracts.
In this episode, you’ll hear:
- Real Estate Investors have False Confidence from Legalese
- How Real Estate Investors Should Vet Partners
- The Risks of Going from Rentals to Flips
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Real Estate Investors have False Confidence from Legalese
Call me biased, but all contracts are not made equally. Contracts are one of my favorite forms of asset protection. However, Investors creating their own contracts run the risk of creating a useless or damaging document. Just because a contract has legal terms in it, does not mean it’s a legal document in it. Legal terms can be inappropriate, duplicative, cancel each other out, or leave grey areas where disputes can arise.
Real estate investors shouldn’t create a contract just to mentally check it off their partnership to-do list. Contracts should provide actual concrete value both during the contract term but also in the event of a dispute between the contract signors.
How Real Estate Investors Should Vet Partners
Real estate investors should evaluate potential partners very carefully. The marriage metaphor comes up often but you are jumping into a legal bed with your partner so choose carefully!
Bonnie suggests evaluating partners using three different metrics: Goals, skills, and financial strength. Ensure that you and your partner(s) have the same financial goals both short and long term. If your goals are out of alignment, that doesn’t mean that you can’t partner but discussing what a buyout or succession planning looks like is key so that way both partners can achieve their goals without a dissolution of the wealth mutually created.
You’ll also want to ensure you and your partner have complementary skills or the willingness to hire out undesirable skills. Everybody doesn’t have to do every job. However, every job has to get done. Ple-planning who is doing property management, bookkeeping, repairs, construction, showings, etc. and ensuring there are adequate funds to pay for it is crucial to avoid ending up in a financial problem or disagreement. Also deciding if work done by the parnters is going to be compensated strictly from profit or if they will be paid additionally for their work.
Finally, talk with your partners about their financial strength. Talking about money is never a comfortable topic but trust me when I say that lawsuits are more uncomfortable. What kind of credit scores do you have? How much reserves do you have in the bank? Where does your income come from – a W2 or elsewhere? Are you going through a financial problem like a divorce or bankruptcy?
You can learn more about vetting partners in Bonnie’s program Landlord Law School.
The Risks of Going from Rentals to Flips
While skills are definitely translatable across different types of real estate investing strategies, it’s not copy and paste. Many investors start a new exit strategy with a false sense of confidence due to their success in another area. Rehabs in rentals are often different quality than those in a flip. Financing expectations for residential properties are different than in commercial. Lease terms for student rentals can’t be applied to office space. You get the point.
Use your experience to recognize areas where the investing strategy is different and investigate ways to modify and adjust.
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Resources Discussed in This Episode
- Template Shop 10% off
- Connect with our Guest James Ledbetter: firstname.lastname@example.org
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