Real Estate Joint Venture Contract: Everything You Need to Know
A real estate joint venture contract is an agreement between two or more individuals or businesses who have decided to put their money and other resources together to purchase real estate. 3 min read
A real estate joint venture contract is an agreement between two or more individuals or businesses who have decided to put their money and other resources together to purchase real estate.
What Is a Real Estate Joint Venture?
All of the parties involved in any joint venture agreement or contract are held responsible for the costs, income, profits, and losses of the project, or "venture." Most real estate projects involve at least one kind of real estate joint venture (JV) when it comes to their financing and development.
When professionals who are interested in developing and managing projects in the world of real estate need some capital in order to get their projects off the ground, they can join with financial providers who have the money to get involved but would rather leave the management to someone else.
There are several different types of joint venture relationships, and people and companies enter into these kinds of relationships for financial needs, time management, a need for expertise, and more.
Both sides of a real estate joint venture contract benefit from the success of a project, but they're also both taking a risk in entering into the joint venture.
Some common types of a real estate joint venture projects include:
- Co-wholesaling, which is when one real estate seller helps another find a buyer for their property and share the profits.
- Real estate fix and flips, which is when someone with the needed cash joins with someone with the needed experience to purchase, fix or update, and resell a piece of real estate.
- Landlord agreements, which is when an owner of a property can offer to lease the property to tenants while trying to sell and then split the profits when the property is sold.
Real Estate Joint Venture Basics
There are two sides to a joint venture agreement in real estate, the operating member and the capital member. The operating member is the party that acquires or develops the property and the capital member provides the money.
The capital provider can act as a sort of hands-off investor. Sometimes companies will provide the cash for different real estate projects, but then find operating members to actually handle the ownership and buying and selling of the property.
Operating members are usually experts in the particular type of project the joint venture plans to take on. This company or individual should be able to handle the following aspects of a project:
It could seem like the operating member puts in more than the capital member, but the money is the foundation of a project. No real estate venture can happen without cash. The capital member may not have the same level of actual responsibility that the operating member does, but they take on the risk of financial investment.
Joint Venture Agreement
Commonly, joint ventures are structured as limited liability companies (LLCs). The parties involved in the venture form an operating agreement, or joint venture agreement. This agreement should lay out the specific rights of each party including:
- Profit distributions
- Management rights
- Exiting rights
- Ownership transfer rights
The parties involved in an LLC are called its members and have ownership of the business.
The Members in a Real Estate Joint Venture
Even though real estate joint ventures can include any number of members, they usually involve two.
Between the two members, you'll have a capital member and an operating member. These can be viewed as the brains and the brawn of a project. The operating member provides the brains, or expertise in real estate management, and the capital member provides the brawn, or money.
In some cases, the capital member can be involved only financially with no say in any of the daily operations of the project. In these cases, this capital member is called a "silent cash partner."
The members in a real estate joint venture do enjoy a level of liability protection, especially when they form an LLC.
Real Estate Joint Venture Structure
Once both parties sign the real estate joint venture contract, they legally agree to all of the details laid out in the document. These details should include things like:
- The objective or ultimate goal of the venture.
- The amount of money contributed to the project by the capital member.
- How exactly profits will be shared between the members.
- Management responsibilities.
- Ownership rights.
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