The Top 3 Things Investors do to Kill Their Deals, as Seen by an Attorney
As a real estate Attorney and Investor, I frequent many transactions… successful and unsuccessful. The failures I observe commonly result from the same factors- the “Big 3 Deal Killers!”
1) The “PARTNERSHIP”: Investing with another party? You may unknowingly form a partnership. Defined as an association of two or more persons carrying on as co-owners of a business for profit, regardless of intent, this is a legally recognizable entity. By way of a partnership, liability can attach to all involved!
Perhaps after forming an LLC (limited liability company), you believe yourself immune from disaster. Great! However, formation alone is insufficient. An operating agreement, which provides the terms of governance, should be drafted at the inception of the LLC. This document should articulate the significant details of the working relationship, thus avoiding project loggerheads. The operating agreement should address such factors as:
- Decision-making authority (potentially troublesome with only two members, as there is no majority);
- Injection of additional capital;
- Share and allocation of losses;
- Inability to sell a property and long-term plans.
- Who will be the project manager? Simple as it may seem, these expectations must be articulated before the project begins.
2) The CONTRACT with the Repairperson: Working with a repair professional? If so, then the relationship is likely governed by a contract.
Oral contracts are valid in North Carolina. If you and your repair professional verbally agree to terms –such as a Completion Date, Expenses, Scope of Work, or the use of Subcontractors – then a contract exists even if a written contract is never executed.
With the repairperson, investors should fully articulate the terms of the agreement, and reduce them to writing. Simply put, repair related issues frequently arise, and a written contract trumps its verbal counterpart.
3) WORKING CAPITAL: A lack of working capital is the bane to a viable real estate deal. Underfunded projects struggle to finish. Smooth seas are often interrupted with unforeseeable encounters. Having a reserve of working capital to deploy, combats the inevitable unanticipated repair issue (a project “hiccup”).
When a project lacks the requisite capital reserve, trouble arises and lawsuits are filed. I would much rather work with a successful investor healthily growing a business than try to defend one owing great sums of money due to poor planning!