JV (Joint Venture) or Outright Sale? We help you decide in 6 minutes!
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| The Kodak Moment that all Joint Ventures begin with! |
According to Investopedia, a JV in general is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. However, the venture is its own entity, separate and apart from the participants' other business interests.
#1. The Landowner(s) and
#2. The Developer(s)
to jointly build a project for profit (mostly).
A Quick look at Joint-Venture and Outright-Sale models
Note: Investopedia also says this about Joint Ventures - "Although JVs represent a great way to pool capital and expertise and reduce the exposure of risk to all involved, they do present some unique challenges as well. For instance, if party A comes up with an idea that allows the JV to flourish, what cut of the profits does party A get? Does the party simply receive a cut based on the original investment pool or is there recognition of the party's contribution above and beyond the initial stake? For this and other reasons, it is estimated that nearly half of all JVs last less than four years and end in animosity."
A Quick look at Joint-Venture and Outright-Sale models
Way 1: JV. "I want to unlock the maximum potential of my land!"
If you want to take the JV route, it is only because a joint venture appears to be far more profitable option on paper. Here are the good and bad sides of a Real Estate JV
Good things about JVs
#1. Could give you far greater returns in the future than what you get by selling your plot of land today
#2. Get the chance to own some cool new real estate in a contemporary building which would be a great asset to own and also some great stock to sell when the building is ready
#3. Plus you get some cash upfront (we love this part)
Bad things about JVs
#1. Could turn out completely different from what was planned resulting in financial losses, relationship losses and severe bouts of acidity
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#2. As a land owner, your lack of real estate know how could act as a deterrent to the business on the whole. Think about it this way. If you were to go into a major partnership with someone who didn't understand your business model, why would you want to work with her/ him?
#3. Project costs, just like our monthly beer budget have a nasty habit. They always land up being way higher than expected. Unreal figures and profit projections, rampant cost cutting during construction leading to poor quality product and more strips of antacid are free accompaniments with most real estate JVs. This is dependable information.
Way 2: Outright Sale. "I want to sell my land, take my money and ride into the sunset. Thank you."
There is nothing to explain here really but here are a few things to remember.
#1. Ensure that the valuation of the land is correct and that you are not being underpaid. Scout around the neighbourhood and you will get a fair idea on how much the last few such sales happened for.
#2. Keep your asking price realistic. Remember that a developer who just saved some money while buying your land is going to be a happier guy. So, anyway you look at it, that alone is good for your land and the building that gets constructed there.
#3. Ensure that you follow up on the paperwork and assist in every way possible to enable the sale to happen. Remember that you are the person being paid. If you have any special conditions, make sure they are all met before the final registration of the sale of land takes place. Once that is done, your plot of land is as much yours as the bike you sold in college and cried.
An outright sale or a JV? What works better?
These suggestions come backed by first hand experience so they are dependable to a large extent and should point your thoughts in the right direction. This post aims to achieve just that and no more.
Situation 1
You own a plot of land. You have an offer for an outright purchase at 10% below your expected price. You also have an offer for a JV from a builder that promises you much more.
What should you do?
Sell your land. Take the money. Go back to your land home. :)
Situation 2
You own a plot of land. You are not being able to sell it but you have an offer for a Joint Venture from a builder that looks good.
What should you do?
Firstly, the comparison here should die. You just have one option and that is to form a JV. So stop wasting your time or fooling yourself and call your lawyer to get things started. Also, scroll up and read Way 1 again. Is there a path around the misery? Yes. Just one. Partner with a good human being. You should do well.
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6 minutes have ended and you hopefully have a solution.
Situation 3
You don't own any land. You're just curious.
What should you do?
You should think about this. If you had to sell off your school time rusty bicycle and there were two buyers. One guy said he would give you 100 bucks cold cash. The other guy said he would give you 200 bucks. However, he would take your bike right away, give you this 200 over the next 4 years subject to 25 conditions. What would you do? You would sell the bike, take your 100 in cold cash and walk.
Or;
You are in the bicycle renting business yourself.
Cheers!
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