As the going gets tough, people tend to get creative with their problem-solving skills. So when property investors have trouble obtaining loans in the current economic climate, the solution is to leverage on other people’s money to build wealth, portfolio and income streams.
This is often done in the form of a joint venture (JV) or sharing agreement, a method that has steadily gained traction over the years as loan approval rates reduced drastically. Through such ventures, one appears to have stronger credit mobility.
The ingredients for a successful JV in property investment include proper screening, designated responsibilities and check and balance analysis prior to signing a deal together. However, when the deal doesn’t work out, it often ends in a nightmare of broken relationships, bankruptcy and foreclosures on homes and businesses.
Joint Venture – What? When? Who?
The ideal JV allows two or more people to benefit from each others’ strengths and balance out their weaknesses during a property purchase. Often used as a tool to build one’s property portfolio, this venture allows profit sharing among the partners involved.
According to property investor Patrick Poh, those considering JV agreements should ensure that everyone involved has the same goal and vision in their approach to a particular property. A JV does not solve personal indifference – like credit weaknesses – therefore everyone’s approach has to be in sync.
The most common place to find JV partners is through a property investment network, seminars, courses or when investors have the same property guru.
There are two types of JVs;
A loose JV does not require one to form a company or register a business entity (LLP). It requires a partner to act as a trustee (registered owner) and to purchase the property under adjoining partnerships.
A Real Property Company (RPC) is a venture that forms a proper licensed entity, which is incorporated under the Company Act. The parties involved can form a shareholders’ agreement to hold shares on properties they jointly own. These shares can be traded instead of sold when one person decides to exit, without going through a strenuous legal battle.
Understand financial and banking responsibilities
As JVs are essentially a group of people coming together as a means to generate funds, there are numerous things to consider so things do not get sticky between you and the banks. Banks are reluctant to approve loans for properties bought via loose joint ventures because an application that involves third parties is seen as highly dubious.
Sitaraman Mani, Managing Director of CIC Banque Privée, urges individuals to thoroughly scrutinise their rights within the agreement to ensure that individual rights are not compromised when in disagreement. This is pivotal to ensure your credit score does not get affected as a result of problems faced by third parties.
Legal Matters
Mike Lee, a senior legal associate, points out that, another way to form a JV is to have a trustee deed, which is legally binding unless it breaches existing public policies. The latter will result in you being held in contempt of law. For example,
- A JV between bumi and non-bumi who purchases a bumi lot
- A JV with foreigners
- A JV with residents who hold PR in another country
Lee advises those who are party to JVs to put everything in writing and to get a good lawyer to vet the documents and agreements thoroughly. Since this is a form of profit and liability sharing, all percentages regarding the matter should be clearly spelt out in black and white. As this falls under contract law, any breach of the agreement is entitled to legal remedy.
Property investor Hazel Leong echoes his thoughts and asks everyone to get his or her paperwork right from the beginning and to have an exit strategy.
Exit Provision
According to Lee, in instances where one party breaches their obligation or agreement, the partner may seek several recourses which includes:
- Selling the shares of the defaulter to a third party
- Selling the property to a third party
- Servicing the remainder of the loan if it is within your means and be the sole owner of the property
The locking period set by banks has to be taken into account in the event of a default by a partner. A lock out period stops the seller from negotiating with any other party. Hence, during this period, the partners involved have to fully service their loan.
A breacher or defaulter would be subjected to a civil suit based on the terms and conditions placed on the contract. As a JV is a profit agreement, the court will take into account the provision of profit lost during the period of contract has been breach.
Without a proper framework and binding documents, any contractual breach will result in an arduous he-say-she-say battle in court. The beneficiaries and results of the decision will take years to settle.
This story was originally published on Property Insight.
