The offer seems enticing. Your friend comes to you with a great idea: help me invest in some property I am buying and I will do all the work, cleaning it up, flipping it, and you will make a profit when I sell it. All I need is $$,$$$ and, by the way, sign this short contract that I wrote up for us to sign. With banks offering such a low rate of return on savings accounts and other investment vehicles, it sounds like a great offer. Until three years later when you end up across the conference room table from me trying to figure out how to either (a) get your anticipated profit or (b) get your money back.
Early 2013 has seen an uptick in consultations for these friendly real estate deals gone bad. It seems that this time of year, tax refund season, is a particularly good time for your friends to come visit you and see if they can help you “invest” that extra cash that the government just gave you. Before doing so, make sure you read the contract and figure out what are your ways “out” if things go sour or you want to pull out.
One common problem I have seen is that there is no provision for you to receive your money until a property is sold. Especially in this real estate market, this could provide quite a headache for your meager investment with a friend. What if your friend actually lists the property for a “loss” – do you still get your money?
Another common problem is when the contract asks you to make monthly payments to support the property, all with the promise that you’ll make a profit at the end. Well, what happens when the value of the property falls and you are essentially throwing good money into a bad investment? Do you have an exit strategy for that.
The moral of the story is, don’t sign the contract without reviewing it, preferably with an attorney, and be sure to look at the options for exiting the investment. It takes a lot of work to get that refund from the government and it would be a shame if it takes even more to get a portion of that back from a friend.
For more information about real estate investment contracts or to schedule a consultation, please call my office (718.568.0221) or visit my website (AndrewMAyers.com) for more information.