How Partnerships Can Complicate a Real Estate Project

Meet George, he has been in an IT role for years and has always wanted to get into the real estate game. He has a buddy, Paul, who has been a contractor and who has his own company. The two of them are having a few brews and decide, why not partner and do a fix and flip on a duplex here in the Denver market. This was in January of 2020.

Coronavirus hit, and suddenly the money invested by George is in the house and Paul is getting started on the work. But then a series of events happen that make this issue require legal help on multiple fronts. One of the issues that happens when doing real estate deals with partners, is partners can come with complications.

George is told in May that his services are not going to be needed because the company he supports has people working from home and only at half staff. So the 3 IT support people is now going to be 2, and since he is the most expensive of the three, he is going to be without a position.

George has 3 children. All of the age where they are in, or about to be in college. He starts thinking about the future of his kids, and then starts to freak out a bit. He decides he no longer wants to be in the real estate game because he has too much capital in the home. He also doesn’t want to leave his friend Paul hanging. What can he do?

In this position, there are already complications, based on how the deal was structured. Is Paul obligated to buy George out? What if Paul doesn’t have the money? Or, what if Paul is half way done with the work, and if the property sold now it would be for a lot less because all of the demo work was done and he can’t afford it and George refuses to add more money to the pot because he is worried about his kids.

Either George or Paul could seek the services of a Denver real estate attorney. George may be looking for how to cleanly get out and how to unload the asset without making huge errors from liability standpoints. Paul may seek to chat with an attorney because he has spent 3 months working without pay in good faith his efforts are to be rewarded on the back end of the agreement. Now, in this scenario, it seems he is being asked to work for free for 3 months and his marriage is already a bit rocky because he can make financial moves his wife doesn’t always appreciate.

Even in situations where peace is a bigger desire than rights, an attorney is helpful to draft documents and set up expectations and standards within the real estate operating agreements the parties are adhering to. No one should enter into binding agreements without considering their risks and obligations legally.

In this situation, some questions could arise:

  • Is George expected to provide the financing to complete the job?
  • Who owns the property in the unfinished state if George paid the money and Paul did work on it?
  • Is Paul required to keep working on it?
  • Is there a way for Paul and George to work this out in a way both can win?
  • What if Paul’s wife is wanting him to sue his friend, leaving Paul in the odd position of having a potential divorce or a lost friend? How is he going to work through that?
  • If Paul finishes the job and used his money or credit, what does that do to George’s share?
  • If they sell the property at “break-even” and Paul did a bunch of work, what is fair compensation for his time?

These are the kinds of issues that can come up in partnerships, and they can get even more complicated.

  • One partner gets cancer
  • A partner gets married/divorced – what does this do to the agreements? If your partner dies, do you have to work with their spouse?
  • A partner decides to change careers or exit out of involvement prior to completion
  • A partner doesn’t pay required taxes, now what?
  • A partner doesn’t get insurance and there is a liability claim, who is responsible/at risk?
  • Prices in the market (like on lumber) rise substantially, making a project not make sense to complete.

You will find, no matter the examples we give, you will have one that doesn’t fit into a list we make. Rest assured, if you have issues that involve real estate and partnerships, we can help you solve and work through these issues. Sometimes it is smooth, sometimes there can be some pain. Our job is to ensure our clients get the best possible outcome for their Denver real estate law case. Please call us to see how we can help you!