Buying Homes With Friends Part 2: Red Flags & Creating Operating Agreements

Hello again, it’s Co-Founder Kristina here. 

If you've been following our Instagram updates or read our previous blog post “Buying With Friends Part 1: What Makes a Great Partnership?” - you may remember that we're focusing on the theme of "Buying With Friends" throughout January and February. 

This time, I’m here to share insights on effectively navigating real estate challenges and the crucial role of an operating agreement in preserving your partnership. Pair this info with season 6, episode 2 of our podcast, available on Spotify and Apple Podcast.

Spotting Problems & Facing Challenges Together 🤝

In any venture, real estate included, challenges are part of the journey. It could be financial bumps in the road or differences in goals. The trick? Spot those warning signs before they become obstacles.

Choosing the right real estate partner is a bit like selecting a date. Trust your instincts. If your potential partner keeps changing plans, goes silent, or just doesn't align with your vision, maybe it's time to reconsider!

You want someone trustworthy, a clear communicator, and who shares your values.

Sometimes, things don’t pan out as expected.

Steph and I teamed up with a friend a while back, thinking it would be a perfect match. However, as we started looking at houses, our friend's ever-changing ideas and the pursuit of grander things became apparent.

The place we ended up with didn't excite any of us, so we sold it pretty quickly. Luckily, even though the real estate partnership had its flaws, it didn't turn into a financial disaster. Why? We had an operating agreement that outlined the details and structure of our partnership.

What’s an Operating Agreement? 

Simply put, an operating agreement is a written document that explains the rules of the game for your real estate partnership.

It's not a one-size-fits-all situation, but having this agreement can make a significant difference.

I highly recommend consulting with a lawyer as you put it together. They're like your partnership coaches, ensuring you navigate the process with confidence.

Essential Info to Include in Operating Agreements

1. Ownership Percentage:

Ownership doesn't have to be a 50/50 split, especially with multiple partners. Varied ownership percentages can align with contributions.

2. Initial Cash Contribution:

Clarify each partner's initial cash contribution to the deal.

3. Exit Strategies:

Address scenarios like death, voluntary exits, etc.

4. Owner's Draws:

Consider if partners can take personal draws from the partnership income.

5. Reserves:

Define the desired amount of money in reserves at all times.

6. Exit and Sale Conditions:

Outline the circumstances under which we will or won't sell the property.

7. Property Management:

Determine who will manage the property and handle taxes.

8. Financial Considerations:

Address the need for extra money for repairs or updates.

9. Decision-Making Process:

Clearly define how decisions will be made - unanimously or by a different process.

Remember, an operating agreement is like a prenup for your real estate partnership, clearly outlining expectations and responsibilities to save the relationship even if things go sideways.

Make This Idea Actionable: What Do You Bring to the Table?

In the previous post, I asked you to write down your answer for the following: “What do I bring to the table? Which of the preferred partnership qualities do I possess?”

Use your answer to jot down some ideas for how you could pitch yourself as a partner to friends, family, colleagues - and members of our community at events!

What’s Next…

Read - Buying With Friends Part 3: Pitching The Idea to Friends, Family, Co-Workers & Beyond

I’ll explore the art of pitching real estate ideas to friends and family next! Effective communication (that’s pretty important, I’m sure you’ve noticed 😉) takes the spotlight as I share more stories and tips.

Until then, do you want to learn more about the home-buying process in general…

Take Homeschool on YouTube - a completely free resource that’s already helping thousands of people learn about buying a house with an investor mindset. 

If you're looking for some one-on-one support, book an intro call with our agent team in Austin, Texas. 

I will say, we’re the only brokerage and real estate education company with a focus on buying with friends. And, Realtors Sydney, Jenn, and Alan have each purchased property through partnerships as well. You deserve to work with someone that really knows their stuff - that’s us. 🙂

Got a quick question? DM us on Instagram to chat through it!