Heads of Agreement/joint Ventures
The use of the joint venture arrangement by transaction engineers established through what is commonly (although not accurately) called a Heads of Agreement) is a great way to transact with sellers BUT there are common traps that the transaction engineer should avoid.
Most importantly the transaction engineer should never lose sight of the fact that the arrangement is just that a "joint venture" between the seller and the transaction engineer. The basic notion of a joint venture is that each party brings something to the table with a view to make a financial return.
There seems to be a growing trend for transaction engineers to see the arrangement as purely an exercise for them to make money out of the transaction and the seller as the party that they have "saved" from a difficult financial position.
Where the transaction engineer sets the transaction up taking 100% of the cash flow profit then the transaction is at serious risk of falling over. Despite what ever has been explained/disclosed to the JV partner (seller) when the reality of the transaction hits home then my experience is that many sellers start to question the transaction. The answer to the dilemma is of course for the transaction engineer is DON'T BE GREEDY, set up a transaction that is fair to both parties. The seller should also get something out of the transaction as well, not just relief from mortgage payments and property outgoings.
More particularly there is a trend by transaction engineers to try to get to big a profit - e.g. Agreeing with the JV partner (seller) to be liable to just pay them the amount owing on the mortgage (even where the market value of the property is greater) and finding a buyer at a price significantly greater (e.g. $30-50K higher) and seeing the whole of that profit as a fair fee for their efforts "...in saving the seller..." Such actions not only cause the seller (when they eventually become aware) to feel ripped off but also places into question the credibility of the transaction engineer and vendor financing generally.
Remember, it takes two to tango, be fair and share the profit.
Also remember that at the end of the day the buyer needs to be in apposition to obtain traditional finance at the end of the sale transaction. If the profit is screwed to hard at the start the buyer will struggle to get finance at the end.
Remember the deal must work and be fair to all parties.
I remember the advice of my late father when as a property manager for a multi-national corporation he said "...always leave something in it for the next man...". My fathers explanation being that if you don't, it will come back to bite you.
Most importantly the transaction engineer should never lose sight of the fact that the arrangement is just that a "joint venture" between the seller and the transaction engineer. The basic notion of a joint venture is that each party brings something to the table with a view to make a financial return.
There seems to be a growing trend for transaction engineers to see the arrangement as purely an exercise for them to make money out of the transaction and the seller as the party that they have "saved" from a difficult financial position.
Where the transaction engineer sets the transaction up taking 100% of the cash flow profit then the transaction is at serious risk of falling over. Despite what ever has been explained/disclosed to the JV partner (seller) when the reality of the transaction hits home then my experience is that many sellers start to question the transaction. The answer to the dilemma is of course for the transaction engineer is DON'T BE GREEDY, set up a transaction that is fair to both parties. The seller should also get something out of the transaction as well, not just relief from mortgage payments and property outgoings.
More particularly there is a trend by transaction engineers to try to get to big a profit - e.g. Agreeing with the JV partner (seller) to be liable to just pay them the amount owing on the mortgage (even where the market value of the property is greater) and finding a buyer at a price significantly greater (e.g. $30-50K higher) and seeing the whole of that profit as a fair fee for their efforts "...in saving the seller..." Such actions not only cause the seller (when they eventually become aware) to feel ripped off but also places into question the credibility of the transaction engineer and vendor financing generally.
Remember, it takes two to tango, be fair and share the profit.
Also remember that at the end of the day the buyer needs to be in apposition to obtain traditional finance at the end of the sale transaction. If the profit is screwed to hard at the start the buyer will struggle to get finance at the end.
Remember the deal must work and be fair to all parties.
I remember the advice of my late father when as a property manager for a multi-national corporation he said "...always leave something in it for the next man...". My fathers explanation being that if you don't, it will come back to bite you.
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