Joint Venture in Real Estate Good or Bad?
A joint venture is a development in which two independent entities (people or companies) agree to work together on the project and split the profit (or loss). It usually comes about when one or more partners bring something into the deal that the other party is lacking. For example, a developer who is experienced but short on cash to invest will seek out a financial partner (investor). An investor with funds to invest but no experience in development will seek out a project with an experienced developer. The split is not set in stone. It is usually negotiated between the parties.
See Also: Important Things To Keep In Mind While Making A Development Agreement
Good Sign:
A major joint venture can help your business grow faster, increase productivity and generate greater profits.
Primarily, a JV benefits small developers. Consolidation and merger with the Grade-A developers facilitate small developers to deliver high-quality projects. Small developers might not have access to a marketing strategy or capital of that scale. A JV allows them to channelize their energies and venture into projects, which are not in their scope single-handedly.
On the other hand, established real estate developers could fine-tune their project delivery potential. It even instills confidence in skeptical homebuyers as the name of an established developer gets attached to the project.
- Access to new markets and distribution networks
- Increased capacity
- Sharing of risks and costs (ie liability) with a partner
- Access to greater resources, including specialized staff, technology and finance
Joint ventures often enable growth without having to borrow funds or look for outside investors.
You may be able to:
- use your joint venture partner's customer database to market your project
- offer your partner's services and products to your existing customers
- join forces in purchasing, research and development
Bad Sign:
Partnering with another business can be complex.
It takes time and effort to build the right business relationship and, even then, it can be difficult to completely avoid all joint venture risks.
Problems are likely to arise if:
- the objectives of the venture are not clear and communicated to everyone involved
- the partners have different objectives for the joint venture
- the partners bring in different levels of expertise, investment or assets into the venture
- different cultures and management styles result in poor integration and co-operation
- You might be tempted to leave the joint venture: You will get enough leadership and support in the early stages of a joint venture and might be tempted to leave.
- Lack of clear communication: As a joint venture involves different companies from different horizons with different goals, there is often a severe lack of communication between partners.
- Unreliable partners: Because of the separate nature of a joint venture, it is possible that the partners do not devote 100% of their attention to the project and become unreliable.
- Unclear and unrealistic objectives: Unrealistic and unclear objectives may be set up. To avoid this, it is necessary that you and your partners do a lot of research before starting your joint venture.
- the partners don't provide sufficient leadership and support in the early stages. Success in a joint venture depends on comprehensive research and a detailed analysis of aims and objectives. For the venture to work, you should effectively communicate the business plan to everyone involved. Find out how to plan your joint venture relationship.