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Homeownership Option 5: Joint Venture - All you Need to Know 
Homeownership Option 5: Joint Venture - All you Need to Know 
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Homeownership Option 5: Joint Venture - All you Need to Know 

Money254
Farah Nurow
July 29, 2022

Homeownership provides a number of financial benefits to investors. It can help you build equity, cushion you from rising inflation and help you achieve capital gains when your investment appreciates. However, a lack of time, expertise, and money can delay your homeownership dream. 

But there is one route that can help you circumvent all these barriers slowing you down and preventing you from achieving that dream -  a Joint Venture (JV).

This article explores joint ventures in real estate in the fifth edition of our six-part series exploring the common homeownership paths Kenya can take. 

It will cover what JV is, how the process works, its pros and cons, what to consider before taking this route, and the pitfalls to avoid. 

What is a Joint Venture?

In real estate, a joint venture involves the collaboration of two or more parties, each offering something distinctive to achieve a common end goal. A joint venture will primarily include three parties: You (the landowner), a developer, and a financier. 

A developer will bring their market and building expertise, and a financer will provide the funds needed to complete the project. You will provide the land.

You and the two parties will sign an agreement on how profit will be shared. The two common profit-sharing strategies are dividing the building units among yourselves or selling the properties and sharing the generated profit. 

A joint venture is suitable for landowners thinking about homeownership but:

  • Don't have access to capital to actualize their dreams, 
  • Don't have the expertise to build a house, 
  • Don't have the time to spend overseeing construction, 
  • They don't want to go into debt or liquidate their investments to buy a house
  • They don’t want to shoulder all the risks that can arise in the homeownership process alone 

The Seven Stages of Joint Venture 

Joint ventures can be the most complex of all the homeownership routes available in Kenya. It can prove to be cumbersome, especially when you choose to do it alone. Hiring a real estate lawyer to guide you might lower the burden and make the process less complicated.

Stage 1: Finding Partners

The first step of this stage will be acquiring land where your house will stand. When taking the joint venture route, it is crucial that you buy land in a prime location that is accessible. Partners will only collaborate with you when the value of your land can match the value they bring.

Once your land is ready, you will need to find a real estate developer specialising in joint ventures. You can find them in real estate publications online and in magazines, visit different agents' offices, or get recommendations from your network. Once you find one, together, you can embark on finding a financier who can be a lending institution, an individual investor, or another developer.

When choosing a partner, ensure you run a background check on them. Study their previous partnerships, experience, and history. Partner only with reputable and reliable developers who won’t expose you to risks.

Stage 2: Project Proposal

This stage is the most important one as it shapes the direction your homeownership path will take. Your partners will visit your land. perform their due diligence, get a land appraisal and create a project proposal. Ideally, they should create a financially and technically viable project and present it to you.

The project will highlight every detail from the project design, budget, revenue, returns, and the profit sharing scheme. The proposal will also highlight if you need more partners, especially if the budget is high. You will be given time to study the project, and if it works for you, you can move to the next stage.

Stage 3: Sign the Contract

Once you and your partners are on the same page, the developer will draft a contract called Joint Venture Agreement (JVA). Given the number of disputes that typically arise from this partnership, a JVA will legally bind all the parties and protect everyone should things head south. 

It will contain all the terms and conditions of the partnership, and each party must accept for the project to move forward. 

A JVA will highlight: 

  1. The financial responsibility of each partner
  2. The management structure of the partnership 
  3. The rights and roles of each partner
  4. The rights of exit and transfer for the sale or the transfer of the joint venturer's membership interests 
  5. The downside protection for your land
  6. The profit-sharing structure 

Stage 4: The formation of SPV 

After you and your partners have signed the joint venture agreement, you will need to bring all your resources together. To do this, you will visit the registrar of companies and create a Special Service Vehicle (SPV). An SPV can be registered as a private Limited Liability Partnership (LLP) or a Private Limited Liability Company (LLC). 

Once the SPV is registered, you will transfer your land to the SPV, and your partners will transfer their expertise, capital, and other inputs. 

Stage 5: Get Permits and Government Approvals 

At this stage, the developer will create building plans and blueprints and present them to the government for approval. They will also apply for all the necessary permits required before any construction can commence. 

Stage 6: Construction 

Through the SPV you created, the developer will hire all the experts needed to bring the project to life. They will also oversee the whole project to completion and ensure everything is done within the stipulated time. 

Throughout the project, the developer will update all partners on the progress of the construction, communicate any changes, and account for all resources used in putting up the house. 

Stage 7: Profit Sharing 

This is the final stage and the one that finally makes you a homeowner. After completing the project, you and your partners will share the profit according to your earlier agreement. The profit sharing can be in the form of cash you generate from selling the properties or in sharing the housing units among yourselves. 

If your goal is to own a house, ensure you sign a contract that profit sharing will involve members getting house units or apartments. If the profit is cash, you can use your money to buy a ready house or construct a new home from scratch. 

Also Read: Homeownership Option 3: Building From Scratch

The Benefits and Risks of Joint Venture 

Advantages

  1. A joint venture provides you with access to funds without having to liquidate or take on debt.
  2. Development expertise as you partner with real estate experts 
  3. Lowers your risk exposure as losses will be shared among all investors 
  4. It can help you generate income as you might receive more than one housing unit
  5. The joint venture agreement protects the value of your land 

Disadvantages 

  1. Finding the right partners and going through all the legal processes can take months.
  2. You don't get complete control of the project and have to make compromises to appease other partners.
  3. Shared costs and risks mean profit will also be shared, and you might receive the smallest share depending on the value you brought 
  4. You are at the mercy of developers, and exiting the contract can be costly. 

Factors to Consider When Investing in Joint Venture 

  • Returns and Profit: In joint ventures, profits are shared according to each partner's contribution. The valuation of your land determines the value you bring. If your land is worth less than what other partners bring to the table, you will receive the smallest share of the profit. 
  • Conflict of Interest: If the other investors have a longstanding partnership and history together or your developer is also your financer, they might have a higher decision-making authority which might sideline you. When forming an SPV, ensure you have equal voting powers and address all your concerns about the potential conflict of interest. 
  • Your Needs: Since your goal is to own a home and your partners, in most cases, are in a joint venture for profit, you should have a framework to ensure you achieve your end goal. For example, the profit you will generate should be able to help you afford your dream house. 

Also Read: Homeownership Option 1: Buying a Ready House - All you Need to Know

  • Exit Mechanism: To avoid legal battles later and possible loss of your land, have a solid exit strategy with your partners. Your JVA should highlight all the events that can allow you or other partners to trigger the joint venture's dissolution. 

Pitfalls to Avoid in Joint Venture 

For a joint venture to materialise, the utmost collaboration of all parties involved is essential. But when the venture often involves more than two parties, the possibility of things going wrong increases. And as Murphy's law states, "Anything that can go wrong will go wrong." 

A joint venture can lead you to many pitfalls, including long legal battles, loss of your land, additional costs you didn't anticipate, and lack of control over the projects. To avoid these pitfalls, ensure: 

You have legal representation - a real estate lawyer with your best interest in mind will help you find the right investors to form a joint venture with. It's crucial you only work with reputable partners whose goals are aligned with yours. Doing it all alone can be costly as you might miss some red flags that will come back to haunt you later.

You have realistic expectations - The value of your land will determine the ROI you receive. Before you form an SPV and transfer your asset, perform an appraisal to decide on your current land value. Then conduct a financial viability study to predict your profits. Only form a joint venture when you know the returns you will make. 

You have boundaries - To prevent mistrust and conflict, have a clause in your joint venture agreement that obligates all partners to share all shared information freely and demands regular updates and accountability from all members throughout the project. 

WRAPPING UP 

The success of a joint venture is determined at the early stage when you are choosing your partners. Choosing the right ones will help you avoid exploitation,  save you money, and accomplish your homeownership goal in time. The wrong partners will only expose you to risk. 

With many homeownership paths available in Kenya, take time to research each individually and settle on the one that makes the best financial sense to you. A joint venture might appeal if you are looking for a path that lets others do the heavy lifting for you (from building plans to construction) as you concentrate on your career. If it doesn’t, you can try another homeownership route.

Also Read: 9 Ways for Owning a Home In Kenya

Farah Nurow is an experienced Content Writer who enjoys writing creative and educative articles meant to provoke readers' thoughts. He loves sunny weather and thick books. You can connect with him on LinkedIn.

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