For many years in my land investing business, the biggest constraint that kept me from doing deals was access to capital.

I walked away from countless opportunities when I could have bought properties at a fraction of their market value.

Why? Because I didn't have the money to buy them, and most banks wanted nothing to do with these kinds of land deals.

These sellers weren't flexible enough to let me assign the contract to another buyer or put an option on their property, and I couldn't find a title company nimble enough to let me do a double closing.

These deals required a quick, clean cash sale, but I didn't have the cash.

Disclaimer: REtipster does not provide legal advice. The information in this article can be impacted by many unique variables. Always consult with a qualified legal professional before taking action.

The Emergence of Land Funders

Fast forward 15 years, and the world of land investing has changed a lot.

Thousands of new land investors have entered the industry, making some things easier and others more difficult.

Of the many people who tried to be land flippers, some realized there was an opportunity to specialize in the funding side of this business.

They could partner with other land flippers (aka – ‘Operators') who knew how to find the deals but didn't always have the money to buy them and provide all the funds needed to do their deals.

Usually, these funders will front all the cash needed to buy and hold the property until it sells at a profit.

When that profit comes through, the Funder and Operator will divide the profits at the percentage split they both agreed upon. Both parties are happy because they both benefited from a deal that neither party would've been able to do on their own. If everything goes well, they'll do it again, and the win-win relationship continues!

It's a brilliant way to pair up an Operator willing to hustle and a Funder willing to put their financial resources on the line.

The Land Funding Recipe

Over the past year, I've been diving deeper into this sub-niche of the land investing business because I think it's a fascinating way for both sides of the partnership to make money.

I've talked with many land funders and operators about how they structure their deals, assign responsibilities, and set expectations.

It's an interesting sub-niche of the land business because some of these funders do it here and there, almost like a hobby, and some of them have developed a big business out of this, making themselves known to other operators who had plenty of acquisition opportunities but lacked the money to buy them.

In talking with many of these funders, I’ve found that none of them do everything the same way.

Each has a slightly different “recipe” for how they divide responsibilities and make decisions.

The details of their working relationship are usually spelled out in a ‘Partnership Agreement' or a ‘Joint Venture Agreement' between the Funder and Operator.

In most cases, this document is carefully crafted by the Funder, laying out each party's responsibilities.

Not surprisingly, since the Funder drafted this document, it's written to protect the Funder's interests, first and foremost.

If you're the Operator, the first lesson is to read this contract carefully and have your attorney review it, too.

You should be 100% sure you understand and accept the Funder's terms because they were probably not written to protect you.

How to Structure the Deal

When a Funder and Operator work together, their relationship can be structured in many different ways, depending on the deal's specifics and who contributes which resources to the project (time, money, or both).

If you participate in a deal like this, how should you structure it?

When I started working with my attorney to draft my version of this document, he started structuring it with a Note and Mortgage.

After spending a lot of time on this attorney and getting nowhere, I eventually realized why most land funders do not structure their deals this way.

Why a Note and Mortgage Don't Work

When a Funder uses a Note and Mortgage (instead of a Partnership Agreement), it's much harder for the Funder to squeeze the huge profits they want out of the deal.

They are limited to making their money by charging interest on the loan balance (like a hard money lender) rather than the huge potential upside of taking a percentage of the profits.

The problem with using a Note and Mortgage is that if you are trying to take 30-50% of the profit, a court could interpret your transaction as violating state usury laws, and some states have criminal penalties for usury violations.

Of course, it's not likely this would happen, but it could, and the Funder would be taking an unnecessary risk by using documents designed for loans rather than a partnership.

This is why most Funders use some form of partnership agreement instead.

With a Partnership Agreement, the two parties can clearly define which property they're working with and answer all of the following questions about how they are working together:

• What's the Acquisition Price? Who is paying for this?
• What are the Closing Costs? Who is paying for these?
• Who will hold the title?
• What are the Holding and Improvements Costs? Who is paying for these?
• What are the marketing costs for buying and selling the property? Who is paying for them?
• Who is in charge of selling the property? Who decides whether to lower prices and which offers to accept?
• What is the expected resale timeline, and what are the penalties for delays?
• How will ‘Profit' be measured and split between the Funder and the Operator?
• Who gets to make key decisions and sign documents for the project?
• Who gets to set and adjust the sale price?
• Will seller financing be an option when selling? If so, what seller financing terms are acceptable?
• If there is a disagreement, who has the final decision-making authority?
• What if the deal loses money?
• Definition of ‘Default.'
• How can the Operator be confident they will be paid?
• Which party will keep all the financial records?

As you can see, there are a lot of things that need to be thought through.

So, where do we start?

The Big Decisions

When looking at all the items above, there are at least two BIG considerations to start with.

Trust Between Parties

How well do the Funder and Operator know and trust each other?

If this is a new relationship between parties who don't know each other well (for most professional funders, this is how most relationships begin), the funder will have every reason to structure all the terms in their favor, giving themselves maximum control in the worst-case scenario.

Why? Because the Funder is taking on all the financial risk.

In the worst-case scenario, the Funder would have a huge financial hole to dig themselves out of, and unless the Operator contributed some of the capital upfront, they would be free to walk away from the deal.

Complexity of the Deal

Will this be a basic flip (buying a property for cheap, doing nothing to it, and selling it for a higher price) or a more complex project (minor or major subdivision, entitlements, physical improvements, or otherwise)?

If it's a basic flip, this will simplify many things in the partnership agreement. Buying low and selling high is not a difficult concept to grasp, and far fewer transactions and movements will happen along the way.

If it's the latter, there will be many more things to consider.

For example, buying a property for a discounted price, spending additional time and money to improve it, or splitting one parcel into several properties and selling them off at different intervals, prices, and terms can be a much more convoluted project.

The Terms I Follow

With all the different variables that can be adjusted, there is a near-infinite number of different ways you can structure your Funding Agreement.

That being said, when I look at funding a land deal, there are only a couple of different ‘situations' I'm working with.

• Scenario 1: I do not know the Operator well. I haven't worked with them before. They seem competent, but I don't trust them implicitly.
• Scenario 2: The Operator is experienced. I know, like, and trust them. I have worked with them before and/or they have a long track record of good, profitable deals.

Most deals fall under Scenario 1, but every so often, if I'm dealing with a particularly skilled and experienced operator, Scenario 2 will come up.

I'll explain how I set up my Funding Agreements under both scenarios for each line item below.

Acquisition Price & Closing Costs

This one is pretty simple. Whatever price is stated in the initial purchase agreement between the buyer and seller goes here.

This is also where I would state the anticipated closing costs and who is paying for them.

For example, if the purchase price is $50,000, and the closing costs are $2,000, I would state both amounts here.

When I'm the funder, I will pay for both amounts, regardless of whether I'm working under scenario 1 or 2.

Who Holds Title?

When an Operator and Funder are working together on one property, there are a few ways this relationship can be structured and who can hold title.

1. Funder Holds Title: The Funder can keep the property in their name and sign a Funding Agreement with the operator. This is the safest for the Funder and the most common setup I've seen to date.

2. Operator Holds Title: If the Funder knows and trusts the operator (which is always the preferred scenario), the Operator can hold the title in their name while the Funder records a simple, one-page Declaration of Interest that refers to the original Funding Agreement. This would be enough to cloud the property title, and in most cases, it would be sufficient to prevent the Operator from selling the property without the Funder's consent.  Title companies will vary on whether the funder can be paid directly from closing proceeds based solely on this recorded notice.

3. Co-Ownership: The property can be co-owned by both the funder and operator as tenants in common or joint tenants. However, this can be a hassle, because it requires more signatures at every closing, and if there's a disagreement or someone dies or goes AWOL, it can gum things up. To date, I have not encountered many people who handle it this way

4. Joint LLC Ownership: The funder and operator could form a new co-owned LLC. This presents similar challenges to the idea of co-owning a property and involves some additional costs in forming the new LLC and figuring out how to write the Operating Agreement. This is a common scenario in bigger syndications or massive deals that will make millions because the bigger numbers justify these extra steps. However, it's not common with land flips in the sub-million-dollar price range.

5. Operator Holds Title with Mortgage from Funder: The Funder and Operator could work together as a Lender and Borrower. However, when the Funder's objective is to get a 30-70% portion of the profits, notes aren't typically written this way. Notes are written to be repaid with interest, not a portion of the profit. Worse yet, this type of transaction (where the funder gets a large portion of the profit rather than interest) could be interpreted by a court as violating usury laws in some states. So, if a Note and Mortgage are used, the Funder would be acting more as as ‘Lender' than a ‘Funder,' and they would need to be okay with getting their return in the form of interest, not a portion of the profit.

Almost every funder I've talked to will insist on holding title to the property, and in my opinion, this is a very reasonable requirement. After all, the funder is sinking all of their cash into the deal and the risk is squarely on their shoulders. If anyone should be secured by owning the property, it's the funder.

As such, in Scenario 1 (the most common scenario), I will hold title to the property when I fund a land deal.

However, there are some cases when I consider Scenario 2, where it makes logical sense to put the title in the Operators' name.

These are situations where I know and trust the operator. I've worked with them and seen their long track record of good, profitable deals.

These projects also involve more ‘movement' throughout the process until the property is sold. This often happens with subdivisions or entitlement projects when the operator works closely with the municipality and other professionals to make improvements or alter the property.

If I'm funding a deal that involves a lot of ongoing decisions and signatures, it can be a lot of extra work for me, as the funder and person on title, to manually approve every little decision, sign every document, and pay for every little transaction.

By putting the title in the Operator's name, they will have the autonomy and authority to make these decisions and move the project forward without my constant involvement.

Does this create some risk for me? Only to the extent that the operator tries to cut me out of the deal and/or makes worse decisions than I would make.

This goes back to working with the right operators.

If the operator knows the market and the deal better than I do, and if I trust the operator implicitly, this arrangement can make sense.

Scenario 2 is a unique situation. Otherwise, most deals fall under Scenario 1, where I hold title as the Funder.

Holding & Improvement Costs

This is another important set of costs, and if the project involves substantial improvements, these numbers could significantly impact the deal's profitability.

The Funding Agreement should state the anticipated costs (after getting cost estimates from the appropriate professionals doing the work) and who pays for them.

In either case, when I fund a land deal under Scenario 1 or 2, I will pay for all holding and improvement costs because this is my implied role.

However, the Operator could be heavily involved with this process since there can be many smaller transactions and movements to improve the property. As such, they can either:

• Pay these expenses out-of-pocket, document each expense, and then get reimbursed by the Funder (me) later.
• Tell the Funder an expense comes up, and the Funder can write a check to pay it directly.

Note: If there are cost overruns, the Funder pays for them. This underscores the importance of getting accurate cost estimates on the front end.

Marketing Costs

In most land flips, there are two types of marketing:

1. Acquisision Marketing: Sending mail, texts, cold calling or other marketing channels to find off-market deals from motivated sellers.
2. Disposition Marketing: The time and money needed to get a property listing prepared and visible to the world, until the property is sold.

I do not pay for the acquisition marketing costs when I fund a land deal because I cannot control how the operator is filtering their lists, sending their marketing messages, handling each conversation, etc.

The operator's ability to find great land deals is the biggest value they bring to the table, and it's how they earn their share of the profit. Neither of us would be in business without their ability to find great deals.

Disposition marketing is a bit different. There are at least a few ways to sell a property (we'll get to this shortly). Whichever way we choose to sell, the costs associated with getting the property sold are deducted from the gross sales price before the profit is recognized and split between both parties.

Selling Responsibilities and Resale Deadlines

There are at least a few different ways to sell a property, and each option involves some costs.

Option 1: Listed and Sold by a Licensed Realtor

A good Realtor who specializes in vacant land can be a very effective way to get a property sold.

Most Realtors charge a 6-10% commission on the sale price, regardless of how good they are at their job, how quickly the property sells, how much the seller lowers their price or what terms they accept in the purchase agreement.

When a Realtor is enlisted, their commission is deducted from our gross sale proceeds before the profit is split between the Funder and Operator, so in essence, both the Funder and Operator pay this cost together.

Most of the deals I've funded are substantial enough to justify the involvement of a Realtor. This is also an easy way to take the responsibility off of both parties. If the property sells slowly, they can both point fingers at the Realtor rather than pointing fingers at each other. 🙂

Option 2: Listed and Sold by the Operator

If the Operator is well-versed in creating listings and selling properties on various online marketplaces (free or paid), they can use their existing systems to do this job.

This could justify the Operator getting a larger portion of the profit if they can sell the property faster.

For example, I've seen some funders set up a sliding scale for the profit split based on how quickly the operator gets the property sold.

• If the property sells within the first 30 days, the operator could get 80% of the profit.
• If it sells within 60 days, the operator could get 70% of the profit.
• If it sells within 90 days, they could get 60%, and so on.

As the sliding scale implies, some of these Funding Agreements will completely cut the Operator out of the profit split if the property is not sold within a certain timeframe (12 months is a common deadline).

Option 3: Listed and Sold by the Funder

The Funder could also take on this job if they are competent at creating listings and selling real estate.

Similarly, this could justify a higher percentage of the profit, given the additional time and money they may be putting into the project.

Interestingly, I've never encountered a Funder who sets a profit split on a sliding scale based on how quickly they can sell the property.

A Warning for Operators

If you are an Operator partnering with a Funder, be sure you understand whose responsibility it is to sell the property and what consequences (if any) apply to you based on how long it takes to sell the property.

For example, if it's the Funder's responsibility to sell the property (i.e., the Operator has no control over pricing or promotion), and there's also a provision that cuts the Operator out of the deal after 12 months, this could be a clear conflict of interest. After all, it wouldn't be hard for the Funder to sit on their hands for 12 months so they can cut the Operator out and keep 100% of the profit once they decide to start listing it for sale.

I've talked to some Operators who felt cheated out of their share of a profit after the Funder simply followed the terms outlined in their agreement.

Accepting Offers and Decision-Making Authority

There are many decisions that need to be made throughout the course of any land flip.

For example,

• Suppose the Operator and Funder choose to list and sell their property with a licensed Realtor, who gets to decide which Realtor to use?
• If the property isn't selling and the price needs to be lowered, who decides when to lower the price and how low it can go?
• If a buyer offers to buy the property with seller financing, who decides whether to accept the offer and what seller financing terms are acceptable?

These are all things that should be ironed out at the very beginning, because all of these issues can have a big impact on how quickly the property sells, what the profit ends up being, and it can even affect the profit split.

For many Funders and Operators, seller financing doesn't work because their objective is to earn their profit quickly so they can deploy that capital again.

However, some funders may love seller financing while the operator does not, and vice versa.

It's important for both parties to think about these possible outcomes, so they can be on the same page and avoid any unwanted surprises when the property is sold.

How Is Profit Measured?

Definitions are an important part of making sure both parties are in alignment.

One of those important definitions is profit and what numbers are deducted before we arrive at this number.

In my Funding Agreement, there's a lot of deal about which party contributes what amounts to cover which portions of the project, but we measure profit like this.

After Funder and Operator have both been fully reimbursed for their Capital Contributions, the Funder will receive __% of remaining Net Profit, and the Operator will receive __% of remaining Net Profit.

In other words, both parties are paid back for their respective contributions to the project (not including the Operator's initial marketing costs to find the deal), and the remaining profit is distributed based on the percentages we both agree to.

When Is Profit Measured?

Some projects are a bit more complicated.

For example, let's say a funder and operator plan to buy a 40-acre parcel for $100,000. They split it into four 10-acre parcels and sell off each one with a Realtor for $50,000. In the process, they incur about $10,000 in closing and improvement costs, and they have to pay the Realtor's 6% commission.

$200,000 gross revenue – $100,000 investment – $10,000 additional costs – $12,000 Realtor commissions = $78,000 profit… right?

Yes, but when you split a property into four parcels, they won't all sell at the exact same time.

Since the sales proceeds for each child parcel are generated at different times, the IRS requires you to recognize income and expenses as the transactions occur. This is based on the general principles outlined in the IRS code and regulations.

This is how my Funding Agreement is worded:

If Property is subdivided, Capital Contributions will be reimbursed on a pro rata basis equal to the proportion of acreage sold, divided by the total acreage, less any common areas: Acreage Sold / (Total Acreage – Common Areas).

As you can see, it lays out a clear, simple definition of when and how profit is recognized when said profit comes in at different time intervals.

What If the Deal Loses Money?

Losing money is always possible, so both parties should consider it from the outset.

When I look at this from the Funder's perspective, where I am taking on all the financial risk, it's something I simply have to acknowledge and accept. If I'm not comfortable with that risk, then I shouldn't be funding the deal.

My agreement is worded like this:

Should the Net Proceeds to Seller be insufficient to fully cover all Capital Contributions made by the Funder and/or Operator, any shortfall shall be deemed as a loss, with the loss being applied to the tax return of the Funder and/or Operator pursuant to generally accepted accounting principles, provided Operator has not committed an Event of Default under the following Section.

If we lose money, both parties have to take it on the chin and consider it a loss and a lesson learned. It's as simple as that.

Events of Default

Any partnership involves some risk. One of those risks is that the other party will not follow through or perform its responsibilities.

As such, we need to define what constitutes “not following through,” or in other words, ‘Events of Default.'

In my opinion, an Operator is officially failing at their job under these conditions:

• If the Operator agrees to market the property for sale but isn't doing their job.
• If the Operator held title (Scenario 2), the title company ignored my Declaration of Interest and paid the Operator, and the Operator failed to reimburse my capital contribution and/or my portion of the net profit from the deal.
• If the Operator is a corporate entity, and that entity is sold to another party, the person controlling that entity changes, or the entity is dissolved during the term of our project (i.e., my partner in the deal changes materially or disappears altogether).
• If the Operator spends project dollars and costs unrelated to the project.

My agreement is worded like this:

EVENTS OF DEFAULT: Occurrence of any of the following events shall be an “Event of Default” under this Agreement: (a) Funder determines that Operator has failed or is failing to make a good faith effort to fully and properly market and sell the Property; (b) upon the sale of the Property, Operator fails to determine and/or reimburse Funder’s Capital Contribution or to pay Funder it’s appropriate disbursement of the Net Profits; (c) the dissolution or merger of Operator, or other change in the ownership or control of Operator; (d) the cessation of Operator’s normal business operations; (e) Operator allocates any portion of a Capital Contribution for an expense not associated with or that directly benefits the Project; (f) Operator’s obligation under this Agreement is not fulfilled and satisfied within the Interim Period; or (g) a trustee or receiver is appointed for Operator, or Operator becomes a debtor in any voluntary or involuntary bankruptcy or insolvency proceeding.

Operator's Security

In most cases, when I fund a deal, I put up all the cash and hold title to the property.

In the same way, I have specific ‘Events of Default' to define when an Operator is becoming a problem. The Operator should also look out for their interests to ensure they get paid what is owed to them after the deal is done.

Aside from signing a Funding Agreement that spells out what each party contributes and receives from the deal, what can an Operator do to ensure they get what is owed to them? What if the Funder goes rogue, ignores their agreement, and keeps all the profit for themselves?

The best option I know of is for the Operator to record a ‘Declaration of Interest' in the subject property (the same thing the Funder could do if the Operator held title to the property).

This would cloud the property's title, and in most cases, it would be sufficient to keep the operator from selling the property without the funder's consent. Title companies will vary on whether the filer of this notice can be paid directly from closing proceeds based solely on this recorded document. Still, it is almost always sufficient to cloud the title if the other party tries to sell the property without your consent.

Records and Bookkeeping

With any complex business relationship that involves more than a single transaction, someone needs to keep track of the details.

Depending on what kind of ‘partnership' you get involved with, the IRS may require you to file a partnership tax return, partnership agreements, registrations, FINCenregistrations, etc. (thereby adding more accounting costs to each deal done this way).

I want to avoid all of this, and one way to do it is to include a section in your Funding Agreement (notice how I don't call it a ‘Partnership Agreement') that explains how all the accounting and taxation will be handled. In this section, I specify whether the Funder or the Operator is responsible for keeping detailed accounts of all financial transactions for the project.

In my case, I designate myself for this because, as the “money guy” behind the deal, I'm already keeping track of all these details. However, if I fund a deal where the Operator is particularly detail-oriented and they're handling all these transactions anyway, I could designate them for this role, too.

The point is that someone needs to be responsible for the details, and it needs to be clearly stated that each party is responsible for filing and paying the taxes for the respective profits they hope to make from the project.

Want to Use My Funding Agreement?

As you can see, I've thought through this whole thing pretty thoroughly.

Every deal is unique, and the terms that make sense for one project may not make sense for the next one, so I created this template in a way that would allow me to easily make adjustments for each deal I fund.

Do you want to use my template for your deals?

I'm not an attorney, but you are welcome to take what I created, have it reviewed by your attorney, and manipulate it to meet your needs, whether you're the Funder or the Operator in a deal.

I even put together a detailed tutorial to guide you through each line of this document so you can understand what it says and how to adjust it, depending on the specifics of your deal.

With a template like this, you'll be well on your way to funding your first (or next) land deal.

You could even use this template to GET funding for your deals! Remember, this document can be adjusted to serve the needs of the Funder or the Operator, depending on which seat you're sitting in.

If you want access to my Funding Agreement template, along with a Declaration of Interest template, which you can use to protect yourself when you're not on title, along with some comprehensive video tutorials explaining how to use each document, you can get it all right here!

Preparing this type of agreement took many hours and considerable effort, with collaboration from several other funders and operators. I also paid thousands to my attorney, so you don't have to.

If you are interested in this type of joint venture, whether as a funder or an operator, this will give you a great foundation from which to start!

Note: When you sign up as an REtipster Email Subscriber, I’ll send you an instant $20 off “Discount Code” for this item. There's no pressure – I just want to make sure you're aware. 🙂