Documentation Necessary if Building Home with Next-Door Neighbor

Question: My next-door neighbor has a construction background. I can get construction financing. We want to buy an old home in downtown Glendale, and do a “scrape and build,” i.e., tear the old home down and build a new home. My next-door neighbor is fine with a “handshake” deal. In other words, everything would be in my name to get the construction financing and we would split the profits after we sell the new home. What are your thoughts?

Answer: Not good thoughts! In every business relationship, and especially in a business relationship with a neighbor or a family member, you should at least have basic documentation. For example, what happens if there is a divorce or death of one of you? What if there are no profits? What if you can’t get a building permit because of soil settling problems? The basic documentation could simply be the formation of a limited liability company (“LLC”) naming you as the manager of the LLC, and you and your neighbor as the 50/50 members of the LLC. In addition, the Operating Agreement for the LLC could specify the rights of the members of the LLC, including the rights after death or divorce of an LLC member. Finally, the LLC should still be able to get the construction financing if you and your wife personally guarantee the construction financing.