Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes
Alright i'm not 100% sure how I want to go about this.
I have a tentative JV agreement in place. I'm writing up an offer for a house to hold as a rental . It will be a 50/50 split. I have a money guy coming in with the purchase price and my company will come in with half the initial repair cost and do all managing and repairs going forward. 50/50 profit split. The issue is the money guy does not have all cash. He wants to come in with a mortgage. (He is prequalified) Best way to do this?
Options.
Put him and my company on title but have the mortgage only attached to him? I have a hard time believing a bank would be willing to go for this?
I'm thinking about Having him purchase the home in his name and quit claim my company onto title after close. Should I be worried about the "due on sale" clause? Is this getting into a grey area?
Has anyone closed a deal such as this? If so, how did you go about it?
Lots of ways to do it depending on how much you trust the guy.
If it were me Id get the operating agreement for the partnership lined out so expectations are set and open an LLC with 2 person ownership.
Let him get the loan in his name, put the thing in a land trust with a third party trustee with fiduciary responsibility like a lawyer, then file a second security deed for whatever you put in. Structure it as if the LLC is borrowing all the money at the mortgage interest rate, run all income and expenses through the LLC in a separate checking account then do your disbursements from there depending on what you guys agree to pull out and when.
I just did a JV and my private lender funded it. The 2 member LLC borrowed the money, but never would have gotten it without my personal guarantee. Pretty much the same thing only you're getting the money from a bank instead of a person. Your partnership is what is going to pay it back, so the structure should try to reflect it being the borrower of all funds as much as possible IMO.
Simply doing a quit claim deed after close to the LLC should be fine. As far as the due on sale clause, a bank won't look twice at it as long as he lets the bank know it is an investment property. Transferring a property to an LLC is common practice now a days and doesn't effect their rights given in the mortgage at all. I would just make sure both of you are on the LLC prior to close and prior to transfer. If not, the continuation of obligation won't meet requirements and May effect options for refinancing or obtaining other credit in the future.
When we use someone else's credit for a property (they take out the mortgage) we simply use them as a straw buyer, close it in their personal name, and then quit claim to LLC. We pay a flat fee for someone doing this. Straw buyers are a legal practice as long as it is disclosed with a conventional loan. FHA won't allow it because FHA is for owner occupants and there really isn't a reason for an OO to need a straw buyer.
There are of course other, more complex ways to do it but just make sure all the JV and operating agreements are spelled out and signed/notarized prior to entering into a contract.
If you are doing a JV and he is supposed to supply the money but he does it by taking a mortgage out on the property, he increases the risk for you. To make sure he is responsible to pay back the mortgage, make sure you have a very detailed operating agreement that makes him responsible for the entire mortgage cost out of his share of the proceeds and holds him personally liable in the event the note is not paid or foreclosed on. It is worth your time to have a lawyer make the operating agreement ironclad so there are no disputes over it.
Thanks for the response guys. I'm good with the operating agreement stuff and risk assessment stuff.
What I am cloudy on is the stuff with the bank. I am a licensed agent so disclosure to all involved is huge importance to me. I do not want this transaction to fall under the umbrella of an agent buying a property without disclosing all the info to others involved. It reminds me of a case that was similar to this scenario.
(Ex. bob asked agent z to list his house for 100k. agent z owns another LLC and that LLC offers bob a low amount for the listed property. Bob never has the knowledge that agent z was an owner in the LLC and b/c of agent z's advice to take the offer bob took under market value for his property) A scenario like this is totally against license law. & a broker's license was revoked for something along those lines
Writing up the contract with only the money guy attached to the purchase agreement even though there is a pre-set agreement that after the fact My company will be part owner feels like its getting in the same boat as the above example.
I suppose I answered my own question as did @Mike Neubauer in that this is ok to do so long as I made sure it was disclosed up front. But then again if the bank has no problem with someone coming onto title after the fact why not just be put on during the transaction?
Has anyone done a deal like this where they were placed on title throughout the closing process but not required by the bank to be attached to the mortgage?
@James Wise I've never done any partnerships, so I probably won't be able to offer any good advice. The others that you tagged can probably help out tremendously.
The banks probably do not mind when someone is added to title after closing because they are added via quit claim deed, not warranty deed. And a quit claim really has no standing if they had to foreclose on you.
If you're okay with your two personal names on title, which it sounds like, you being on title with him from the beginning, is not important. You can be a buyer, on title, but Not a signer/responsible on the note. You will have to execute the mortgage since you're on title, but not responsible on the note. The issue of your partner using a loan/mortgage on This property, as opposed to bringing cash, is another matter which as Jerry said, brings additional risk to you.
Sounds like you're not too comfortable with the "I'll probably be fine with a quit claim deed after the fact" approach. I'm with you there.
I like @Darrell Shepherd 's approach...I'm doing a somewhat similar deal, where the money guys put up the equity and as the GP, I'm actually signing for a hard money loan to fund the remainder of the project. Equity gets a preferred return of 8%, then I get a developer fee of 6% of costs, then all add'l upside is split 50/50. Property is owned in an LLC (single asset entity, formed just for this deal), LLC is the borrower, property AND my interest in the LLC secure the loan. This is obviously risker to the partnership, but we have enough equity in the deal that we're not concerned about getting upside down. In your case, if the money guy needs a mortgage to fund his contribution, you may have to ask yourself if the splits should be re-worked. If the mortgage must be secured by the property (e.g. not a line of credit secured by another property that the money guy owns), then a single asset entity borrower, with him as the guarantor and a tight operating agreement is probably your cleanest execution.
My reply would have many of the same points as you have already received. I just didn't want you to think I wasn't paying attention , after I said I would! Many ways to go about this as pointed out. Go with the one you feel most comfortable AND protected with.
I've just been busy with selecting a home in The Villages, FL and only have a week to do so. Good Luck. Rich
I'm not an agent so take this with a grain of salt, but I dont know that you are doing anything to risk your license here.
I cant imagine the banks being OK with a straw purchase like Mike said, that's just crazy to me that you can disclose "I'm using this person just for their credit because you wont give me the loan, but I'm going to pay it" and the banks are fine with it. Never underestimate the stupidity of anyone at a bank or government, though. I've taken my fair share of sub2's which is actually more creative so if it works for someone, more power to them.
This is very different, though. If you do it the way I described, your partner is basically buying the property himself, then forming a partnership with you to get the work done and you are securing your interest in the property. The land trust keeps anyone from attaching the property for his personal debts, as well as puts a third party in charge of signing over docs so neither of you can do stuff without the other. Don't worry about the due on sale clause, no bank cares at all about the title on a loan that is current and none of the yahoos at the bank know what a land trust is anyway. Their security doesn't change in the least, their collateral and buyer remain the same. The additional security deed you file is no different than a HELOC going on after a mortgage. Nothing shady there. Besides, they really dont have a mechanism in place to know what happens to the title after closing (except for the insurance notices being sent) anyway. Also, the due on sale clause says they MAY call the loan due, I haven't seen one that specifically prohibits transfer of title or says the loan is automatically due. Might be out there, but I haven't seen it.
I'm a little confused about using quit claim deeds to transfer property. A quit claim means you release your claim on it. Think husband and wife buy a house together and then get divorced and the wife quit claims it to her hubby. She relinquishes her claim on title so he is the only owner. You cant quit claim it to someone that isn't already on title.
I also agree with Jerry, you need to make sure you are on the same page with who is bringing what into the deal. You have additional risk if he is bringing a mortgage and you are bringing cash.