Mildly complex question

11 Replies

I am in NY, my friend in Texas owns a house outright that he is rehabbing, due to some unfortunate circumstances he has run out of cash, and wants to finish the rehab and eventually sell the house. He has some overdue taxes but is not yet in any danger with the assessor's office. He asked if I would take out a mortgage and buy his house, which would afford him the cash to pay the back taxes and finish the rehab, upon which he would then have me sell the house at fair market value, approximately triple the amount he is selling it to me for. He would be making the payments, and I would receive my loan amount back plus a little extra for helping him out. My mortgage would be paid off after the proceeds from the sale are complete.

We've known each other for 30+ years, however I want to make sure I cover all the angles up to and including taking out an insurance policy on him should something happen to him, or a surety bond to make sure work is completed. What other things can I do make sure I don't end up on the losing end?

@Jeff MacIntosh welcome to BP. When it comes to mixing financial transactions and friendships forget about it. You are taking on a double risk. Your friend needs to find his own way out, and if you don't participate he has to understand and so do you. I could write you paragraph after paragraph here of possible and probable outcomes but why bother............ Just don't do it. IMHO

Hi Bjorn,

thanks for taking time to reply. As my original post implies, I am taking a non-sentimental approach to the point of researching what I can do to ensure against unfavorable situations many people find themselves in. If it cuts into the overall return, so be it. I appreciate your insight, thanks for your time.

@Jeff MacIntosh it sounds like a good deal.... BUT there are a lot of potential pitfalls

What if the reno still takes longer and costs more?

What if the house doesn’t sell?

What if the house sells for 70% of what he thinks it will?

What if he runs into an unexpected issue with the foundation/roof/etc?

Was everything permitted? What if the city decides it needs to be?

If everything goes well, you might have a good deal. If it runs into issues (as RE has a tendency to do), you’re in a lot of trouble with a house you don’t really control.

This would be the case with any property. In this case, you’re risking $xxxK on your friend who has already run out of money. You’re the only one who can really say if it’s worth it.

This could be the start to a great partnership making both of you a lot of money in the future. Or maybe not. Just make sure you have all the details before you make a decision. Maybe even have a contractor walk through the house with you for a second opinion.

@Mike McCarthy Thanks for the insight. The points you make are valid ones, and it is the reason I want to know what can be done through either a bond or policy that could protect me to some extent from the potential pitfalls. In response to your questions, here's what I know...

What if the reno still takes longer and costs more? - This is an x factor. what is needed is insulation, sheet rock , and a roof. All wiring and plumbing are intact and in good order, up to code. 

What if the house doesn’t sell? - This house is in a good area that once done should be well on par with other houses in the area, and market is strong near Austin, TX.

What if the house sells for 70% of what he thinks it will? - I can't speculate other than to research other houses in the area to get a feel for what the market will bear. If it takes a while to sell, I am fine with that.

What if he runs into an unexpected issue with the foundation/roof/etc? - Foundation is solid, roof is to be replaced, needs insulation and sheetrock.

Was everything permitted? What if the city decides it needs to be? - Everything is above board and permitted with the city.

I suppose it is about risk assessment, which is why I would like to learn more about how I can hedge my bet, to ensure against as many obstacles.

Why don't you treat it like a hard money loan (hml)? Or in this case private money lending? Basically, give your friend a chance but at high interest that will cover your risk. He will pay a high interest rate for the usage of your money (low cost). If he screws it up then you get the house at a significant discount. You do your friend a favor but you cover yourself by treating it as a loan with default penalties. You can get an attorney to draw it up. I would reach out to a few on BP that are local to help you with the paperwork. There will be some caveats of course but you should talk to an attorney. The loan that you take out should not have any due upon sale clause which could possibly cause your lender to accelerate the loan.

How much outstanding taxes does he have?

What is the budget of the remaining tasks? The roof? Does it need to be replaced or repaired? Insulation? Okay..all of it or partial? Sheetrock? Got it...How much space? Does that include the ceilings are just the walls? What about texturing? Painting? Baseboards?  I guess that everything else is in order. 

In this scenario, as the lender you could act exactly how a lender would do. That is, have your friend complete a task and then have it inspected. Once its passed inspection then he can get a draw. You could get a local Austin person to inspect it. 

In other words, finance the cost of construction and if he screws it up then you take over the property at a significant discount. 

You will give your friend a chance to finish it and you get paid handsomely along the way with interest margin. Don't forget to charge points upfront which you can roll into the loan thereby inflating your rate of return. Its common practice. But at the same time your friend has the opportunity to finish the project and make some money..hopefully very serious money as is the case with many flips. Just my two cents. 

I have used hml many times and have noticed the way their business works. Its good for me. If the equity is there and the profit potential is there for your friend then its a win win.

My #1 ruel is Do NOT do business with friends.

Ruel #2 when in doubt see Ruel #1 NO EXCEPTIONS.

I hope this helps.

@Jeff MacIntosh   I like @Aaron Gordy point of view. Jeff, it sounds like your financial situation is good enough for you to mortgage your house. You might consider a HELOC. Draw that money down and use it for the loan you will make to your buddy in Austin. You will have a first mortgage on his house. If he doesn't get the house completed and sold, you get to foreclose and own the house yourself. Make sure you have enough remaining in the HELOC to cover the cost of foreclosing and completing the house (any remaining costs he has not completed).

Before doing that, I would ask and verify a number of things: 1) Is this project the cause of him running out of money? If so, what is the problem; 2) Is he using a contractor? Is he any good?; 3) Are his remaining cost estimates accurate?; 4) Is his estimated sales price accurate?; 5) Verify the delinquent taxes; 6) Verify no liens on the property; 7) Verify he is the sole owner of the property; 8) Get an appraisal on the property; 9) Get legitimate deed of trust and note documents; 10) Close the loan at a title company; 11) Do not lend him more than 65%-70% of the estimated sales price. There are probably other things I'm missing.

I'd do the loan for him, but he doesn't have any money.  I would want someone else on the note to guarantee the loan.  If you want to partner with him and be on the deed and you have the financial wherewithal to guarantee the note, we can talk more if you both are interested.  

Hope this helps. Good luck.  BTW, I don't agree with never doing business with friends.  I prefer doing business with people I trust and I generally trust my friends more than people I don't know. 

your mixing two things together  One you say he wants to sell you the house and the other you say U want to put a loan on it.

you wont do both.

Easiest way and safest for you is to simply have him deed the house to you.. since he is a friend you do a JV agreement.

you put up the money to finish the rehab.. which probably cant be all that much.. and then when the house sells you as the seller just net out how much you put up and the profit you agree to.. he gets the balance as a unsecured loan on the hud

we do this often.. if for some reason he goes dark on you.. you don't have to foreclose and you own the home.. so you know he is going to be motivated to get it done so he gets his dough.. VERY VERY simple transactions.  

@Jeff MacIntosh ,

I would do something like what @Jay Hinrichs has suggested. 

If you are friends now, and he is asking you for money, then something like "Sure, I would be happy to help you out, I would just need you to deed that over to me" would really protect your position.


I also agree with all of the others who say not to mix deals with friends.  You will probably end up with either your money or your friend at the end of the day.  Pick one!

Originally posted by @James Call :

@Jeff MacIntosh,

I would do something like what @Jay Hinrichs has suggested. 

If you are friends now, and he is asking you for money, then something like "Sure, I would be happy to help you out, I would just need you to deed that over to me" would really protect your position.


I also agree with all of the others who say not to mix deals with friends.  You will probably end up with either your money or your friend at the end of the day.  Pick one!




@Jay Hinrichs has the general gist of what I want to do.

Again, I would like to thank everyone who has taken the time to reply and offer advice. Since I started this thread, this is what I have found out...

He owns both properties outright, no liens
Back taxes total $12,000
Loan to Value ratio is about 30%
Both properties compared to others on the street are valued around 180k each
The main cost is Plumbing, sheetrock and insulation
A recent divorce was the cause for the depletion of cash. taxes assessed have been amended since the first property in the midst of a flip. He is doing a thorough rehab on the property. 
The offer was and still is that I buy the properties from him for a total of 60k. properties are signed over to me, finished, and then sold. I get my 60k back with another 25% extra for helping out after costs.

 I figured this way, if anything happens to him, the properties are mine to do with as I wish, and I should be able to recover 60k plus costs from them.

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