Borrowing Credit, not money? Creative financing

3 Replies

So I have a creative financing situation that I need some help with.

My Brother in law and I are flipping houses together and our father in law is our contractor help, but also has some investing potential. 

He has some property that he owns free and clear, and we've discussed about him getting a HELOC against it, but here's the complicated situation, He makes enough money with his retirement to be able to borrow about 350k against but his credit isn't currently in good enough shape to get a HELOC. We could just do a straight up refi, but we like the HELOC idea so we only have to pay on the money we need at that time. (And I know thats a whole other discussion to be had) but what I'm asking advice on is this:

One of our family members has Excellent credit and makes way more than enough to qualify for the HELOC if we put him on the deed to the property. What we want to pitch to him is doing that so we can access the money we have in this property, but what our dilemma is, is what to offer him for compensation. we are currently structured profit splitting by thirds (Father in law, Brother in law, myself) and someone mentioned offering him 25%, but I feel like that is way way too much for just allowing us to use his credit.

So my ultimate question is--What would be a fair offer for him as compensation for risking his credit, but ultimately none of his money?

I was thinking something in line with private lending 7-12% but what dollar amount should we base that on?

What would you do in this situation?  I know ultimately this decision is ours, but I'm really interested in other ideas to brainstorm off of.

Thank you in advance!  I'll try to reply as quickly as possible!

David,

Without knowing anything specifically about your operation, my initial thought was I would be real reluctant to do this if there was ANY chance my hard earned good credit could be impacted unless the payoff would be worth it. If your family member invests in stocks he might argue that he can keep getting the same, or better, rate of return you are offering without the additional risk. That's just my personal thought.  Whatever you decide I would weigh what you offer him based on what the returns are for other investments such as stocks. I'd then sweeten the deal to give him a reason to make the jump. Good luck and i hope it works out for all of you.

John,

I appreciate your reply, and I agree that risking his credit is a big deal for him, but I'm trying to valuate what his credit is worth, since he's not investing any actual money.  He's familiar with our operations and is excited to get in and get a slice of the pie, so to speak; however, if our company profits were $400k I'm reluctant to offer $100k or 25% just for credit.  And I've had the thought about comparing to stocks or other investments, even private RE lending, but with those there is money to base a return off of.

I'd be interested to see if @Brandon Turner has ever thought about anything like this or heard of anything along these lines

Good Morning David-

I agree with the poster above, I would actually see it as unfair to not include your family member in the profit sharing, as he has just as much if not more to lose in the case of having the deal go south and having his credit ruined. In the past, we have made credit partners a part of the deal and thus profit sharing. Just my opinion, hope it helps.

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