Would offer a cosigner a monthly payment - what do you think

[Phil Champagne]

My wife and I want to relocate to the Austin, Texas area and purchase a house. I went through the financing process but I need a cosigner to get the final approval. We have credit scores in the mid to upper 700s, all good credit, no late payments, no bankruptcies or default and plenty of assets. This property will be turned into an investment or flipped within 2 or 3 years. We intend to get involved with real estate investment in the area as well.

We are looking to offer to an investor (to be found) who would be a cosigner for the loan. We would be the owner of the property. The agreement we would like to offer to the cosigner is as follow:
We will pay $700 to the cosigner at closing.
We will pay $40/month to the cosigner until the loan is paid off.
There will be a lien (to protect cosigner) on the house in the amount of the down payment in 2nd position after the mortgage.
We (the buyer) will pay for the down payment, closing costs, the only requirement for the cosigner is the cosigning on the loan.
This agreement will be in writing crafted by our real estate lawyers. You are welcome to consult your own.

The property will be in a stable or growing area of the Austin metro, between $500,000 and $650,000, a 3 bedroom, 2 bath single family house.

I would probably need to protect myself so that the cosigner doesn't bail out at closing and I lose the deposit.

Anyone has done something similar to this?

Thank you in advance.

[Travis Hall]

I love the creative thinking in HOW to make it work instead of just saying you can't do it yet.  Well done! I have a couple of clarifying questions for you for curiosity sake.

1. is the co signer simply brining their "credit worthiness" or are they also bringing funds to help with the down payment? If bringing funds as well, how much capital is needed? 

2. if bringing funds, is there a profit share or some percentage of the deal they would be getting later on down the road or just the $40 a month and $700 up front?

Thanks @Phil Champagne.

@Phil Champagneundefined

[Phil Champagne]

Thank you Travis. Just the credit worthiness. The entire downpayment and closing costs will be assume by us. The cosigner would get a protection from the lien in 2nd position, in the amount of the downpayment (or more?). I'll need to go over the contract with the lien with the RE lawyer obviously. Wanted to get some input on what it would look like.
But I'll also need to protect myself once I make an offer on a house so that I don't lose the security deposit if the cosigner changes his mind or is not reachable at the time of the closing when it is time to sign. I've never done a loan with a cosigning before - (I was fine on my own) - so I'm not sure if they have to sign at closing or if it can be done earlier.

[Jordan Moorhead]

@Phil Champagne interesting proposal! I think my first stop would be friends and family for this venture.

[Charles D Cruz]

So if I follow everything correctly. 

you have mid 700 credit score but require a cosigner.

within 2-3 years you intended to make the property into an investment.

sounds like your missing income to qualify and are intending to occupy as a personal residence.  Correct me if I missed anything.

[Bruce Lynn]

Great idea if you can make this happen, but this makes absolutely no sense to me and I would think most people.  Hate to be so negative.   Why would you need a co-signer with all the things you say...good credit (probably need to be in the 740-780 range for best interest rates), no lates, no bankruptcies, etc?   Unless perhaps you have no income or are short income.

Co-signer in 2nd position ends up being on the hook for the whole thing if it doesn't work out for some reason with almost no return.  Ties up their credit for $500-$650K probably.   Lien doesn't really protect them.  In reality with inflation probably negative returns versus almost any other investment.  (Although I guess you could pitch this as infinite returns as they're putting up no cash and banking $50/month.)  If you end up defaulting on them, they could foreclose perhaps, but might not make sense if there is a big first or no equity and not worth even the expense of foreclosing with so little at stake on their part.  What you are asking is someone to use $500K of their credit to invest with you for $500/year return, versus investing it somewhere or anywhere else.   So they could be giving up $100,000 or more return somewhere else to get $500/with you????

As others have said, maybe mom and dad do this deal to help out the kids, or maybe an employer to help out a rockstar employee, but I just can't think of one 3rd party I've ever met that should do this.  Really doesn't make sense for mom and dad or company either probably, but we do see people cosign or guarantee.

There have been some companies with the idea of appreciation share.  Not sure exactly what their model was, but maybe something similar, but they'll take some % of the equity at sale or may expect you to refinance in 5-7 years.  My quick thought would be they'd probably want 40% of the equity gain or something like that, with some minimum payout.

My thought is if you have big assets, but no or low income is find a lender who will allow you to do non-traditional financing, like use restricted stock awards or restricted equity as collateral for the loan if that's the position you're in. (Think Elon Musk...I think he takes no salary, but gets giant stock awards....big assets-no income) Not a lot out there that will probably do something like this, but there are some lenders that will do non-traditional loans like this.  I would think your local banks in Silicon Valley or Credit Unions would be experts at this....same in Austin although they might be newer to the game.

[Nicholas L.]

@Phil Champagne I have to agree with @Bruce Lynn - this sounds like unnecessary complexity.  Why not find something you can afford yourself?

[Dwayne Poster]

I have done similar for both my children. Would I do it for a 3rd party, it would depend on your down payment and loan amounts, which you've failed to state. Out of curiosity, what rate of return would you think such an investor should seek, considering you want to attract such an investor?

[Phil Champagne]

Problem resolved, there was a misunderstanding in the filing. I didn't need to go this route after all.
Thanks everyone.

[Ryan Kelly]

@Phil Champagne interesting concept, but as others have stated, I think this method would work best for the family. We have family in Walnut Creek, CA and keep talking them into moving here, but no luck so far. Happy to chat if you want to learn more about the market!

[Marco Bario]

@Phil Champagne - I see that the issue may have gone away for you, but for the record, this concept isn't far-fetched. I see it on commercial deals, and there are residential real estate investors in my network who support each other in this way as financial friends.

One could also:

• Seek a private money lender
• Offer the co-signer a deed in lieu of foreclosure to be held in escrow in addition to the junior lien 
• Have someone else buy the property so they control it, then lease option to you
• Offer the investor an equity position in the property so they share in the appreciation

Glad it worked out. Hats off to those who replied and were supportive of thinking outside the box.