What's my exposure to any bad faith here?

8 Replies

Out of state SFH property in arrears. A son is negotiating with his owner mom who is behind. The son needs a cash partner (me). He has another investor offer on the table for 350 cash, but the son wants to buy/hold and is offering me 50/50 equity partnership.

I was told no to the scenario below by a mentor, but didn't have time to get the why. He just half-joked "Get the deed, or don't do the deal."

The questions: 

1) In what ways can he screw me? 

2) How can I protect my position; contract. 2nd mtg, ...? 

3) Is the deal doable/worth it?

Thanks.

The deal: Purchase Brrrr via sub to with 26k down from me for arrears/rehab. Balance payable at ($xxx a month for xxx months) I become 50% equity partner. If I want an early exit , I get 50k at 18th month, otherwise... I'll negotiate some more pending this being worth pursuing.

The house:

435k arv

272k mtg

  26k arrears & rehab + 29k profit wanted by mom

327k purchase = 75%

2100 rent x .85 vacancy = 1785

1735 mtg service

Updated 7 months ago

Seller is ok with payments of $500/month until paid off and will carry a silent 2nd for the 26k down. Son is suggesting shared deed. Did some reading; not comfortable with exposure splitting the deed presents. Any other solutions for this deal?

Hey, all. Can I get some feedback why this and another post in the Buying and Selling discussion with the same question got zero responses? I want to make sure I'm asking the right questions in the right areas. Thanks.

I'm not a fan of subject to deals at all, but my risk tolerance is low.   I don't like complicated deals, either.  I don't like a deal where I'm the only one with cash in the deal and someone else is getting 50% of the profits.  What are they bringing to the table that justifies that 50%?  Just the deal?  Is it really such a good deal that you would give away half the profit as a "finder's fee"?  $327 is too much to pay for $2100 in rent.

I don't like this deal at all.

The main points I wanted out of the question was 1) in what ways can I be scammed, 2) in what ways can I protect myself, respectively, and 3) was the deal worth it? I need to build my street smarts.

Thanks @Jon Holdman . I walked from the deal, too. He's a friend, so the favor factor was there. He's doing a deal to keep the investment in the family. His skin would be: it's local to him, cross country for me,  so he'd manage and rehab, and the 29k is coming from him at $500/month til done. So my 26k up front, his 29k down the road, so, 47/53 partners? 

The $327 comes from the $272 mortgage plus the 26k down from me, plus the 29k that is payable on the side, son-to-mom, from other cash flow he has, not my responsibility I included it as part of the overall deal parameters.

The current payment on the $272 mtg is 1735 and is covered by the 2100 rent. Does any of that help the (dead) deal in your eyes?

@Christopher Phillips, As it stands, 272 owed, 3 months in arrears, 435 arv.

I think the other risk to this is that you're doing a subject to deal. What is the plan if the bank calls the note due because of the due on sale clause - which can happen given that the seller is deeding it over to you and the son.

But the other thing here is that you're paying 26k for the arrears plus the two of you are going to have to pay the mom 500/mo until she gets 29k. Where is that money coming from exactly?   There's not much room in the rental income by the time you add repairs and vacancy and everything. Maybe 200/mo net?   So will you two each pay 150/mo (300/mo total) to make up the difference? 

That would be negative cash flow for the next 5 years.........

And you're only gaining half the equity capture in the deal?

Thats just not a good return. 26k plus 5 years of coming out of pocket to support the house and you're only gaining half of the equity capture (60k or something? Unfortunately, I can't go up and look at the post for the number because of this awful BP interface/website).

That really makes very little sense.   

Why not find a deal in a lower price range (like 250k). Get it under contract for 80% LTV and put your 26k down to see if you can't get a better cash flow. You'd have more equity capture 50k and you won't have to wait 5 years for it to make money. Plus you'll get 100% of the appreciation and principal paydown going forward.

So no, I wouldn't touch this deal for anything. Too much money and risk for too little reward.

@Geoffrey Pierce

What's it worth now - $272 = equity. If there is no equity, it's a sinking ship and they're asking you to plug the leaks and not get much for it.

If you're going to plug it with $26K, why would she expect profits later?

If her equity is $29K and she's trying to save it, you're already buying her equity with the $26K.

Originally posted by @Mike H. :

...Thats just not a good return. 26k plus 5 years of coming out of pocket to support the house and you're only gaining half of the equity capture (60k or something? Unfortunately, I can't go up and look at the post for the number because of this awful BP interface/website).

I wind up duplicating the tab and dragging to another monitor. I agree there.

Other than the $500 comes from him and his cash flow as a separate arrangement between him and his mom, the rest of the analysis is on target. No deal.

For my edification, what happens if the deed is held in escrow but not recorded. Is that a strat? Just trying to see where the creative lines can be drawn. 

Originally posted by @Christopher Phillips :

@Geoffrey Pierce

What's it worth now - $272 = equity. If there is no equity, it's a sinking ship and they're asking you to plug the leaks and not get much for it.

If you're going to plug it with $26K, why would she expect profits later?

If her equity is $29K and she's trying to save it, you're already buying her equity with the $26K.

Partner is quoting 7k rehab, 435 arv, so conservatively say 400 value today -272 = 128k. 
The 29k "profits" are I'm assuming a family arrangement and payable separately. That said, I'm out. 

Thanks all.

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