Deadbeat dad or investment opportunity? Need advice.

4 Replies

Let me begin by stating that I’m by no means a professional real estate investor but I’m looking to take my fist steps in building cash flow/appreciation as soon as physically possible.

I'm interested in getting my toes wet in the world of REI and I believe I can leverage my experience with construction in this career.

* I need advice on whether or not an opportunity to help a loved one refinance there home is an investment opportunity or a total red flag. A member of my family has fallen on tough times and cannot keep up with there current mortgage payments. This person would like their monthly payments to be in the $500-$800 range but with a recent close call with having there home foreclosed on, along with the fact that this person doesn‘t have a steady paying job (small business owner) to maintain a mortage over $1000 a month, they’ve reached out to me in an effort to fix the problem.*

*Keep in mind that in order for the homeowner to get there mortgage payment down to a reasonable amount, the length of the loan would be astronomically longer than most, probably 40-50 year mortgage. *

The home in question is worth about $125k currently & has about 50k left on the loan. The home is by no means perfect and there’s definitely a lot of opportunity to up the value with the right work. The terms of the hypothetical deal go a little something like this:

(1) Appraisal of the home, (2) refinance home and work in another 20-50 grand into the deal to renovate, after renovations are all said and done this homeowner believes that the home will be worth at least $230k. So we're looking at about a 100k loan split between the two of us on a, hypothetical, ARV of $230k.

Now this person is asking for two things in particular: 1. for me to sign on the loan with them due to my credit/stable income & (2) Sweat equity in the form of helping out with renovations that were financed.

This is a childhood home so the homeowner would likely live there for a few years after the renovations are completed. The homeowner has agreed with me to write in a clause to the contract forcing him to buy my equity position out over time or pay out a lump sum after a certain period of time.

I feel a bit of uncertain about the deal due to my inexperience in real estate investing but I would really appreciate any insight & advice I can get.

I can see how this is an opportunity for some good appreciation, but if i can’t get my hands on that cash until the sale of the home/or until the clause kicks in, how will this deal benefit me?

*** My question/concern is how will this affect me moving forward in the purchase of my own home in the future if the homeowner doesn’t decide to sell the home soon after renovations?***

Thank you to all who took the time to read this and if I’ve left out important details please let me know and I can provide.

I wouldn't touch this deal for many reasons.  

The homeowner doesn't need you: If the homeowner wants a lower payment then he should be able to go to the bank and refinance his 50k balance over 30 years which would come out to roughly 500/month depending on taxes etc. A remodel and ARV is completely pointless unless he plans on immediately selling, which he doesn't, or unless the remodel allows you to charge more rent, which in this case he wants to pay less rent.

In this scenario you are the one assuming all of the risk, and have very little if any upside potential.  From what I see the homeowner wants you to put your credit and finances on the dotted line and co-sign, then put in sweat equity, and for what purpose?  So the homeowner can get all of the benefits of living in a newly remodeled place and still pay less each month?

If the owner can only afford 500 / month, how do you plan on being compensated for what you are contributing?  If he can only afford 500 what makes you think he will actually be able to afford to buy out your position?  You won't see a dime until he sells, which if this is a childhood home that could be never.  And good luck trying to liquidate your fractional share of a single family home.

Sounds to me like the guy is going to stop making all payments on his freely renovated place as soon as you cosign, then you will be stuck paying his rent for him indefinitely or attempt to evict him.  

You say this person is family, but nothing can tear a family apart faster than one person owing another person large sums of money.  Never mix business with personal, refer them to a bank to refi that 50k balance over 30 years and don't do a remodel.  If he wants a new kitchen he can buy himself a new kitchen.

There is $50K left owing on the house and the current owner wants their payments to be between $500-800 a month.  Even on a $100K mortgage at 20 years, the payments should be about $700 a month.  Meaning they already have their payments in the range they want.

The house as is is worth $125K, but with $20-50K of renos, they figure it will be worth $230, but you want to split a $100K loan.  I'm guessing you are looking at a $100K loan, $50K will be for what is owing on the house and the other $50K will be for renos? Is that right?  Has someone else confirmed the after reno value of $230K? 

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@Jake M. Hi Jake, 

If you are asking, the short answer is probably no...

The long answer: From an investment opportunity this is a non starter. Too many things are outside of your control.

If your loved one can't afford to pay their mortgage, I wouldn't be helping them take money out. Plus, a straight 15 year refi on 50K would have to be 9% to break the $500 budget mark you quoted. Even with taxes and insurance, a reasonable rate on the 15 year would more than make up for that. Help them find a loan that they can afford and excess savings can be used to renovate the house over time. Feel free to contribute sweat equity, but the situation seems much less dire than it has been described to you. Your family member should try to qualify for that on their own and if they can't, then you can cosign if you are feeling up for it. However, the debt service on that loan could affect your ability to purchase in the future, so you should consider that you are committing yourself to a 15 year (at least) increase to your debt that will affect your debt to income ratio on all loan applications down the road. That being said, I've cosigned for family members from time to time, but I always had a way I could liquidate what equity there would be in the asset and get out from under the loan if I was the only one left holding the bag.

@Ben Zimmerman I really appreciate your insight. I had thought about a lot of these setbacks before but it really helped to get clarity and more perspective from your reply.

Thank you for your honest opinion Ben.