Refying for partner?

Question

I met someone at a local real estate group meeting who has two houses that she financed through hard money loans thinking she could refi them immediately, but that was in the days of looser credit. She has more than 4 mortgages already, and no lender will talk to her. We got to talking and I mentioned that I have an 800 credit score and only one small mortgage. She proposed that I refi one or both of her properties for her to take advantage of my good credit, and put the loan in my name but title in both of our names. She thinks she can rent it out for positive cash flow. She proposed that I take all of the tax benefits and we split the positive cash flow, after a certain accumulation in a reserve fund, and then she gives me some percent (which we did not discuss) of the profit on sale. We would form an LLC and have a contract to work out the legal issues.

Does this sounds legit? How would I buy it from her so that the mortgage is in my name but title is in both of our names, yet I still purchase at < 80% LTV? The loan that she needs to pay off the hard money lender is for $325K, and the house is worth about $425K, so there is a fair amount of equity.

Thanks, MJ

Does this sounds legit? How would I buy it from her so that the mortgage is in my name but title is in both of our names, yet I still purchase at < 80% LTV? The loan that she needs to pay off the hard money lender is for $325K, and the house is worth about $425K, so there is a fair amount of equity.

Thanks, MJ

Jon Holdman · Answer

Absolutely agree with Tom.  You would be on the hook for the mortgage payments regardless of what happened with the property.  But, you can't sell it if it becomes an albatross.  You have all the risk, she has none.

You would have to have a down payment.  Or, buy with hard money and then refi.  Or, buy it from her "subject to" the existing hard money loan and then refinance.

If its a good deal, you could buy it from her subject to the existing HML, and a seller second.  You now own it exclusively and she's rid of her problem.  You refinance at some point (you'll need income and some cash in the bank, in addition to the good credit) and pay off both the HML and her second.

We would need some numbers to see if this is a good deal.

If she insists on retaining control, walk away.  You would be a "credit partner", which essentially amounts to you taking all the risk for only a share of the rewards.  No way.

Tom NA · Answer

Don't do it!  Don't do it!  Don't do it!  I can pretty much tell by looking at the amount of the HML that these are *not* positive cash flowing properties.  That aside, let's say that there was some cash flow, I would *never* take financial responsibility for the property without having title exclusively in my name.  What risk is the other person taking?  You have all the skin in the game yet they are getting a good portion of the benefit.

Yes, I'm embarrassed to say that while the stakes weren't nearly as high, I very stupidly was the money in a partnership where I didn't get on the title and I was ultimately left with nothing but a judgment that I can't collect.  Learn from my mistake and don't do it!