Fix and Flip Using Someone Else's Mortgage

[Steven Beckham]

I'm looking at doing a fix and flip, but I don't have the funds for the purchase, and the hard money quotes I've been getting are too expensive. The subject property is in livable condition and qualifies for bank financing, but just needs a major face lift. However, I currently own my primary residence and can't qualify for a mortgage unless I put at least 20% down, which I don't have.

A friend of mine is interested in real estate investing but doesn't have the time, so it seems like a perfect partnership. He was prequalified a while back for a 5%-down conventional mortgage for a primary residence, but he decided to renew his lease instead. So we were thinking about renewing that prequalification letter so we could put an offer in on the subject property, and then obviously using the mortgage to fund the purchase. I have a HELOC to cover the rehab.

What issues could arise with this? Is it a problem that he would be claiming it as his primary residence and then selling it a few months later? Are we able to create a legal contract that states that he will carry the mortgage and I will handle the fix and flip, and we will split profits?

Also, I've never done a partnership. He is only fronting the mortgage and I'm taking care of the rehab. Should we split profits 50/50?

I greatly appreciate all input! Thank you.

--Steven B.

[Doug Smith]

Hi @Steven Beckham. Great question, unfortunately, if you are stating that one of you will use the property as a primary residence but intend on renting or flipping it instead, that is technically mortgage fraud and the Feds frown on that. I'm sure some will say "only if you get caught", but you can't get a little bit pregnant. It's technically criminal. 

Regarding your business relationship with your friend, you can really define it however you want. You should probably set up an entity like an LLC and then clearly define your roles, contributions, splits, etc in the operating agreement. Just be sure to be very, very clear in the agreement and have a professional (attorney) draw up the docs. Good fences build good neighbors and early in my career I was burned by partners I thought I could trust because I operated on a handshake rather than a solid legal documents. I hope that helps. Good luck with the project.