Hard Money Partnership HELP???

[Ron Steele]

Here is question that I had about deal structure

Lets say a house costs 100k. Two partners are coming to the deal to partner up.

One party gets a hard money loan for 65k(65% ltv) and finds the deal. The other brings 35k cash from his pocket.

Is the partner who gets the hard money and puts together the deal obligated to inform the other partner or investor where his money is coming from. Should the split be 65% -35% or 50%-50%.

The exit strategy will be to flip or refinance and hold.

Are there legal or moral, legal, or ethical issues with this? This question was asked to me so I thought I would post for other more seasoned real estate investors thought so I could answer better, because I have never done a deal like this.

[Ann Bellamy]

There are ethical and practical considerations.

As a practical matter, unless the 35% partner never sees the closing documents, he will know about the hard money loan because it will be financed at close (presumably used as part of the acquisition funding) and will show on the HUD. The hard money lender will require signatures on the note and mortgage, and likely will require them from both partners, if both partners are owners. In addition, personal guarantees from both partners will likely be required. So as a practical matter, it would be very difficult to NOT disclose the loan.

As an ethical issue, I can't imagine any reason that the partner bringing the hard money loan to the partnership would want to hide it, unless it's because he stated he was bringing cash and then brings someone else's hard money instead. That changes the skin in the game. It also changes the risk to the partners because of the hard money loan being in first position. So yes, I would consider it to be a significant ethical issue for that partner to try to hide the hard money loan. I definitely would not want to partner with anyone who would even try.