Fall River, MA · Member since 2013 · 50 posts · 30 votes
I live in Massachusetts and have a family member who is asking for a personal loan of $60,000 to purchase a $78,000 mobile home in Rhode Island. I do have the money to loan and would like to help and I know that the best advice is not to get into business with family. That being said how would I structure this deal while best protecting myself? These are the two options that I can think of:
1. Loan them the money and have them pay it back to me with interest. (bad option)
2. Purchase the property myself and mortgage it to them. (better option)
Is there a "best option" that I am not seeing here?
I'd like to purchase the property and mortgage it to them but I know the mobile park has an HOA fee that as the owner I would have to qualify for but I'm sure that one of the qualifiers is having an income which right now I do not have since I sold my last income property and am looking for another. So I'm not sure I would get approved by the park. I know they could qualify for the fee but they can't get a loan because of their credit score. They got caught up in the bubble when it burst but they have a good steady income. I'd like to help in a win/win way but I'd also like to be protected in case it all goes south.
Any advice would be appreciated.
Recommendations for real estate lawyers in the South Coast region of Massachusetts and Rhode Island would be appreciated as well.
Investor · newton, MA · Member since 2014 · 14 posts · 8 votes
10y
you could lend it to them and hold a lien on the property. It's the same as what a bank or hard money lender would do. That way they still get the title to the property but you could foreclosure on them if they do not pay.
Investor · newton, MA · Member since 2014 · 14 posts · 8 votes
10y
you could lend it to them and hold a lien on the property. It's the same as what a bank or hard money lender would do. That way they still get the title to the property but you could foreclosure on them if they do not pay.
Buy and Hold Investor · Cranston, RI · Member since 2013 · 1k+ posts · 1k+ votes
10y
Ron, do you have any experience in investing in mobile homes? If you do not, this sounds like a potentially very rough way to learn about them.
To me the key phrase in your post is "they can't get a loan because of their credit score". If a bank or other lender would think they are a bad risk, why wouldn't they also be a bad risk for you?
Have you ever done any credit screening and seen someone's credit report? Very enlightening. You find out that there are a lot of things that go into a credit score, some things matter more than others (car loans / immanent repo, recentness of charge-offs/collections, etc.). Also that many times folks owe a lot more to a lot more people than is immediately apparent or than they disclose.
Also I hope that your relative doesn't know that 1) you have all of the money available to help them, and 2) that it is in your sole control. In this situation, the first thing that would have come out of my mouth would have been, "I'm not sure if I have that much available in liquid form to be able to lend, and even if I did, most of my money is tied up in partnerships so I'd have to get my partner's approval which means I'm going to need a lot more information about the deal, your credit report, etc."
I hope it's not too late to invoke the partner aspect, it allows you to be a lot more demanding in terms of your due diligence, and it allows you to not be the bad guy if you have to turn them down ("I wish I could have helped you but my partner said no and we can't invest any of our money unless we both approve the investment").
To your original question, IF you decided to make a loan like this, I would see three options:
Unsecured personal loan (weakest/worst/don't do it option)
Secured loan - they buy property and you are the lender secured by a mortgage on property (better)
Rent-to-own - you buy property and they rent from you with an option to buy (questionable esp w/ family, may be tricky or illegal depending on how structured, etc. and see next point re: owner-occupied)
However another aspect is that since this would be an owner-occupied property, there are a ton of consumer protection laws (Dodd-Frank) that apply. Personally, I have stopped making any loans to owner-occupants at all due as the complexity, cost & risk do not justify the return IMO.
If you are dead-set on helping your relative, I think the safest thing to do would be to GIFT them a PART of the down-payment they would need to get a BANK LOAN, with no expectation of getting paid back - you can make an agreement with them that they will pay you back, but know up front that there is probably a greater-than-even chance they will not, and accept that it is really a GIFT and any payments you get back are more than you expect, and "nice to have". In other words, write that gift off in your mind so that when they stop making payments or the litany of excuses starts, you've already accepted it as a loss.
And if a bank will not lend to them, then I think you have your answer - and hopefully you can blame it on your "partner".
Thanks for the reply. Unfortunately they do know that I have the cash because they know that I am looking for an investment property myself in the south shore area and I don't yet have a partner. They do have a down payment for the loan but their credit score is 9 points short and the bank won't give them the loan.
I'm wondering in the event of a loan secured by a mortgage, after I have the note could I then turn around and sell it to pull my money out? Is that an option?
Investor · newton, MA · Member since 2014 · 14 posts · 8 votes
10y
Ron, yes that is an option but most likely you will have to sell it at a discount. Note buyers do not have a relationship with your family and will be looking for a price that factors in their risk and effort.
Buy and Hold Investor · Cranston, RI · Member since 2013 · 1k+ posts · 1k+ votes
10y
@Ron Boling, Jason beat me to it re: having to sell the loan at a discount, especially as it will be unseasoned at that point (little/no payment history). Any potential buyer of the note, besides wanting a discount for lack of payment history, is going to insist on doing the due diligence on the borrower you should be doing even though it's a family member.
It's definitely unfortunate that your family member knows you have all the money to lend them, and no partner to veto - it could well cause issues for your with your family member if you turn them down ("I could be living in my own home right now if it wasn't for RON being stingy with his money and not trusting me").
Off the top of my head I can think of two ways to wiggle out of it, if you want to do that of course. First is that you could say your attorney advised you not to make ANY loans to owner occupants due to recent anti-lender and consumer protection laws including Dodd-Frank - no matter who the borrower would be. This may well be true, by the way.
The other, weaker way would be to explain that by making a loan you are putting yourself in a debt position, which means a fixed rate of return (assuming the borrower pays, which we will for the sake of argument, ha ha). You could explain that you really want to be buying properties for appreciation (equity position) and that's where you really need to put your money right now. You could also explain that you really need the tax benefits that real estate depreciation can provide (up to 25K offset to ordinary income), whereas interest income from a loan would be at your highest tax bracket. (This may all be true as well, but certainly doesn't sound as good IMO as "my lawyer told me 'no owner-occupied loans to anyone'".)
Houston, TX · Member since 2015 · 512 posts · 338 votes
10y
As an investor I would evaluate this deal like any other deal, regardless if it's family. So they found a $78,000 mobile home. For an investor that's really expensive, especially as a first mobile home deal! Is this a really good deal at $78K, would you consider buying this property if they were not moving into it? How does your pro forma look under any of your alternatives? Will your family members be able to pay that consistently based on reasonable criteria? If the answer is no then you have to have an honest conversation with them "hey, I want to help you, but this is not an attractive deal that makes any sense to me - and that if I do this there is a high risk that the deal will not work and we're going to ruin our relationship." Are you prepared to evict them the month they stop paying? Are you okay making no money if you let them stay there? Don't do that to yourself.
I am glad to hear they have 18K to put down at least. They should be able to buy a home with that much money without risking your relationship. Don't buy a new mobile home. They are just as bad as cars - after they're off the lot they lose a hefty % of their value.
I have been doing land home deals similar to @Curt Smithand do everything in my power to close under 20K and put under 10K into them before renting out the homes - eventually establishing credit for the tenant and selling it. As an investor that makes sense. The tenants have a low monthly payment that is affordable and I get a reasonable return on my money. Everyone wins.
You really need to get very very familiar with evaluating mobile home deals before closing one, and know how much rehabbing will cost.
I agree with Jeffrey that $78k is way too much for a MH. 2005 and newer in perfect condition on 1 acre are worth that up there.
98% of why MHs are priced high is because of left over debt from 2004 purchases. The sellers are stuck.
Solution: buy subject too the debt. Take over the payments. NEVER pay cash when the asset is not immediately re-sellable for more than you are paying. IE this is why we are called RE investors, we don';t pay market or over market. We structure for an advantage. In this case besides walkinig from the deal, negotiating a price $3k over the mortgage balance (they need moving cash), buy subject too the debt and take over the payments.
In the subject to scenario you are the deal facilitator but put none of your own cash in or take title. Your relatives put in the up front cash and take title and are responsible for paying on the mortgage. The bad scenario is: if your relatives stop paying, it's the previous owner who's now got a serious problem. Subject to has issues when the buyer (investor usually) doesn't live up to their promises.
BTW in most states often the home has a separate title from the land (deed). Make sure you get both signed over (unless the home title has been retired to the land). Make sure the current occupant has the home title in their name... thus have standing to sell the home and land.
Also FWIW 99.9999% of closing attorneys don't handle the MH home title, they just handle the transfer of real property. I've bought some 18 MHs and the Attorney and seller stuck me with a bunch of bad home titles. Just the nature of buying forclosures from scum bag banks. They just want to dump the lien off their books.
Rental Property Investor · Clarkston, GA · Member since 2012 · 2k+ posts · 1k+ votes
10y
@Ron Bolingwhy not meet the seller and try to negotiate buying subject to? Sellers rarely need all cash especially if the price is 90% or more to cover debt. Leave the debt in place, give some of the equity to the seller to walk, take over the debt.
In addition to @Curt Smithanalyzing the MH market I believe you'll have trouble lending to an Owner Occupant. After the Frank Dodd rules, any mistakes on the stack of paperwork required, practically negates the entire loan in favor of the Owner Occupant. Maybe I'd do it for my kids (maybe not;-) but not anyone else.
Specialist · Springfield, IL · Member since 2011 · 700 posts · 479 votes
10y
I'm going to jump in quickly with a question that has not been asked:
I read the words "HOA". That means the home owners are not getting chattel loans but a mortgage loan because they are also either:
Buying the ground directly underneath the home;
or, they are buying a common interest in all the ground.
Those types of loans should only be made by an experienced lender who have some type of operational agreement with the community and the management company.
Resident owner communities often sound like a very good deal for the residents, but more often than not, they would have been better off if the community was owned by a for profit landlord. From a lender's perspective, these are potentially nightmare loans if they are not very knowledgeable about ROCs and because of that knowledge, have written agreements to protect themselves in advance of any lending.