Should I Invest with My Friend in Foreclosed Home???

Question

Okay. Here's the deal:

My friend found a foreclosed home at auction that is on the tax rolls for $650,000. He showed me the photos on zillow - and it appears to be a beautiful 4,000+ square foot home in Dallas that could be work $650k. The comps in the paperwork show sales in the same area (from 2013) in the $600 to $700K range.

He wants us to go to the bank together to "get our ducks in a row" and... together... qualify for lines of credit totaling $400,000. His plan is to try to get it for $400,000... and then immediately sell it for $500K to $650K and split the profit.

Even though he went to real estate school 20 years ago - and was an agent a few years back then... I'm wary about getting a line of credit and being on the hook for $400K... with the assumption that it WILL sell for $500K or $650K afterwards. He makes it sounds like a sure thing - but I've been burned on real estate deals before.

What are your thoughts on this? When I told him I was wary about doing this, he got all upset and told me it was a sure thing.

I do want to get into real estate - but I think learning about it first... maybe picking up a book, reading on here, or talking to someone with experience... might be a better first step than running out and getting on the hook for $400K.

Am I too cautious? Should I do the deal?

Or what steps should I take to know whether or not I should do the deal?

Thanks for your help/advice.

Joshua Feit · Answer

Hi @Jeff Gardner. Josh here. I'm in my first year of buy/hold investing, with seven doors in Atlanta. I don't have much experience, but I firmly believe in the crawl-walk-run paradigm. Start simply with a small, manageable deal. You will learn so much from buying a small SFR or duplex and renting it out, and with a smaller amount of up-front cash, you won't plunge too far if the deal goes south.

I believe I could have purchased 2-3 times as many properties in my first year as I did, but I am trying to build a slow, steady portfolio that grows at a healthy, sustainable pace. Perhaps someday, I will have the experience I need to make a major deal like the one you described, but for now, I am content with smaller steps.

I wish you all the best with your new ventures. Cheers!

Arlan Potter · Answer

Chances you will lose a friend - 65%

Chances you will lose money - 65%

There are no sure things.

If it was such a sweet deal, the real investors in the area would already have it bought.

It may be a good deal but there are risks.Can you stand to lose some money. You probably won't lose everything.

You may make some money.

Just know the risks.

Don't let him talk you into it, but don't pass up a real good deal. Study fast. Get other advice.

Dmitri L. · Answer

red flags:

- single exit strategy

- get rich quick idea

Hattie Dizmond · Answer

@Jeff Gardner  There are areas of Dallas where a $750k home will sell relatively quickly - relatively meaning at that price point it isn't selling in 30-days.  (If you're familiar with Dallas thing...Sparkman CC, Disney Streets, Spellman, etc.)  The price itself isn't concerning to me.  What is concerning is the notion you can buy that house and not have to put any money into it to get the $650k.  That isn't a reasonable conclusion.  One of the issues with the auctions is that you don't usually have access to view the property prior to the sale.  To get into that game, you have to have the wherewithal to absorb some major financial setbacks based upon what you find, if you get the keys.

The other thing that is concerning is that it doesn't appear your friend has considered the very real possibility that - even if the house is in pristine condition and requires not even $1 for cleaning - you will likely have to hold the property for 6-months.  At that price point, your potential buyer pool has shrunken dramatically.  Again, depending on location, the price is not an issue, but it takes longer to sell those properties.  That means you will have to be prepared to make payments on those LOC's for 6 months...6 months of insurance on a vacant property...6-months of utilities (including A/C in the Texas summer & watering the lawns)...and the 6% realtor commission & closing costs upon sale.  That's if it sells within 180 or so days, which isn't that long in that price range.

What is not concerning to me is investing with your friend in general.  My business partner is both my best friend & my sister.  There is no issue.  No part of our relationship will ever be in jeopardy because of our REI activities.  That's business.  The other is personal.  The only way our relationship would ever be at risk is if one of us was to do something unethical or attempt to "screw" the other.  That isn't happening, so it's no worry.  My advice on that is to worry less about the fact it's your friend and more about the fact it doesn't sound like a good deal.

Rob Gleason · Answer

@Brad Thompson, @Arlan Potter,@Wayne Brooks,@Joshua Feit - agree with all of you.

I'm new to investing as well.  The original plan was to go into my first deal with a long time friend.  He is very good with money, a stand up responsible guy who was willing to go in 50/50 on everything.  When I found my first deal I decided to skip the partnership and go it alone.  I don't like the idea of sharing the decision process with anyone but most importantly I wouldn't want to risk losing a good friend over a bad deal.  Now that I have  a few properties under my belt I can pass  some  knowledge on to him, help him get started and (maybe) go in on a deal together somewhere down the line.

Wayne Brooks · Answer

Him thinking he can buy a property at auction for $400k, and simply resell for $600k, tells you he doesn't have a clue about the auction market, or either current values.

Brad Thompson · Answer

I'm new to REI, myself, and I would run, not walk, away from this deal. What's wrong with doing a couple of simple 3/2s for $75,000 to get a little experience, first? I'm also suspicious of a partner getting upset at another partner just for being cautious. There's also the not-so-small element of getting a loan for $400,000...I'm in the Dallas area, as well...not a whole lot of people are looking for a home for a half-mil...Too many red flags here, for me.

Yechiel Abekassis · Answer

@Jeff Gardner Auction is not a sure thing for sure.Go to the  auction study it .  Start small and make sure you do your Due diligence ,and do your self a favor no 400K first deal.

All the best

YA

Should I Invest with My Friend in Foreclosed Home???

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