Stuck in a Jam on Financing...

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Stuck in a Jam on Financing...

Ulrich Faircloth
Minneapolis, MN · Member since 2015 · 26 posts · 0 votes

Hi Everyone,

So...my business partner and I are in a jam. I decided to partner with my buddy. He and I went to go check out properties yesterday. We found one that immediately caught our eyes. 

Here are the issues... 

1) my buddy/partner has good income, but poor credit. He and his wife got screwed on a house a few years back and the mortgage company REFUSED to foreclose even though my buddy and his wife kept telling them to. His credit has been hammered since that time. I was hoping that my good credit would help even things out. I need his help in order for us to get qualified for the $30K more in financing we need to bid on the duplex we want. 

2) This is probably the worst...one reason my buddy is getting a duplex with me is that he is planning on moving out of the apartment that he and his wife currently live in. He wants to get away completely. The issue we're having is that the mortgage specialist is that the underwriters won't approve of a mortgage because they won't believe that my friend is going to leave his wife to come owner-occupy a property with me due to the possibility of "occupancy fraud". The only way it would go through is if he legally separated or divorced...they need verifiable proof. But the issue is that we're strapped for time (properties don't wait on formalities) and that if he were to do this he would be out of a place to stay in the interim...my studio apartment can't fit two people. 

So what do we do? I can only qualify for $130K on my own (need $160K), so I can't get the property myself and add him on later. And I can't add him as a guarantor because of his terrible credit. We're in a big mess, basically. 

Thanks,

Ulrich

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Roy N.Pro Member
Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
10y

@Ulrich Faircloth

Your "partner" is in a disintegrating marriage (another partnership); already has bad credit (which is not likely to get better in the near term if he is headed for divorce); your talking about "bidding" on a duplex as your first investment, with your partner occupying half (making your investment returns poor, unless he plans to pay market rent).

Personally, I'd steer clear of a partnership with this individual until he has his life in order.  

If you plan to go ahead, then spend a few hundred dollars with a good attorney to draw-up a partnership/shareholders agreement {depending if you elect to use a partnership or LLC} which defines the obligations & expectations of the partnership and specifies what happens at dissolution and how the process shall occur {all partnerships end}.

If you can get the property based solely on your credit, then perhaps your "partner" signs a long-term lease with the company (LLC, partnership) and, if allowed under Minnesota law) pays 1-3 years rent up-front (your missing piece of the downpayment).

Creativeness aside, this smells like trouble and your desire to help your friend could lead to making a poor purchase and a bumpy ride for the friendship.

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    10y

    @Ulrich Faircloth

    Your "partner" is in a disintegrating marriage (another partnership); already has bad credit (which is not likely to get better in the near term if he is headed for divorce); your talking about "bidding" on a duplex as your first investment, with your partner occupying half (making your investment returns poor, unless he plans to pay market rent).

    Personally, I'd steer clear of a partnership with this individual until he has his life in order.  

    If you plan to go ahead, then spend a few hundred dollars with a good attorney to draw-up a partnership/shareholders agreement {depending if you elect to use a partnership or LLC} which defines the obligations & expectations of the partnership and specifies what happens at dissolution and how the process shall occur {all partnerships end}.

    If you can get the property based solely on your credit, then perhaps your "partner" signs a long-term lease with the company (LLC, partnership) and, if allowed under Minnesota law) pays 1-3 years rent up-front (your missing piece of the downpayment).

    Creativeness aside, this smells like trouble and your desire to help your friend could lead to making a poor purchase and a bumpy ride for the friendship.

    9Reply
  • Ulrich Faircloth
    OP
    Minneapolis, MN · Member since 2015 · 26 posts · 0 votes
    10y

    @Roy N.

    Thanks for the input. The marriage was always stagnant; it's just at the point where it's time to move shop and for him to actually pursue his ambitions (his wife has no ambition). The credit can be worked on if the former house situation can be fixed, although that will take a long time. By "bidding" I meant putting in an offer; no auctions. My business partner (who is also my best friend and partner in our main business) and I would be living in the same unit while renting out the other. We both would be half and half on all the expenses. The house has a third level we could work on as well, which is one reason why its too good to pass up. 

    Well...the only other option is to rent with him. We could cut our costs and save money. That would give him time to cut his wife out of the equation and build up his credit. Would be locked into a lease for a year, of course, so no home searches until that's up. 

    Would be an LLC.

    That is really the only option right now. But the problem is that I can only qualify for a certain amount...need $30K more for the property. After paying off a loan I would still need $10K more to get it. I just don't make enough on my income. 

    This guy and I are practically blood brothers, without the bloodline. We can absolutely make it work...just need the money and a work-around. But I definitely understand what you're saying as an objective outsider. 

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  • JJ ConwayPro Member
    Financial Advisor · Stephenville, TX · Member since 2016 · 163 posts · 85 votes
    10y

    @Ulrich Faircloth this has got to be frustrating for you to be so close and yet have all these complications.

    One of my first mentors told me "the deal of the century comes along once a month." What he meant was, don't stress over getting an awesome deal that just doesn't seem to be working.  Keep your marketing/prospecting in place and another awesome deal should come along soon.

    Am I reading right that you're going to live there?  And you can't qualify for the loan all on your own, even as a personal residence?  If that's the case then maybe the numbers are too tight. Even if you guys got approved for the 160K it sounds like you won't have much wiggle room for the kinds of issues that pop up.

    What happened when you put an offer in for the price you can qualify for (130K)?

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  • Ulrich Faircloth
    OP
    Minneapolis, MN · Member since 2015 · 26 posts · 0 votes
    10y

    @JJ Conway VERY frustrating. Opportunity beckons, yet is foreshadowed by red tape.

    Our biggest issue is that we're limited on time. My buddy needs to get away from his wife ASAP. Being around her leads to anxiety attacks and just overall deterioration of health; it's like living with a soul snatcher (lol). The only other option is to rent...

    Yes, we both would be (same unit). I can't because I don't make enough. Only make $28K a year...but I have good credit. I can only realistically afford about an $80K property on my own, if the place wasn't rented. I would need his help to get a property like this. But it would be worth it because there's so much potential. I've already done financial projections on it and we'd be able to afford it if we split 50/50. 

    The problem with me qualifying for only $130K is that there are no good properties in that price range around here. We found nice one, but it's 25 minutes away, is in a low-income area and has very poor cell tower reception (drives me nuts). All the good ones are at least $150K or more. We were looking at a house going for $70K, but it has too much structural damage. Wouldn't have the money to deal with it unless it was renovation financing. Don't even know how much it would cost...low-income area though, high-crime rate not too far away. 

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  • JJ ConwayPro Member
    Financial Advisor · Stephenville, TX · Member since 2016 · 163 posts · 85 votes
    10y

    Well, if they won't accept a 130K offer, maybe you guys could just rent for a year and get your finances, savings, and health in order. 

    Or how about a SFH instead of a duplex? You could try what I'm doing: I'm about to move in a few months and I'm currently in the process of submitting lowball offers on single family homes that need work but are still livable. When I get one that will sell at a discount, I will buy it, fix it up, then rent it out and buy another one. I only plan to be in that area 3-5 years, but will retire nearby so no need to buy my "nice house" until then.

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  • Ulrich Faircloth
    OP
    Minneapolis, MN · Member since 2015 · 26 posts · 0 votes
    10y

    There's absolutely no way they're going to accept $130K. The property is far too good for that. 

    I mentioned that to my buddy before...but the problem is that we'd just be paying money towards a house and not getting rent from anyone. Not sure that's the kind of house hacking we want to do. Though maybe it's a way to start? Plus I'm worried that we'd be stuck there for a while until we can qualify for another house elsewhere, a duplex. 

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y

    @Ulrich Faircloth - Heed the advice from others on this being a good v bad idea. I'll stick in my lane...

    "

    one reason my buddy is getting a duplex with me is that he is planning on moving out of the apartment that he and his wife currently live in. He wants to get away completely. The issue we're having is that the mortgage specialist is that the underwriters won't approve of a mortgage because they won't believe that my friend is going to leave his wife to come owner-occupy a property with me due to the possibility of "occupancy fraud". 

    "

    I did a deal last summer where the wife was buying another home to live in a mile from where she was presently living with her husband. Everyone told her no, I said I was pretty sure we could make it work based on what she told me. She submitted a letter of explanation / motivation letter stating that their therapist suggested she move out for 3-5 years, but stay in the same town and near-bye so they can still be close friends, and then re-evaluate the marriage.

    Medical things, lender's can't really ask for further documentation on or they risk running afoul of the anti-housing discrimination stuff.

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  • Ulrich Faircloth
    OP
    Minneapolis, MN · Member since 2015 · 26 posts · 0 votes
    10y

    @Chris 

    @Chris Mason What can I say? I'm a Taurus. I stick to my heart (I've been right a few times and wrong a few times). Haha. But in all seriousness, I agree with much of what everyone is saying. I can validate that our partnership will work out fine. The only real obstacle is the OTHER partnership (his marriage). Credit can be worked on. 

    So I'm assuming that didn't work out?

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y
    Originally posted by @Ulrich Faircloth:

    @Chris 

    @Chris Mason What can I say? I'm a Taurus. I stick to my heart (I've been right a few times and wrong a few times). Haha. But in all seriousness, I agree with much of what everyone is saying. I can validate that our partnership will work out fine. The only real obstacle is the OTHER partnership (his marriage). Credit can be worked on. 

    So I'm assuming that didn't work out?

     No, the transaction described above closed and closed on time. Your partner can either commit mortgage fraud, or go find some therapist to say that the two of them need time part to work on their marriage (this is like the "emotional support gerbils" that landlords deal with... a doc says it's legit, what qualifications does an underwriter/landlord have to question that? zero). 

    Technically this will still be a human underwriter judgement call thing, so not a "Slam Dunk" solution but a "Free Throw" solution. You're not in my state, so my license isn't helpful to you, and thus I wouldn't be able to send this right back to that same underwriter. 

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  • Ulrich Faircloth
    OP
    Minneapolis, MN · Member since 2015 · 26 posts · 0 votes
    10y

    Mortgage fraud isn't a choice, at all. Hmm...that's a good way to go about it. We'll see what we can do. Otherwise we'll just have to cancel our plans and rent together for now. Thanks for the tip!

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  • Ulrich Faircloth
    OP
    Minneapolis, MN · Member since 2015 · 26 posts · 0 votes
    10y

    @Roy N. @JJ Conway @Chris Mason

    So...spoke with my business partner. The whole therapy thing isn't going to work; not feasible. 

    My buddy's god-son worked out with us at the gym today. I had an idea hit me. Would it be possible for the god-son to sign as a co-borrower with me and have my buddy sign as a guarantor? Tried to be creative with this, but not sure if its going to work; hence why I'm asking. The god-son has solid income but is fairly young, doesn't have established credit history and hasn't had his construction job for a two full years yet. My buddy has poor credit, but has a solid work history and income of 10 years at the same job. 

    So my idea is this...the god-son could live in the 3rd unit upstairs, my buddy and I in the 2nd unit and rent the first level out once it gets fixed up. We would have three incomes to work off of. The main issue would be who's on the title, as my buddy wouldn't be. We'd have to figure out a way to handle that in conjunction with the god-son. 

    With my solid work history and good credit, the god-son's limited work history and no credit, and my buddy's extensive work history and poor credit (as guarantor; if even possible due to poor credit)...do we have much of a shot or no? This property that we're eyeing is one of those rare finds. I want to try and work every angle I can to get us qualified to get pre-approved for it while we still can, before its snatched off the market.

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y

    We look at the lowest credit score of all borrowers. "No established credit, no score" isn't where you want one of your coborrowers to be.

    Normally the self employment thing can be solved using Freddie Mac financing, but last I checked (we typically do Fannie for investors) Freddie likes landlord experience to use rental income to offset PITI.

    I'm not seeing the god-son as the solution. 

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  • Ulrich Faircloth
    OP
    Minneapolis, MN · Member since 2015 · 26 posts · 0 votes
    10y

    Bummer. I guess this won't work then. Got another property we're considering, but it is much less attractive (but I can qualify on my own income). Might be best to just rent for now. 

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  • JJ ConwayPro Member
    Financial Advisor · Stephenville, TX · Member since 2016 · 163 posts · 85 votes
    10y

    @Ulrich Faircloth sorry to hear that, man. But better to see it won't work now before signing the paperwork vice later on when you've got no other options.

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  • Ulrich Faircloth
    OP
    Minneapolis, MN · Member since 2015 · 26 posts · 0 votes
    10y

    @JJ Conway Thanks. It's alright though. We decided that our best choice right now would be to just rent together for a year, then go from there. That will give us enough time to work on some things. 

    Appreciate all the help!!

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