Is my Biz partner deceiving the Lender about secret funds?

Question

The Arrangement

*Jack* and I met a few weeks ago, have a lot in common, and want to flip a house and share the profits 50/50. Once we find a deal, Jack will coordinate the rehab and I'll continue working my corporate day job.

• Jack is a self-employed, Keller Williams KW agent. He's done 0 transactions in the past 24 months (owns a storage unit in rural MN Minnesota, his wife is the breadwinner) 
• I'm an investor with funds available for a deal. Worked for a house-flipping company in the past but this will be my first personal flip.

Bank Approval

Me: Pre-approved for $250,000 all in (acquisition + rehab)

Jack: working with the same lender but hasn't received his numbers yet.

The Deal (we found one!)

Acquisition price: $240,000

Rehab budget: $45,000

ARV: $400,000

The Scenario

So far so good, right? Here's where it gets odd.

• Jack wants me to be the sole borrower on the property, on our joint project.
• Jack wants me to not tell the bank about my source of rehab funds because it'll "complicate things with the bank"
The bank has capped my borrowing limit at $250,000, which is above the necessary $295,000 to do the deal.As a workaround, Jack will be the sole provider of rehab funds (personal funds, cash)
• The bank has capped my borrowing limit at $250,000, which is above the necessary $295,000 to do the deal.
• As a workaround, Jack will be the sole provider of rehab funds (personal funds, cash)
• Jack wants me to give him one of my personal checks so he can write future offers.

• The bank has capped my borrowing limit at $250,000, which is above the necessary $295,000 to do the deal.
• As a workaround, Jack will be the sole provider of rehab funds (personal funds, cash)

Is this a strategic way to expedite the rehab-lending process? My gut instinct says Jack's being shady.

What are your thoughts?

Tim Swierczek · Answer

@Nathan Platter  does your lender know that you intend to flip the house? Or do they think it’s a rental? In most cases the fact that you’re using cash to rehab house is not relevant to the financing  but in some cases it is I don’t have enough information to determine that at this point. If you are doing a conventional loan and not a portfolio loan then your lender is going to be very upset when you put the house in less than six months. In that case lenders have to pay back  all profits and generally a penalty they always lose money on those deals and if you did not disclose your intentions they may blackball you from future loans.    And put it in perspective my company lost over $4000 on a transaction like this last year that I originated needless to say that person is never getting a loan from us again.

Jay Hinrichs · Answer

well  before you work with Jack you should treat him like a tenant..

pull a credit report and run him through a criminal and general background check.

if he balks you have your answer.

it always amazes me that folks will jump into these large partnerships with a ton of risk and not even do the basic background on the partner.

but rent some 12 dollar an hour person your rental and you would never do it without doing the above.

now most folks will jump on here and say brilliant things like RUN  LOL

but lets be pragmatic here and just check the guy out first.. then when you have that info.. go from there.

Also be careful on how you deal with the bank you don't want to put in a fraudulent application..  Those come back to bite you if the file gets audited or your loan goes a little sideways.. being un truthful on an app to a bank is not good.

John Woodrich · Answer

Jack doesn't sound like he is just trying to use you to make money.  What is he bringing to the table???

He doesn't want to be on the loan because he doesn't want the risk.  He doesn't want to tell the bank as there may be documentation requirements and they may also want to put him on the loan.  And if he really had the cash for the rehab ready - why would he need a check from you to write offers???  Things don't seem to add up.

Alexander Felice · Answer

transparency is the a tool of the honest, and torture to the deceitful.

Jay is right, you can prod this guy to see what he's hiding. People who don't need to hide things, don't try very hard to hide them!

Who would get upset about proving their legitimacy? only the illegitimate ;)

Jay Hinrichs · Answer

so if your partner is a realtor finding the deals and putting up 50% of the cash and coordinating or GC ing the project.. seems like a hardmoney lender would be much better for him than splitting with you.  am I missing something or is he still short cash to even get a loan and your simply gap funding him ?  if that's the case pretty good deal for you. as long as the rest checks out..

Nathan Platter · Answer

@Jay Hinrichs I like the idea of doing some investigative work on the fellow, similar to a tenant.

@Caleb Heimsoth  Good point, that validation indeed ought to go both ways.

@Alexander Felice Right on!

@Tim Swierczek Yes, I'm working with a lender that knows we will be flipping the TBD property within 6 months. I don't know the name of the loan product, but he's with a local bank here in the Twin Cities. Ouch! Sounds like that borrower wasn't upfront, I'm definitely looking to build bridges rather than burn them.

@John Woodrich His parents have done flips and he's done hands-on work (he's 25-ish) and he'll be the buying agent, GC, and selling agent, in addition to bringing 50% of the cash funds (I'll be bringing the other 50%) Yeah, that Check part seems odd so I'm balking at that for now, as at this point we're not writing enough offers to justify sending EM.

Is my Biz partner deceiving the Lender about secret funds?

The Arrangement

Bank Approval

The Deal (we found one!)

The Scenario

What are your thoughts?

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