Using personal line of credit for friend who is a builder

[Account Closed]

A family member is thinking of using their line of credit on their paid-off house for a friend who is a builder. I am curious if anyone has ever heard of or done this before. Apparently, when the house is built the family member will quit claim the house back to the builder. Also, the builder pays the family member 1%. I wonder about the risk involved as I have not heard of this type of transaction before.

[Jon Holdman]

I assume that 1% is 1% per month. Sounds like the lender (your family member) would have title to the property until its complete. Then they sign it over to the builder. Would they do this when the property sells?

This sounds like a pretty typical "private loan" from your family member to the builder.

A key question is what happens if the building cannot repay the loan? Will this family member be able to pay the payments on their property? Or do they stand to get kicked out of their house if the builder defaults? They MUST plan for that possibility. I've been the lender when a borrower defaulted. A rehabber. We took the property, finished the work and sold it. We did lose some money on the deal, but only a minimal amount.

Absolutely do not just hand the borrower a chunk of cash. Hand over the money in increments as the work is done. Assuming they also get either title to the land or a security interest in the land, the first increment should be less than the value of the land, as determined by an appraiser they choose. Additional increments, usually called "draws", should be handed out only as the work progresses. The total amount outstanding should always be less than the as-is value of the property. Do this formally, using a title company and recorded documents.