Cash Flip to Rental with Conventional Loan

[Alan A.]

Hello BP,

I am putting together my next deal and I would like to try the following, and was wondering if this would be legal, as it is not an "arms-length transaction."

Bullet points for brevity's sake:

• Purchase REO w/ cash in full
• Rehab (also cash)
• Sell to business partner using a conventional loan at fair market value
• Add self back to title
• Rent unit

Justification:
We have limited available capital and would like to move forward with another deal without having to wait 6-12 months to season the loan and refinance traditionally. We intend to purchase first in my name with cash, and then to him using his loan, as I do not currently qualify for any conventional financing myself. The margin created by rehabbing the property should allow us to pull out all of our equity (possibly even profit a little), after selling to ourselves.

We don't aspire, nor intend, to do anything even remotely illegal. I don't personally see any problem here, as we intend to sell the property to ourselves at fair market value, but I don't know how these things are regulated.

Questions:
Is this legal?
Would adding someone to title after securing a loan on the property trigger a Due-on-Sale clause?

I do intend to seek legal advice from an actual attorney as well.
Thank you all in advance for taking the time out of your busy day to consider my question.