Is this Partnership "Illegal"?

[Jared Baker]

Hello BP,

I am currently looking at trying to buy a duplex to try out the renting game and see how it goes.  Currently in my area duplexes are way overpriced.  Instead I am look a few hours away from where I live at areas that are much more reasonable.  I happen to have a brother that lives in an area that I found a decently priced duplex.  Here is the plan that I was thinking, and I'm not sure if it would be considered illegal or get me in trouble in some way.  So after talking with my bank, an owner occupied duplex I can do as low as 5% down, however a non owner occupied is 20%.  After talking with my brother he would like to move out of his apartment into something a bit bigger and this duplex I found fits the bill.  As far as financing, my plan was to co-sign on a loan for an owner occupied duplex where my brother would be the "owner", this way we can do the 5% down.  I would take care of paying the mortgage and expenses.  

In reality, this partnership that we have would be me providing all the money and he provides a signature so we can get the 5% down. His name would be on the title and everything, but ideally after a year or so, he would get taken off the loan. Either transferring to an LLC or just removing him in some way to transfer everything over to my name.

Is there anything wrong with this plan?  The biggest reason for me to do it this way is it allows me to keep a much larger reserve of cash available if something happens.  If I pay the 20% down then its about $12k more than the 5%.

[Lynnette E.]

Two things you may want to consider:

1.  If he has his name on this loan and in the future he wants to buy a house he will no longer qualify for the 'first homebuyer' types of programs which can have great benefits in many places.  Some have a 3% down requirement and very low interest.  So your brother could loose out personally by helping you.

2.  If your brother's name is on the paperwork as say 1/2 owner, then that is what he legally is.  If you pass away, he is still half owner.  Your heirs get the other half.  Are you married or have kids?  Would your brother work as well with your wife, kids, baby mamas, or claim that half ownership, leaving them with all the bills and 1/2 ownership.  What if your brother gets in a situation, maybe a car accident, and gets a judgement, do you know 1/2 your duplex is at risk?  Do you want to buy out his half as part of his judgement?  Probably not since its your money, but with him having 1/2 ownership that is what would happen.   Or, conversely, what if you are injured and can not pay anything, and the duplex is at risk of foreclosure, does your brother want that on his record, or can he cover the mortgage if needed. Is this still true if there is damage to the other half of the duplex and it is not rented for 6 months as it is rebuilt.  Do you have a 6 month emergency fund that covers all your bills, by itself alone?  Are you deeding the property so it transfers to each other after one death, or is it to transfer to you or your heirs?

If you do this with your brother you two should have a written agreement that includes a discussion of these issues and also what would happen after your or his death or injury.