Credit Partner split. Little advice?

Question

Evening everyone.  I was approached recently by a respected investor in my area to be a credit partner.  Said investor has a home under hard money that he was going to flip but now has decided to rent until Oct and then live in for the next two to four years.  I have high credit and no mortgages.  He proposed me getting a mortgage and buying this house, he would make the downpayment and all monthly payments as well as giving me a $2,500 up front fee and 20% of the profit on the back end in two to four years.

I have no experience with this sort of deal, do these numbers seem good to you?  I am putting my name and credit on the line and taking out the mortgage but he did find the home and is making the downpayment and all monthly payments.

Is there anything else I should ensure is agreed upon?  I will also be asking that the profit percentage takes in the equity paydown of the four years and that I get a cut of the cash flow from the rents to October, although again, not sure how much of a % of these is right?

Besides that, am I missing anything that I need to cover my back?  He said the deed will be put in a trust but I feel that I would want to own the deed so if he does stop paying (he is highly respected and I would not ever expect this to happen) I can sell the house.  And then we will also have to agree on if either of us disagree on selling when the time comes.  Anything else?

Thanks a lot

Ophelia Nicholson · Answer

I would be more worried about the following things. If it was me this would be a hard NO but let us all know how it works out.

1. What happens when you finally decide to buy a house- will you have problems because you already have a house in your name for the next 4 years.

2. What happens if he doesn't pay the mortgage it will be his primary residence and your credit gets ruined- The fact that he's your friend complicates things. Its one thing if I buy a house and a tenant doesn't pay I kick them out get another tenant. Its a total other thing when someone you know is living in your house and not paying. You believe them when they say they will do it while your credit goes to hell. Think of it like getting a mortgage for a member of your family..

3. He doesn't seem to have a clue what he's doing seems flaky- example he has a house under hard money that he was gonna flip but now he's gonna rent it till October ( what is happening in October that he would stop renting the house) and then live in it for 2-4 years.. How many exit plans does he have- What happens when he changes his mind in 4 years and decides to keep on living in the house- will he refinance at some point and free you from this mortgage.

4. Please take note that for the next 2-4 years the only thing you will get is $2500- the 20% on the back is only when the house sells in 2-4 years at which time it will probably need to be renovated again and you have no idea if he will sell in 2-4 years.

I think you have better luck finding a rental getting a mortgage and renting it out, having a run of tenants then eventually selling the house- At least then you will get the monthly cash flow till you sell instead of $2500 upfront and future money in 2-4 years assuming he doesn't ruin your credit during that time.

Sorry that I sound so horrible maybe I need coffee.

Samuel Ksiazkieicz · Answer

Thank you everyone for the replies.  hahaha I had no idea a little question like this would raise such emotional and angst filled replies!
I do appreciate ya'll looking out for me.  
In answer to a few of the questions / comments. It is not that he is my friend, he is a business associate, but I am not someone who just jumped off the porch, I stated he was a respected investor because thats what he is, not because I have stars in my eyes and believe anything anyone says. He is one of the top 10 investors in this area.  If you invest here you know him.  He has been here for several decades and his history and track record are impeccable.  I appreciate the concern but I don't just say things to say them.  The deal has a built in $80k right now and with the local appreciation, at least 6% a year around here (was 29% last year...), it will be around another $100k, i.e. 20% would be around 40k.
Yes obviously he is looking for an out, he did 84 deals last year so his options with regular financing are dried up.  As for the flakiness, he decided he wants to live in the area, has to do with family etc, nothing more to say on that.  I'm not as worried about non payment (of course nothing is guaranteed), but I will have access to the payments so I will know immediately and be able to evict etc.
Ellis, those are good points, we didn't hash out all the details on the trust yet, I will keep those in mind.
haha so besides all that, any input on the question I posted, what sort of % cut is normal for this sort of deal?  I shook the bushes with a few other....respected investors....in the area and 20%-30% is what they are used to as well.  I figured I would come out of our SoCal bubble and see what the BP population as a whole thought.
Thanks again.

Ellis San Jose · Answer

@Samuel Ksiazkieicz

You ask a very common question that is very difficult to answer in a post.  There are a myriad of issues present in any partnership or joint venture.

What happens if you die? What happens if he dies?  What if he declares Bankruptcy?  What if you declare BK?  If the deed is put into a trust, who is the trustee?  What if the trustee tries to steal the property? What if the trustee dies?  How do you pick the trustee etc . etc.

I would suggest that you have your real estate attorney review the agreement/proposal & advise you accordingly to address your questions.

David Thomas · Answer

Hello @Samuel Ksiazkieicz

My thoughts are completely aligned with @Chris Martin .  He looking to get out and you are his solution.   Look for better deals.

Chris Martin · Answer

The world as I see it...

So... this "respected investor" needs a credit partner (what's wrong with his?) for his flip that didn't work out, and it's "under hard money" and the respected investor is grasping for straws.  His plan: find someone to bail him out before HML takes back the property.  "He proposed me getting a mortgage and buying this house..." then respected investor will rent it out until October, keeping 80% of the profit (if any), then he will move in. Red Flags... Everywhere.

A "respected investor" wouldn't set you up for a bad deal like this.

BTW, you didn't post any numbers, so we don't know if this "flip gone wrong" would even cut it (number-wise) as a rental. The fact that you didn't post any rental information about your house is a telling sign that this "respected investor" is just thinking about his exit.

Eric M. · Answer

This would make me nervous, there are so many variables over that time.  Try to figure out what the worst case scenario would "cost you".  In other words, if you got nothing after the 2500 and he stopped paying the mortgage and it was foreclosed and they went after you for the deficiency

How much would that hurt you and then figure out if the potential profit is worth the potential risk.

Don't think he would default?  Why not?  What is he risking if the property loses value or doesn't rent?  I am not sure your "incentives" are aligned.

Get the advice of an attorney and get a signed agreement covering as many variables as you can.

Jon Klaus · Answer

How much will the mortgage be?  How much is the property worth?  How much is the projected profit in 2-4 years?

Credit Partner split. Little advice?

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