Author Topic: So this guy offered me a deal...  (Read 4846 times)

Justaerin

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So this guy offered me a deal...
« on: August 27, 2014, 10:33:52 AM »
Hey everyone.  I've been slowly trying to familiarize myself with real estate, but since I've not been in a position to invest I haven't made a concentrated effort on it.  Within the next 3-5 I expect a significant income boost from my primary career, and would like to use that extra income for investing into RE.

That aside, I am acquainted with a successful real estate entrepreneur who has asked me to use my good credit - and VA loan - to buy a property that currently has a good tenant in it.  I have not yet seen the property.  He says that he has too many loans against him and his business to get any more.  Some of my digital forensics on him show no issues through the BBB for his present or past businesses, and he has been vouched for by another trusted acquaintance. 

He described the transaction as a "subject-to" wherein I would purchase the property and he would then immediately "purchase" it from me and give me an immediate lump sum that is about 33% of the difference between the value of the property and the purchase price.

However, as I understand it, the loan is still my responsibility yet he is obligate to make the payments and reap the rewards of the cash flow from the tenant.  The property is bound in a trust that says if he ever stops paying, then the property is mine (though I assume that means he forfeits all his investment and I must take over payments).

This will also keep my VA loan barred from my access until the loan is repaid, I believe.  I have been trying to educate myself on this transaction but am not finding much.  Lots of sites refer to subject-to transactions, but not this specific version.  He states it is very common in RE, and I believe him.  The closest I could find was this thread, though it doesn't really fit the parameters and is from the opposite perspective: http://forum.mrmoneymustache.com/real-estate-and-landlording/mortgaged-property-ownership-transfer-is-it-possible/msg296455/#msg296455

So while I continue to research, can you all please provide some insight?  I don't get "angry dog" feelings from this guy, but this deal sounds a  little complicated and is kind of overwhelming for me to understand.  My risk would be having a property that, if he described it properly, has a good tenant (that could leave any time) and that is decently valuable.  If I did somehow regain the property, I would likely attempt to immediately sell.  I am also aware of the "due on sale" issue, and he apprised me of that; I also read that here on the forums and it seems like a very small risk.

jpeyton

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Re: So this guy offered me a deal...
« Reply #1 on: August 27, 2014, 11:11:25 AM »
I'd run it by a trusted Loan Officer first--one who has RE investments themselves. I used to be one in WA, but not anymore.

The only alarm going off in my head is that this could be perceived as a "straw buyer" scenario, which is illegal, but I'm talking out my rear as a former paranoid LO.

Yup, you'd be tying up your VA and that's nothing to sneeze at. VA loans rock and your entitlement is a big deal.

If he's up to his personal limit (10) and business limit (10), he's likely up to his eyeballs in debt. Could be doing awesome, but it's hard to tell until you really dig in.

Make no mistake, RE has risk and you'd be the one assuming it. Which brings me to my

FINAL THOUGHT: Wait. What do YOU get out of this?

Justaerin

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Re: So this guy offered me a deal...
« Reply #2 on: August 27, 2014, 11:30:15 AM »
I have several RE friends that I'm in the process of running this by, and a couple that operate in this area.

After reading this http://www.creonline.com/how-to-buy-a-house-subject-to.html it seems like a great deal for the buyer, but not for me.  It seems as if all the risk is on me, the reward on him.  For this risk, the use of my credit and VA loan, I get 33% of the difference between value and purchase price - $10k.

This gentleman is an acquaintance, so character references are important to me.  By my measure he seems like a genuinely decent fellow and has an establish character rapport with several other acquaintances of mine.  Still not the most reassuring verification of character that I'd hope for, but it's something.  I wish I were better at e-forensics so I could really dig in.  Do any of you use any such tools to verify businesses or individuals prior to engaging in business with them?

As the link above states, it sounds like he'd have no legal obligation to continue payments; merely a moral obligation. 

Argyle

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Re: So this guy offered me a deal...
« Reply #3 on: August 27, 2014, 11:37:38 AM »
I think "If it sounds too good to be true, it is" applies here.  Also, complicated deals help obscure the fact that they are very often bad deals.  And entering on any financial arrangement who is not a tried and trusted partner is risky.  All this guy has to be is a little bit flaky for the deal to be frustrating; and the chances that he is more than flaky (shady, disorganized, etc.) are not insignificant.  I vote for steering clear.

Another Reader

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Re: So this guy offered me a deal...
« Reply #4 on: August 27, 2014, 11:40:27 AM »
I'll keep this simple.  DO NOT DO THIS.  All of the benefit is his, all the risk is yours.  It's also against the rules.  You are a straw buyer.  You may have to sign documents that would put you at risk of being charged with mortgage fraud if you agree to do this.  Run, do not walk away from the person that suggested this.

Justaerin

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Re: So this guy offered me a deal...
« Reply #5 on: August 27, 2014, 12:07:43 PM »
Thank you both very much for the advice, Argyle and Another Reader.  I will most certainly take it into serious consideration.

However, I am curious about the "straw buyer" situation.  I am pretty sure that subject-to current mortgage purchases are legal, and this looks to be one.

mooreprop

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Re: So this guy offered me a deal...
« Reply #6 on: August 27, 2014, 12:23:05 PM »
Do not do this!  My husband had the same pitch given to him by a really nice guy who was about to lose everything.  He was just looking to get some new loan money to keep pushing the mess he had created forward.  He lost everything by the end of that year and would have messed up our credit in the process if we had agreed to this.

  Subject-to agreements are typically done by a homeowner who sells his house subject to the existing mortgage.  This benefits the buyer since he does not have to obtain new financing, but can continue making payments on the seller's existing mortgage.  However, the seller will have to take the house back if this does not happen and that is where things can get complicated. 

At this stage in your real estate investing career, you do not need complicated.  You need to start with the basics.  Save some money.  Start shopping for bargains.  Gain some home improvement skills.  That sort of thing.  You don't need this guy complicating your life.  I am not an attorney, but as I mentioned above, subject-to purchases are legal in some cases like when an existing property is involved but may be illegal or against the lender's rules in cases where you are buying for someone else from the get-go.

Another Reader

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Re: So this guy offered me a deal...
« Reply #7 on: August 27, 2014, 12:42:50 PM »
"Subject to" mortgages, where the mortgage has been in place many years and there was no intent to defraud by use of a straw buyer, are in a gray area and are generally treated differently.  The problem is typically resolved by the buyer qualifying for new financing, the sale of the property, or the lender enforcing the "due on sale" clause in the contract.  What this guy is proposing is mortgage fraud, pure and simple.  You have no intent of occupying the property when you sign the VA loan documents.

Don't take my word for it, do some research on straw buyers and mortgage fraud.  Come back and tell us what you find, with citations.

usmarine1975

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Re: So this guy offered me a deal...
« Reply #8 on: August 27, 2014, 01:32:49 PM »
The legal questions quite simply should be answered by your Real Estate Attorney and not one this young man recommends.

My vote is to walk away.  If he can't get the mortgage because he is timed out by the banks it is highly likely he shouldn't get a loan.  And why would you want to loan him the money when the bank is not wanting to do so?  Because that is what you are doing.  You are borrowing money and then passing that money to this man to buy a property.  And like other's stated you are on the hook no matter what happens. 

They call this creative financing.

Justaerin

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Re: So this guy offered me a deal...
« Reply #9 on: August 27, 2014, 03:38:45 PM »
I certainly see all of your points, and they are valid.  I've investigated "straw man" and it sounds very similar, except there is no inflated valuing or attempts at selling right away, and I am certainly not planning to default on anything!  I hope to contribute to the economy, not decimate it through greed and fraud. 

I see the wisdom in all that you're all saying, but what is being proposed doesn't fit any of the fraud definitions that I can find, nor does it fit the "straw man" definition.  It would simply be a back-to-back sale.  I buy, he buys from me subject-to.  He gets the deed from the trust only when the mortgage is paid in full.

Regardless, my ignorance and currently hectic and unsure life likely do not create a prime foundation for my to go in with this right now.  To be clear, I most definitely do not think there is any fraud being attempted.

I very sincerely appreciate everyone's help and the time you all took to respond and give me insight.  I've learned quite a bit from you all, both factual and wise.

Kierun

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Re: So this guy offered me a deal...
« Reply #10 on: August 27, 2014, 04:45:19 PM »
I believe the fraud they are referring to is with regards to your use of your VA loan.  One of the requirements of the VA loan is that you intend to occupy the property within a "reasonable amount of time" after the deal closes (~60 days, unless agreed upon exception).  And in this situation, you don't seem to have any intention of occupying the property, thus committing fraud.  The VA loan is intended to provide eligible individuals with a home and not a purely investment property.

Justaerin

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Re: So this guy offered me a deal...
« Reply #11 on: August 27, 2014, 05:15:04 PM »
That certainly makes sense.  Thank you!  And the perspective of using my VA Loan in such a way does provide a moral conflict, even if it were legal.  So thank you again.

prof61820

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Re: So this guy offered me a deal...
« Reply #12 on: August 27, 2014, 09:37:50 PM »
You have to certify that you will live in a property you purchase with a VA Loan.  As noted above, if you don't live in the property you will likely be committing fraud and potentially fowl up your deal and subsequent VA Loans.  The first VA loan does not cost you anything out of pocket but subsequent loans require an origination fee so you want to go large on the first one.  In addition, and as you noted, you cannot use the VA Loan again until the first VA loan is paid off.  Do not use a VA Loan for this deal - especially if you are coming in to more money soon.  You can buy a multi-unit home (so long as you live in one of the units) with a VA loan with no money down and no PMI.  This will be a good way for you to jump in to Real Estate investing.
« Last Edit: August 27, 2014, 10:44:48 PM by prof61820 »

Justaerin

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Re: So this guy offered me a deal...
« Reply #13 on: August 28, 2014, 01:17:27 AM »
Thanks for the great advice Prof!  I have already purchased and sold a home with my VA loan, about 10 years ago, so I guess next time I'll have to pay the origination fee.  I never considered the multi-dwelling unit idea with my VA loan, excellent advice!

usmarine1975

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Re: So this guy offered me a deal...
« Reply #14 on: August 28, 2014, 06:17:11 AM »
There is a limit as to how many unit's can be incorporated into an FHA or VA Loan or at least that's what I was told.  I haven't researched it but I was first told anything over 4 unit's and lastly anything over 3 units. 

wannabfrugal

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Re: So this guy offered me a deal...
« Reply #15 on: August 28, 2014, 07:34:04 AM »
Outside of the mortgage fraud concerns, which trumps economics IMO... 

I want to share some general economic advice I've given as a CPA to many clients over the years when they have people asking to borrow from them because the individual isn't able to get a bank loan... (the reasons for wanting to borrow are varied and do not change my advice)...

The bank is in the business of lending money, they are practiced at vet'ing and evaluating deals and evaluating risk, which you are not, if they see too much risk to be willing to lend, then in general there is too much risk for you as well.





Justaerin

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Re: So this guy offered me a deal...
« Reply #16 on: August 28, 2014, 09:47:24 AM »
USMarine, thanks for your reply - I didn't know there was a limit.  Anecdotally it appears to be 4 units: http://www.military.com/money/va-loans/using-va-loan-as-investment.html

WannaB I really appreciate that advice!  I can certainly appreciate that the bank is in that business and have certain metrics for granting loans or not.  This appeared to be one of those fixed, unchanging rules that doesn't really go into the individual's creditworthiness.  He's reached some not-so-arbitrary cap, but viewing all the other metrics without that across the board cap, he'd still be creditworthy - at least as I understand it.

But you're totally right.  I would be wise to not go against tried and true procedure that is based to minimize risk and maximize gain.  I'm just some dude, I have no clue what I'm doing.  I try to keep in mind that fortune favors the bold, and I certainly want to live life in that area where there is more risk but much greater reward - in all things, adventure, happiness, enrichment... And yes money, as I see it as a freedom to pursue the things on that list.  I just have to try to be wise about it, enjoy the challenge and journey, make some mistakes, but really do more to better my financial situation.  This seemed to align with those goals, so I was a bit jaded.

arebelspy

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Re: So this guy offered me a deal...
« Reply #17 on: August 31, 2014, 09:45:14 PM »
Besides the potential loan fraud, watch out for the due on sale (acceleration) clause, where the bank can immediately call the note due because you've transferred title.

However, as I understand it, the loan is still my responsibility yet he is obligate to make the payments and reap the rewards of the cash flow from the tenant. 

He has no obligation to make payments.  The loan remains solely your responsibility, even if he does pay it, he can stop at any time.


The property is bound in a trust that says if he ever stops paying, then the property is mine (though I assume that means he forfeits all his investment and I must take over payments).

And how much legal work and cost will it be to review all that and make sure you aren't getting screwed there?  Probably a good chunk of what you're getting paid for this.

Stay far away.  :)
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