Investment Property At Risk Without Partnership Agreement

Added January 19, 2009 by Ilyce R. Glink

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Summary: When you buy investment property with partners, it's best to draw up a partnership agreement which clearly describes everyone's responsibilities. When investment property partners don't live up to their end of the bargain you may have to hire a real estate attorney to help you sell the investment and dissolve the partnership. In this instance, a real estate investor discovers that his partners have not been paying the mortgage loan believing they can get a better deal on the loan by going into default. In an investment property situation such as this, there's risk of losing the property to foreclosure and ending up with damaged credit scores.

Q: I own a rental property with two other investors. I've been having problems with both of my partners.

Here's the problem: The rental payments go to me, and I then issue a check with my one-third share plus the rental payment to partner #1. Partner #1 collects from Partner #2 and then pays the mortgage.

I had assumed that the mortgage was being paid on time, but I just got a letter saying we're 60 days late in paying the loan. The partnership has soured as I've questioned the business ethics of my partners.

Partner #1 claims he was holding onto the payments because he's going to try to renegotiate the terms of the mortgage. He figures that by defaulting we'll be in a stronger position.

I expressed my displeasure with the strategy because it will affect my and my wife's credit score. I urged him to pay the mortgage, but to no avail. To make matters worse, Partner #1 told me that Partner #2 hasn't paid his share of the rent for several months but has some of the rent money.

I'm afraid that our credit has been compromised due to his actions. Neither of the partners will respond to my calls or text messages. I am being left in the dark. I'm ready to forego my investment in this property as long as I do not have to deal with these partners and this kind of business practice.

I'm also prepared to seek legal advice and am willing to take a loss, and you should know I also have another house in which I've invested with Partner #1. What should I do?

A: I'm afraid I don't have any good news for you. You may have been bamboozled by investors who might be taking advantage of you. Do you know if your partner actually still has the money in the account and is ready to use it to pay the lender? If not, he may be spending the money elsewhere.

What your partner is doing in trying to convince the bank to renegotiate for better terms may not work, and at best has fouled up your credit along with theirs.

You should have had a partnership document that spelled out in writing what would happen in a situation like this. I'm guessing that you don't have one. Now you'll have to hire an attorney to get you out of this mess.

It won't be pretty and you'll probably wind up losing this investment property, not to mention your good credit rating.

The only bright spot is that the rental payments come to you directly. You might use the money coming in to actually pay all of the expenses of the investment property. Since you get the money, you might be able to control it. If you can bring the payments up to date, the lender might be willing to work with you.

Good luck, and be sure to find a very good real estate attorney. You'll need one.

Jan. 22, 2009.

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