If you invest in real estate with friends or relatives, plan ahead. Otherwise, you may find yourself deep with problems when money is short or disagreements arise.
Q: My friend and I bought a single family house to make some fast money. We wanted to flip the property, but, could not, and we’re on the mortgage together.
This house is my friend’s primary residence but the house is underwater, because it has fallen so much in value. My friend has lost his business. He can’t pay the mortgage.
Can the bank come after me for the balance owed on the home as I have a job and my friend does not? Is it practical to send the key back to the bank? The bank refuses to lower the principal owed on the loan.
How can we get out of this mess? Is it practical or feasible to file me to file for bankruptcy since I have a primary home with my wife?
A: More people are coming to realize the risks involved in “helping” friends and relatives buy a home or trying to make a quick buck in the real estate market. When you assist a friend or relative in their purchase of a home you can do it in one of two ways: you can give them money towards the money they need to buy the home or you and they can sign the documents that are needed to buy the home.
Giving the money is the easy way of doing it. You simply give them the money and they use that money to buy the home. If the gift of the money is within a couple of months from the date of the loan application for the purchase of the home, the lender or mortgage broker may require you to provide them with a letter indicating that you are gifting the money to these friends or relatives and may want some evidence from you that the money you have given them has been in your bank account for some time.
If you meet all of those requirements, you’re pretty much done with the gift of the money and you should have no future worries if something bad happens to your friends or relatives with their finances or with their home.
However, if you help them in their loan application, you are not only signing the documents with them but you are becoming personally liable along with them to repay the full debt that they have taken on in the purchase of the home.
Likewise, if you decide to invest in the purchase of a home and sign the documents, you become personally liable for that purchase and you become financially responsible for all of the costs involved in the purchase of the home, the upkeep of the home and everything that has to do with that home until that home is sold.
If your friend fails to make a payment on time, misses to make a payment or stops making all payments, you’re in for a rude awakening as your credit history and credit score will certainly take a big hit.
Your friend’s actions will directly affect your credit – just as their credit will suffer so will yours.
Having said all that, your best bet is to try to sell the home in a short sale. It may not be an easy process and Bank of America may take quite a while to process you’re the short sale file and may even reject a buyer’s offer – even a good offer. But with a short sale, you and your friend’s credit will suffer but you will avoid a foreclosure blemish on your credit history.
If your friend is unable to sell his home through a short sale, you can see if the lender will work with you in a deed in lieu of foreclosure. That is when you transfer title to the home and avoid the need of having the bank file for foreclosure on the home. The lender does not have an obligation to accept the home in a deed in lieu of foreclosure, but if the company perceives an advantage that will allow them to avoid future losses on the home, the lender might agree to it.
However, if the lender is unwilling to accept an offer that you might get on a short sale, our guess would be that the bank would probably not work with your friend on a deed in lieu of foreclosure.
At that point, you and your friend will have to decide whether to continue to make any payments on the loan, wait for the bank to foreclose on the home, proceed in foreclosure, evict your friend from the home and then move on.
If the bank then decides to pursue your friend and you for the deficiency that is owed on the home – the difference between what the bank gets from foreclosure and what is owed on the loan – you can then decide whether circumstances are proper for you to file for bankruptcy. If the bank obtains a deficiency judgment against you, you may have to consider bankruptcy. Bankruptcy is an option available to individuals when their debts are greater than their ability to manage or make payments on their debts, among other issues.
As your friend lives in the home as his principal residence, he might want to see if he qualifies to refinance his loan or obtain a loan modification. While the whole government sponsored loan refinance and modification plans have been inadequate, it’s possible that he could win the loan modification lottery and find the right circumstances that would reduce his monthly payments. While it may be a long shot, it might be worth his while.
But you should know even if he can get the loan modified, both of your credit scores and credit histories will be damaged in the process.
Here’s more possible bad news: If you are able to obtain any solution to his financial issues through a deed in lieu of foreclosure, short sale, or loss of the home in foreclosure, you should know that you may not see the end of your financial troubles your lender. If the lender decides to pursue you for the repayment on the loan you may find yourself sued to pay up. And even if the bank doesn’t come after you now, the bank may sell of the debt you owe to a collection agency or company to pursue you.
It’s even possible that your friend might avoid the collection on the loan due to his ownership of the home as his primary residence, while you might end up pursed by the bank for what is owed on the home. Finally, because this is not a primary residence, selling the home for less than is owed on the loan (whether through a short sale or foreclosure), could mean you’ll wind up with a big tax bill the following April 15th. Current tax law allows the forgiven debt to be tax free for a personal residence.
Since you own a home and have a job, you might want to talk to an attorney or your tax preparer about your issues to plan ahead in case you must file for bankruptcy and to understand the risks you face and what you may encounter as a result of being on the loan with your friend.