Investor Q & A - When a Friend Buys You Out

Andy!

Could you give me some advice on a situation I have?

I own a home in Waco that I bought several years ago with a friend. Long story short, he bought me out of my share of the home in 2004, but he still owes me $3500 and my name is still on the note & the deed. He is now able to pay me the $3500 and he wants to get a special warranty deed drawn up to remove my name from the title. This sounds like I would still be holding the risk for the property without having any legal right in the property since my name would be on the note but not the deed. What would you recommend?

Hello. I would definitely be concerned if you are still on the note and not the deed. Effectively, you would still be responsible for the payments but have no ownership in the property. The house is still being used as the primary collateral for the loan, but if your friend defaults on the loan then it would affect your credit as well. You are essentially a cosigner on this note. I think that I would have him research getting you off of the note and placing both the house and the note in his name. If your friend is married that might complicate the matter even more. If he is unable to get you off of the note, I don’t see what the rush is to get you off of the deed as well.

Assuming that you are not both on the note, keep your name on the deed, until you can be released from the note. Best Case scenario: The lender may let you off the note if the other borrower is strong enough. Worst Case: Your friend needs to refinance the mortgage and pay you off completely, this would effectively be another closing (or property purchase). This of course, brings additional troubles ranging from title insurance to appraisals to lender fees, etc from anything up to 2% of the sale price in additional expenses. These expenses can be figured out at closing on the Settlement Statement.

In summary, this could have been foreseen and avoided if both parties had considered their Exit Strategy. By principle, I don't recommend anyone over-leverage themselves to make a deal happen. Smart financial principles could have prevented this regrettable outcome. A good deal is a one where your financing is fully collateralized by the property allowing you to have an easy exit.

--locations, property, address, and $$ amount changed to protect the innocent!--

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Leveraging Cash in Real Estate Transactions

Leverage is where you buy more property seeking a multiple return on your investment by purchasing more property.

You can't count on the bank to protect you when leveraging cash for a real estate, you must make sure you can pay your debt service (especially if property struggles).

Main question: Can you sustain the mortgage? if not you're putting your equity at risk.

How far can you leverage before you're in trouble:
1) However most banks want to see 10%-20% as a downpayment to protect both you as the investor and them.
2) A good leverage ratio 5 to 1 (if you have a $1MM, you can look into purchasing a property for $5MM)

Watch this video for more information.


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