What should I consider before co-signing on a house for a dear friend?
May 6, 2016 8:15 PM   Subscribe

I have a good friend who's asked me to co-sign on a loan for a house he wants to buy. YANM(RE)L. Help me think thru all the questions I should be asking a real estate lawyer...and myself! First - can you confirm that it's best to have 2 real estate lawyers, one to represent each person's interests? Or would one for both people be sufficient? Since it's spendy to get two lawyers we were considering just going with one who would create a simple agreement that keeps both people protected.

My friend has a decent income, savings & credit (and a good record of being a responsible & communicative human, I've known him for years), but has only been approved for approx $300K when he wants to purchase something in the $400-500K range. He's seeking a co-signer. I have a very good income/credit/some savings & no debt; no one else in his family does (he's asked alllll the relatives). My brother co-signed a loan for me so I could go to college (my parents couldn't); I'd love to help him out.

Can you help me think of the things I should consider and questions I should ask him/myself before making this decision? What are the worst-case scenarios, and how can we protect ourselves?
posted by red_rabbit to Law & Government (85 answers total) 3 users marked this as a favorite
I'm not sure there is a way to protect yourself. This is an epic level of risk you are assuming.
posted by saradarlin at 8:26 PM on May 6, 2016 [60 favorites]

Some questions: Ask yourself why you think he's a better credit risk than the bank does -- or whether you can afford a second mortgage if it turns out the bank is right. Why is this person going so far as to ask friends to co-sign instead of renting, or buying a property he can afford? What happens to your friendship if it turns out that the bank is right? What do you expect a real estate lawyer can do to mitigate your risk?
posted by chesty_a_arthur at 8:28 PM on May 6, 2016 [18 favorites]

A relative co-signing on college loans is understandable. Co-signing on a friend's mortgage that lending models show they obviously cannot afford is completely insane.
posted by BrandonW at 8:28 PM on May 6, 2016 [120 favorites]

Can you make the full payments on this $500K house? Because you are signing up to a non-nil chance of that.

Also, you have not stated your own mortgage situation. Do you own a home or have any plans to buy one? This is important because you're about to lose a huge amount off your own borrowing capacity there.
posted by DarlingBri at 8:33 PM on May 6, 2016 [16 favorites]

You should consider running away from this.
posted by randomkeystrike at 8:36 PM on May 6, 2016 [10 favorites]

posted by corb at 8:36 PM on May 6, 2016 [21 favorites]

Do not do this. Take it from my bad experience where I co-signed with someone. It was the worst mistake of my life. The market tanked, the house is underwater, it won't sell and my husband and I now live in a different state and can't buy our own house because I'm tied up in this thing. It's an insane level of risk for you to do this and if you were my friend I'd be begging you not to do this. There can be so many unforeseen consequences.

If you must, get your own lawyer for sure. You have separate interests from your friend.
posted by FireFountain at 8:39 PM on May 6, 2016 [23 favorites]

You're going to need records of everything your friend's going to be paying. Mortgage, taxes, insurance, all utilities. Basically anything that if left unpaid could end up screwing you over.

If you're not up for babysitting your friend to this level, you shouldn't be cosigning. If your friend balks at providing you with these detailed records on a monthly schedule, you shouldn't be cosigning.

Why not buy the house yourself and put your friend on a rent to own program?
posted by paulcole at 8:40 PM on May 6, 2016 [7 favorites]

This is a generous impulse, but you must resist it.

If you are thinking that a lawyer to look over paperwork is too expensive, how can you afford a $500k mortgage? Do you currently own a house? If not, this can greatly affect your chances of owning one in the future and taking advantage of first time homebuyer incentives.

How long is the loan term? Are you willing to be on the hook from 15 to 30 years?
posted by topophilia at 8:41 PM on May 6, 2016 [22 favorites]

There is no legal arrangement you can make that will both allow him to piggyback on your financial health while protecting you from consequences when things go sideways. There's a reason why he can't borrow as much as he wants. It's because he cannot afford it. End of story.

Hitching yourself to this wagon also means that it could not only seriously harm you financially, but it will prevent you from making your own financial investments that require financing. His debt is your debt and bankers will see that when you go to borrow money for your own investments. This is not paying it forward. This is taking a major financial risk for a reason that simply doesn't meet the threshold of importance or benefit to you. There is absolutely no up-side for you.
posted by quince at 8:44 PM on May 6, 2016 [47 favorites]

I would think twice about doing this, and then I would say no.

The worst case scenario is that he is unable to make the payments on his mortgage and the bank comes after you for the entire sum, but you're not the owner of the house so you can't force a sale and so you either have to pay his mortgage or trash your own credit in a foreclosure. That's what co-signing means--you are agreeing to pay the ENTIRE AMOUNT if he is unable to. He sounds like a great guy, but are you willing to bet half a million dollars that he won't have a debilitating medical problem or catastrophic job loss?

The other factor is that if you do this you will have a large loan on your record. This is a real debt as far as the banks are concerned even if your friend is the one paying it, so it will limit your ability to borrow money for other things. Do you already own a house? Do you plan on buying one sometime in the relatively near future? Let's say you would be eligible for a 500K mortgage on your own. Except--oops--you already have a 400K mortgage with your friend, so now you're only eligible for 100K.

The other factor is why does your friend think he can afford a 400-500K house when the bank is pretty sure he can only afford a 300K house? Does he have a source of income that they are not counting? Banks are in the business of lending money and their debt to income limits are pretty liberal, and if someone wants to borrow almost twice much as they think he can afford I would want to know how they are planning on being able to pay it in great detail, including taxes, insurance, car payments, etc. If he isn't willing to go into the nitty-gritty of his financial details with you, that's a bad sign that he hasn't thought this through well enough. I'm sympathetic to the fact that houses are brutally expensive in a lot of cities, but that doesn't mean he actually has enough money to buy one.

Because of the above, you would certainly want to have some kind of concrete agreement about when he is expected to refinance the house into his own name, and what happens if he's not able to do that (hint: sell the house). You do not want to have a cosigned mortgage still hanging over your head in 20 years, or even 5.

Finally, if you do decide to cosign on this loan (which I would not recommend), you are effectively acting as an investor in this house. Cosigning on student loans is really taking a flyer, but there is a tangible asset at stake in this case, and you would be offering the use of your assets--your credit and foregone ability to borrow--so I would consider asking for some actual stake in the house. Certainly you will need to ask that anything you end up paying toward the house in a worst-case scenario should be repaid, and it wouldn't be unreasonable to ask for some kind of equity stake should he sell it down the road.

In short, I'm not saying no, absolutely don't do this, but I am saying that this is a very, VERY big thing to be asking of you--substantially in excess of cosigning some student loans, unless you are both a doctor and a lawyer or something--and that you need to have a very, very clear idea of exactly what you're getting into and what the eventual exit plan is.
posted by The Elusive Architeuthis at 8:44 PM on May 6, 2016 [12 favorites]

Sucks to be him if he wants to buy in the 400-500k range. He can't afford it.

I would've liked to live closer to my friends and work than I ended up but I couldn't afford to buy closer in and as I (a) wanted to buy and (b) am a grown up I looked at what I could afford. I wouldn't dream of asking this of my parents much less all the rellies and then friends.
posted by kitten magic at 8:44 PM on May 6, 2016 [28 favorites]

I would not do this for all the reasons stated above. Also I would seriously question the wisdom and reliability of anyone who is trying to buy $200,000 more house than he can really afford.
posted by WalkerWestridge at 8:52 PM on May 6, 2016 [18 favorites]

If I'm going to sign onto a mortgage, I want a bloody roof over my head and walls around me in exchange.

Maybe maybe maybe there are reasons why he's not being approved for the $500k -- say, if he's a freelancer or contract professional but the bank doesn't apply the same multiplier to it as salary income -- but that also means his income isn't as stable as salary income.

And no, I don't think there's any way you can protect yourself financially without essentially becoming your friend's landlord and being willing to evict him.
posted by holgate at 8:52 PM on May 6, 2016 [7 favorites]

You stand nothing, literally nothing, to gain by this except whatever satisfaction you derive from helping your friend buy something he can't afford. Which isn't really helping, it's enabling.
posted by STFUDonnie at 8:53 PM on May 6, 2016 [29 favorites]

Yeah, even if your friend is a perfect angel who makes every single payment on time, this could easily stop you from buying a house as long as your name is on his mortgage (which could be 30 years).

Obviously, if there are any problems at all, you could end up in much much worse trouble than that.
posted by miyabo at 8:54 PM on May 6, 2016 [6 favorites]

Please, please do NOT do this. At best it will strain your friendship even if all payments are made on time and the like. At worst it will ruin your financial life -- and his, too. There are many other ways to help out friends with housing but co-signing should be out of the question. The fact that he'd be willing to even consider this and put your well-being at stake is a sign that it's a bad idea. So many people grow up in small rental properties, sharing rooms with siblings and making do with what they've got. They are happy families, wonderful homes, and the kids turn out great. You'll find so many examples of that right here at Metafilter!

I can understand why your brother co-signed the college loan for you: it was generous and kind of him! This is a very different situation. There are others ways to "pay it forward" to the universe and also ways to help this friend out. You could give him a gift of x-amount towards a bigger apartment, a down payment for a house he can afford five years from now, etc. If he pays you back, it's great but, if not, it's not a loss or stressor but rather a gift!

If you really want to help him in this way and can afford it, YOU could purchase a home that you could rent to him and his family for a low-cost. Heck, it could even be nice duplex and you'd live on the other side.

Ultimately, the choice is yours but I think there are other, better options for everyone involved than what he's currently proposing. Good for your being kind and even better for you for asking -- your hesitation is a sign to stop and try something else.
posted by smorgasbord at 8:55 PM on May 6, 2016 [5 favorites]

For all the forgoing reasons, this sounds like a bad idea to me.

But should you choose to do it anyway, get your own legal counsel to explain to you all the potential liabilities to you for doing this and ask that lawyer what--if anything--can be done to structure your friend's real estate purchase in some manner than insulates you from those liabilities. Then have the lawyer explain to you what sort of liabilities you incur under that scenario. Do not share a lawyer with someone who is asking you to incur mortgage liabilities without any tangible benefit to you and without any sort of security for those liabilities.
posted by crush-onastick at 9:01 PM on May 6, 2016 [4 favorites]

These are very good points. To answer the question posed by DarlingBri and others: I do not currently own a home. I might like to buy one down the road. To address the assertion that there would be no benefits to me: friend was proposing that he give me 10% of monthly net rental income + 5% of net sales if it were to sell.
posted by red_rabbit at 9:12 PM on May 6, 2016

Do not do this.

Unless you're absurdly wealthy and can afford this home and a potential new home of your own AND all of the other debt you may have--by the lending standards of mortgage companies, not your own estimation--you would be preventing yourself from owning a home in the future because of what it would do to your debt to income ratio. Do not do this.

In conclusion, do not do this.

Do not do this.
posted by Special Agent Dale Cooper at 9:16 PM on May 6, 2016 [7 favorites]

Let him get a roommate and save up for a larger down payment on a house he can afford when he can afford it.

Dude, I posted an Ask about having my boyfriend's parents take over the payments on a car that had ~ $3 k left and second guessed it. We had been together 4 years at the time, I wanted to get married and felt like part of the family. Everyone resoundingly said no. I ended up selling the car.

Less than a year later we broke up and I haven't spoken to any of them since. I'm so glad I sold the car. Really think about this OP, it's not worth the sleepless nights, I promise. If this guy was Buddha/Jesus/Krishna/Ra incarnate, maybe consider it. But that's a lot of money and a lot of risk. I've read many threads of ex partners that have to live together for years because they can't afford another place or to buy each other out. And that's a closer entanglement than a friendship.

Another story, when I was a struggling young adult I asked people close to me to help finance a car for work and school. My family couldn't and some wouldn't, so I saved up and finally bought my first car that I ended up selling. It won't hurt your friend to do the same.
posted by lunastellasol at 9:21 PM on May 6, 2016 [6 favorites]

I have no idea what "10% of monthly net rental income" means if he is living in this house but if you are still going ahead with this, you absolutely each need your own lawyers to put that part of deal in writing.
posted by metahawk at 9:21 PM on May 6, 2016 [2 favorites]

Friends of mine cosigned a car loan for another dear-like-a-sister friend. They assumed that because it was a relatively small loan and that the friend was very responsible and an all around wonderful person that all would go swimmingly. I don't know exactly what happened, but it all went to hell in a hand basket and they are no longer friends. Both parties are still wonderful, caring people who no longer speak to each other. The moral I gleaned from this is: Don't help people get debt they cannot afford. Tldr: Fuck no.
posted by defreckled at 9:21 PM on May 6, 2016 [14 favorites]

Woah, woah, woah.

First of all, if you don't own a home already, this has massive implications for your ability to buy your own home down the road.

Second of all, if your friend is proposing to give you 10% of the rental income, this implies he's looking to buy this property to rent out. If that's the case, and you still want to consider this (which you totally should not) then you should also examine doing this as a business where you each put in half and jointly own the rental house.
posted by DarlingBri at 9:23 PM on May 6, 2016 [13 favorites]

IAALIANYL etc, please think again before you do this. The best possible result is that your friendship gets super weird.
posted by Sebmojo at 9:25 PM on May 6, 2016 [2 favorites]

He is indeed purchasing the house for the purpose of renting it out.
posted by red_rabbit at 9:26 PM on May 6, 2016

why on earth are you putting yourself hugely in hock to help a friend maybe make some money a long way down the track
posted by Sebmojo at 9:27 PM on May 6, 2016 [23 favorites]

So let him buy a house he can afford and save yourself the financial nightmare. He can rent out a 500k house but not a 300k house? Come on.
posted by STFUDonnie at 9:31 PM on May 6, 2016 [53 favorites]

I will be surprised if you find one person (besides your friend) who tells you this is a good idea.

As a lawyer who deals mainly in property transactions and insolvency, my advice to you, were you my client, would be not to do this. There is nothing I could draft that would protect you enough to make this a viable proposition.
posted by Salamander at 9:33 PM on May 6, 2016 [29 favorites]

Ahhhhh...you're in Portland. The real estate market is totally bananacakes right now. Nobody can predict the future of this market. The time to buy a house and turn it into a rental, though, is when the market is tilted towards buyers not sellers which is not this market. A $500k home, requires at least 5% down, which is $25k. At 4.25, with PMI & Insurance, you'll need at least $3k to cover your monthly costs and then a little more to pay you out and then a little more for repairs and maintenance. Etc.

This is a joint venture that requires a business plan not simply co-signing on a loan. I just have a feeling it doesn't pencil in its face...and the risks for you are high as others have noticed.
posted by amanda at 9:39 PM on May 6, 2016 [13 favorites]

Why would you assume 100% of the risk for 10% of the rental income? Why wouldn't you each buy $250,000 houses and each get 100% of the rent with no crazy entanglements?

None of this makes sense in any way. There is no way to make this make sense.
posted by bongo_x at 9:41 PM on May 6, 2016 [74 favorites]

Nice Phrasing: I looked through your posting history and wanted to respond with that in mind. I know it's sometimes frowned upon at Metafilter but I think it can also be helpful. That said, you can take this or leave it. I saw that you are a very generous person and are wonderfully reciprocal. You appreciate the little and big things that people have done for you over the years, and you go out of your way to help others. That's awesome! I see that, in the recent past, you haven't always had your own financial matters in order. That's OK and it seems you've gotten them straightened out and are now on the right path. I'd keep going on that path and finding other ways to help people financially that are much lower risk. Giving a disadvantaged student $2000 towards community college each year is one example but I'm sure you can see many more that are to your liking and match your aims; you could even give four college students $500 a year to help pay for books. More people helped and with a great impact at that!

You think you're getting something back here but you're getting high risk for a teeny reward (that likely won't happen.) If you'd like to buy it together as a shared property to rent out, that's a bit different. I still would advise against it but at least it'd be a bit more 50/50 from the get go. And I'd look into classes on owning and managing rental properties. Listen to the good experiences carefully and listen even more closely to the horror stories.

Blunt Phrasing: Your "friend" is using you. He's exploiting your generosity for his own gain: he may not have bad intentions but that'd just mean he's clueless when it comes to owning property. I'm worried about you because, as a fellow Mefite from the other side of the computer, I wish you well and want you safe!
posted by smorgasbord at 9:46 PM on May 6, 2016 [44 favorites]

Wow this would be a rental??? Omg please don't do this. This is a terrible idea and your friend is kind of an asshole for even suggesting that you do this. You shouldn't enable this bad behavior by taking on 100% of the risk for a tiny percent of the rent. This makes no sense.
posted by FireFountain at 9:46 PM on May 6, 2016 [30 favorites]

Yeah I don't understand why you'd put up 40% of the money and get 10% of the profit. You DEFINITELY need your own lawyer and if you really want to go into business with this guy, to create this as a business, not as individuals co-signing on a house.

But I ... kind of feel like your friend is trying to pull a fast one.
posted by Eyebrows McGee at 9:47 PM on May 6, 2016 [27 favorites]

He is indeed purchasing the house for the purpose of renting it out.

What the fuck?

If you want to take on a mortgage to make money on a rental property, you should just do that. Why would you ever do it this way? It doesn't make any sense at all.
posted by mr_roboto at 9:50 PM on May 6, 2016 [15 favorites]

The fact that he's asking you to HEAVILY INVEST (your risk and deep involvement in this purchase can't be understated) in a rental that he then plans to short you on when it comes to income and pay-out when the property sells is so shocking. This is a terrible, very bad, very risky deal. There's a reason why neither the bank nor "alllll the relatives" will go in on this. He's taking advantage of your financial health to enrich himself.
posted by quince at 10:10 PM on May 6, 2016 [28 favorites]

I used to work for a mortgage company. Specifically, in loss mitigation - aka dealing with people who couldn't make their house payments. Modifications, collections, foreclosures. I can tell you from much experience: barring, like, tying a small child to the roof of your car on the freeway, this is the absolute worst possible idea I can think of. Seriously, seriously bad. Stupid even. This is the kind of thing my coworkers and I would groan over, while trying to explain to the customer why their credit was being totally fucked even though they were divorced/didn't live there/etc etc etc. People who buy more house than they can afford are stupid. People who consign for people who want to buy more house than they can afford are even stupider.

Seriously. Worst idea ever. Please don't.
posted by celtalitha at 10:17 PM on May 6, 2016 [46 favorites]

This is some straight up bullshit. He needs you to sign because he can't afford it himself but only wants to give you 10%? That's crazy. This seems right to you? As someone pointed out earlier your pitching in 40% and this is what you get? I haven't seen a positive response to your question as of yet so I thinking you should take the resounding non at face value and walk away. Why would you even think about accepting such a bad deal, limiting your credit and risking your financial good standing. Your friend is a GROWN man, he can pull himself together just fine and do a hell of a lot better than coming with scheming crackpot real estate plans. Everyone else said no for a reason.
posted by CosmicSeeker42 at 10:19 PM on May 6, 2016 [5 favorites]

I'm just thinking about this more because I'm angry on your behalf. One other thing I thought of is if he can't afford the house without your help, how is he going to afford the maintenance and other issues that come up? Is he going to be a shitty landlord? What if he gets sued by tenants? You might get dragged into that too I don't know. This all seems so shady and I'm worried on your behalf. I know we don't know each other but it really makes me upset when it seems like a "friend" is using another friend for personal gain.
posted by FireFountain at 10:26 PM on May 6, 2016 [7 favorites]

I live in a hot neighborhood in Portland. Houses sell in days for way over sell price. Rentals seem to be a bit different. Recently a house around the corner from me that would probably sell for at least 450,000 sat on the rental market for almost three months because they were asking 2200.00 per month for a two bedroom. They had to lower the price to 1900. Which is still a lot of money, but not enough money to pay a mortgage.

You sound like a sincere person but you are not thinking this through. Please get your own lawyer and remember, sometimes lenders are looking out for us.
posted by cairnoflore at 10:27 PM on May 6, 2016 [15 favorites]

I think you have enough answers about the friendship/financial health damage potential. What I'm wondering is if either of you have really researched how many $500,000 rental houses there are in Portland. Do you know who is moving to Portland these days? All those potential tenants? They are young single people or young families who are moving into those tiny, infill housing apartments. And all of them are complaining about how expensive they are.

If I could afford the rent on a $500,000 house, I wouldn't be renting.

I think this is one of those please hear the "consensus on Metafilter" occasions. Good luck! (You are not a bad friend or a bad person if you decide against co-signing.)
posted by Beti at 10:33 PM on May 6, 2016 [15 favorites]

You know the quote about the wisdom of involvement in a "land war in Asia"?
This is that investment.
posted by Prof Iterole at 10:45 PM on May 6, 2016 [4 favorites]

He is indeed purchasing the house for the purpose of renting it out.

The phrase you need to Google is sexually transmitted debt. Everything you find will be applicable even if you're not in a sexual relationship with this person, who - while they might well like you, and you them - is not a good friend.
posted by flabdablet at 10:57 PM on May 6, 2016 [7 favorites]

Either this guy is seriously deficient mentally in some capacity -- for-real struggles with understanding the adult world -- or he is trying to take advantage of you. I would end a friendship over this.

(I would not end a friendship over a more gently flaky "Wanna go in on investing on a rental property, everything split 50/50?" even if my friend was being a bit of a dick because he wasn't eligible for the mortgage. That would be one thing. But with what you've spelled out here he's either stupid, and thus far, far too stupid to be a landlord, or he is a greedy prick, trying to take advantage of you. I am not seeing any other possibilities for this guy.)
posted by kmennie at 11:17 PM on May 6, 2016 [18 favorites]

If you decide to go through with this -- and I'm seriously not recommending that you do -- get your own lawyer. Your interests and your friend's interests are fundamentally different and the same lawyer cannot and should not advise you both.
posted by jacquilynne at 11:48 PM on May 6, 2016 [5 favorites]

I own rental property. Every month, I make a small income because the rent exceeds the mortgage and other expenses. I get that income because I had the ability to borrow for the mortgage and was willing to take on the risk of, e.g., an earthquake destroying the house, renters not paying, etc. I took on 100% of the risks and get 100% of the income.

In this case, you are jointly liable for 100% of the risks. But you are only getting 5-10% of the reward. I don't understand why you would take this deal. If you don't have the vision or knowledge to find a good property, or the time to devote to its operation and maintenance, you could outsource those. With the right property, those would cost you less than 90% of revenue and 95% of appreciation. You should each buy a rental property that's within your means to pay, if that's what you want to do.

Also, as someone who lost a friend over a business deal gone wrong, I recommend considering how much you value your friendship. It's not easy to find good friends.
posted by slidell at 12:04 AM on May 7, 2016 [3 favorites]

Even if this was for a family home, I'd still agree with every single poster above and say "no", that is too much risk (if things go wrong, you're on the hook for the whole amount) and too much impact on you (not being able to take out a mortgage in your own right in the meantime).

Given that this is for an investment property? Wow. He's not a friend, he's an opportunist.

Unless of course you are independently wealthy and have money to burn, and so if the mortgage lender comes calling, you can cover it without any significant impact on your lifestyle. In which case, this would be a nice way to help a friend.
posted by finding.perdita at 12:09 AM on May 7, 2016 [3 favorites]

Please do not do this. I did something very similar once, bought a house for my mom when she needed a little extra time to save but she was going to buy it from me within a year -- long story short, I was saddled for 15 years with a mortgage for a shitty house in the country in a state I will never ever live in, I accumulated debts because she never paid me and so I was on the hook for that plus my actual rent, I couldn't afford a house for myself in the city I actually wanted to be in, and it ruined our relationship. Please, please, please walk away from this.
posted by sldownard at 12:12 AM on May 7, 2016 [14 favorites]

i would sooner give a friend a kidney than sign up for some ridiculous moneylosing scheme like this.
posted by poffin boffin at 12:44 AM on May 7, 2016 [25 favorites]

Consider that the mortgage company is better positioned to take a financial risk on this dude than you are, and if they're only betting $300K on him then you'd be irrational to bet that he can sustain a $500K loan for 30 years.

It sounds like you're in love with him and don't want to risk his displeasure by seeking your own financial counsel. Please, risk his displeasure by seeking your own financial counsel now. There is no bad outcome for you for doing that - if he's pissed that you're doing so (while he wants tenants to just trust him?) that is a gigantic flashing neon sign.
posted by SakuraK at 12:54 AM on May 7, 2016 [4 favorites]

To answer the question as asked: The question you should be asking yourself is whether you would be OK to repay the whole debt if your friend doesn't for whatever reason. Bear in mind that once costs and interest are added into the equation the debt could end up being up pretty close to what was originally borrowed even if they also sell the house. Also know that you won't necessarily get anything for that (not the house, not a thank you, and I'd be surprised if you were still friends). If you can't pay, then what? Are you willing to bet your financial future just to be "nice"?

If you're still thinking you want to go ahead with this (against all of the solid advice above) then please get your own a) financial advisor and b) lawyer before you do so. There are probably ways to structure this that would balance the risk a bit better, but your friend (and likely the bank) would have to agree. That is, you could more fairly allocate the risk and reward between the 2 of you, but I don't believe you can eliminate the risk. If getting that expert advice is too expensive, then I'd gently suggest you don't have financial capacity to do this.
posted by pianissimo at 1:52 AM on May 7, 2016 [2 favorites]

Suppose you put yourself on the hook for, at most, the difference between your friend's $300K and the price of the house, rather than the whole ~$500K. Is there a way you can do that? Even if something goes really wrong with the house's resale value, you can recover your money with a sale and leave your friend on the hook where he belongs.

If you can't afford the whole house, and he can't afford the whole house, neither of you can afford the house even together, because there's no guarantee that you'll stay friends with half a million bucks hanging between you. This friend is buying a place beyond his means, and just because it's a great deal for someone (i.e. someone with $500K in cash or credit) doesn't mean it's a good deal for him, and sure as shit doesn't mean it's a good deal for you to put your own money on the line. You want to be a friend? Help him find a place he can afford. The bank cleared him for just $300K for a reason, and you should take that into consideration at least as much as your friendship-- you're biased in favor of this guy, and there are biased in favor of getting fully repaid.
posted by Sunburnt at 1:56 AM on May 7, 2016

10% of monthly net rental income + 5% of net sales if it were to sell

This person is not a friend. They're trying to rip you off. Those are terrible terms for what you're on the hook for.

If this person was in good faith, they'd make a business proposal where the two of you enter into an incorporation and have the business take out the mortgage under the business' name, not your "friend's."

The split under this structure would be closer to 60/40 (ie., 40% of gross rental income, 40% of gross sale price - and you pay 40% of incidentals; insurance, management fees, taxes, commissions, &c. Under the proposed incentive, it sounds like a lot of shit could be padded into the gross to artificially thin the net.).
posted by porpoise at 2:56 AM on May 7, 2016 [33 favorites]

I will add, as someone who does own a rental, that your friend's ability to make payments will depend on having rental income. Tenants have an unfortunate habit of doing things like, well, not paying their rent. If there's a one-two punch of serious maintenance issues and delinquent tenants--not to mention serious maintenance issues caused by delinquent tenants--then your friend could find himself in trouble very quickly. In addition, turning a house into a rental can lower its property value and make it more difficult to sell.
posted by thomas j wise at 3:30 AM on May 7, 2016 [10 favorites]

Nthing the consensus, this is a terrible idea for you.

If you want to help your friend why don't you loan him the money to have a bigger downpayment to buy a $500K house at the loan he can afford? Then you might get interest out of it. You should charge a small premium over his mortgage rate (e.g., if he is getting a primary mortgage loan at 4% charge him 6%).

You can still help your friend, aren't saddled with a mortgage for a house neither of you are living in (!!) and better chance of a financial return than what he is offering (!!). Don't have the cash to do that? Then helping him financially at all is a bad idea.
posted by rainydayfilms at 3:39 AM on May 7, 2016 [1 favorite]

The fact that your friend wants this as an investment property makes it an even more outrageous request. No one *needs* an investment property and certainly not a higher end one.

If your friend had say a spouse or kids with physical disabilities and was desperate to buy a home so it could be modified for their use (renting must suck for such families) then ok, consider it, though even then it'd be better bought by you and rented to them. But this request is appalling. I bet plenty of the relatives could afford to help but didn't because it's such a terrible proposition.
posted by kitten magic at 3:40 AM on May 7, 2016 [14 favorites]

Run. Run fast and far away from your not-friend.
posted by GeeEmm at 3:58 AM on May 7, 2016 [7 favorites]

Please don't do this. But also, get your own lawyer and an accountant first. It sounds to me for a variety of reasons (I've been a landlord) like your friend is going to end up in a lot of debt. But if he doesn't and you're on the loan and it makes rental income, it's possible that you would be taxed on it? And if it does appreciate and then he sells, wouldn't there be capital gains on that? (I don't know US tax law.)
posted by warriorqueen at 4:01 AM on May 7, 2016

Run, do not walk, as far and as fast from this deal as you can. And I say that as someone who co-signed a sibling's car, only to get stuck with the payments --- she was driving the nice new car while I ended up making the payments on it and driving my own 19-year-old clunker.

It really wouldn't matter if you had one or two lawyers involved, one or two real estate agents, or a written "agreement to keep both people protected": the fact is, the house would be in his name, but the debt would be in his and yours --- so if he (like my sibling) just stops making the mortgage payments, it's still his house; and if he refuses to pay, then your only choice is to either make those payments on his house yourself or have your own credit ruined, and you'll never be able to buy a house yourself.

There's a reason the banks don't think he is capable of repaying a $500K loan on an investment property: and that reason is, based on his "income, savings & credit", he isn't capable of repaying that much. These are hard-headed businessmen telling him this, people who make money only because they make loans, and they don't believe they'd get their money back from lending him that much. Listen to the pros.
posted by easily confused at 4:28 AM on May 7, 2016 [12 favorites]

The other factor is why does your friend think he can afford a 400-500K house when the bank is pretty sure he can only afford a 300K house? Does he have a source of income that they are not counting? Banks are in the business of lending money and their debt to income limits are pretty liberal, and if someone wants to borrow almost twice much as they think he can afford I would want to know how they are planning on being able to pay it in great detail, including taxes, insurance, car payments, etc.

The last time I got a mortgage, the banks were willing to lend us about three times more than I considered sensible. Even after the 2008 debacle, the limits are still very generous and it is easy to borrow more than you can reasonably handle. If the banks are not willing to loan this guy $500k, I'm willing to bet money that he is in no way a reasonable risk for the debt.

There are definitely ways to structure a joint investment situation, but that does not seem to be what you are describing.
posted by Dip Flash at 4:39 AM on May 7, 2016 [15 favorites]

In addition to all the good sense shown in the responses above, I want to highlight this:

> Since it's spendy to get two lawyers

For any transaction involving hundreds of thousands of dollars, never hesitate to pay a lawyer a few hundred or even a few thousand dollars to discuss the risks, decide whether to proceed, and if so, how to proceed and do it right.

If this business plan (purchasing a home as a rental) makes financial sense, he could get a group together to share the costs, the risks, and the rewards in some official form, such as an LLC. You may choose to be one of the group.

The way that the question was originally phrased made no mention of this as a business venture. That makes me wonder whether he plans to borrow the money by misrepresenting this to the bank as a personal mortgage for a home he is to live in. The bank's calculation of the viability of the loan would be different when analyzed as a business venture.
posted by megatherium at 5:00 AM on May 7, 2016 [7 favorites]

Asking how how you can protect yourself while cosigning a mortgage is like asking how a bicycle helmet can protect itself if its wearer bashes his head into a brick wall at 40mph . It can't, and you can't. In this scheme you're considering, you are the bank's helmet, and your financial security is the sacrificial, use-once-and-throw-away expanded polystyrene lining.
posted by jon1270 at 5:02 AM on May 7, 2016 [13 favorites]

You can get some slamming rental properties for 300k in Portland right now. Your friend is straight bananas.
posted by furnace.heart at 5:39 AM on May 7, 2016 [5 favorites]

This is a terrible investment of your credit. Terrible. If you co-sign, you agree to pay 100% of the mortgage if he doesn't. If he pays late, or skips a payment, that goes on your credit.

Now there is a way to protect yourself. You and your friend incorporate as a business. You have a lawyer draw up the articles of incorporation and stipulate exactly how profits and losses will be distributed between you. This will protect your personal credit.

You do realize that if you get 10% of the rental income from this property that you'll be taxed on it, and it will be considered income, right? You'll conversely, get a 10% deduction from your taxes for any losses realized on the house. And how much could this rent out for? Let's say it's $5,000 a month (why not?) The mortgage, taxes and insurance on that mortgage would be $3,500, leaving $1,500 for profit. Less $300 monthly for maintenance or other expenses, that leaves $1200 of profit, or $120 for you. Being on the hook for $500k for a paltry $120 a month...less taxes...there's no money in this for you.

What if the house stands vacant? What if the tenants turn out to be deadbeats and stay in the house without paying until they can be evicted? What if a bunch of stuff needs to be replaced (HVAC, Roof, Water Heater.) Over the years, these things really do fail and they're no small potatoes. Can your friend afford to pay for them if that happens?

Just don't do this. It wasn't in your plans to become a landlord until this landed on your doorstep. WHY is your friend so hot to do this? If he was a businessperson, he wouldn't have cycled through his entire family and landed on you as what, the 54th person he considered?

Don't believe me, ask your accountant. Don't have an accountant? That there should tell you that you're not ready to do this. But it's such a terrible deal for you that it doesn't matter, the entire internet is SCREAMING at you, DON'T DO THIS!

For the love of all that is holy, preserve your friendship, your finances, your peace of mind.

If your 'friend' is angry with you for not doing this....he's not your friend.
posted by Ruthless Bunny at 6:22 AM on May 7, 2016 [15 favorites]

"I'm sorry, but that won't be possible." are the words you need.
posted by Sebmojo at 7:19 AM on May 7, 2016 [5 favorites]

Nthing the nononono advice. Don't do this.
posted by RichardHenryYarbo at 7:30 AM on May 7, 2016

Joining in the chorus:

I have NEVER EVER known this kind of situation to end well. EVER. The cosigner is always left holding the bag for the loan, and with ruined credit. I don't think a "dear" friend should ask this of you. I am so side-eying your friend right now.

If your friend can't get a loan for the larger mortgage, there's a reason. It means the bank thinks they won't be able to pay back the money. If you cosign, YOU will be on the hook for this, I guaran-damn-tee you.

Can't afford to buy the investment property? Too bad, so sad, boo hoo, cry me a river. Your friend isn't going to be left homeless. Don't be afraid to say NO, this will not be possible.

Saddle up your nopetopus and ride away to Fuckthatville.
posted by Rosie M. Banks at 7:52 AM on May 7, 2016 [16 favorites]

Do you feel like buying your friend a half-million-dollar house and getting essentially nothing in return? (His profit-sharing offer is laughable. 5-10% of net? That's insulting.) Because that's what you'd be signing up for. That's what co-signing is. He gets the thing, and if he doesn't pay for it then you have to.

Co-signs are a way for parents to help their kids get a toe in the water, credit-wise. It works because a) parents are more inclined to be generous and forgiving toward their children than pretty much any other relationship dynamic and b) they tend to be able to exert some control over their kids and herd them into making sound financial choices (like setting aside money for debt payments) that a bank would not otherwise trust the kid to do. You're not his parent, and this is more like jumping into the deep end than sticking in a toe.

The whole point of co-signing is that you're accepting total liability for the loan in the event that the other person fails to pay for any reason. That's why banks are willing to do them. Co-signing is never done because it's a safe financial choice, it's done out of generosity and a desire to see one's children succeed in life. By design, the co-signer has no protection at all. That's what it's all about.
posted by Anticipation Of A New Lover's Arrival, The at 8:04 AM on May 7, 2016 [12 favorites]

On second note:

Look, I've been poor before and people have helped me. It's so nice when you get to return the favor! It feels so good! But the way to do that is to, like, help a friend who's about to be evicted or who needs emergency dental, not to cosign for a 500k house.
posted by corb at 8:04 AM on May 7, 2016 [41 favorites]

To pile on: At 10% of net rental profits I'd think you'll be lucky to see him throw more than 50 bucks a month at you from this agreement. If you're as comfortable as you claim, is that $50 worth it to you to put your entire financial stability at risk based on circumstances entirely out of your control?

All that needs to happen is your friend misses one payment, and your own ability to buy a house in the future is seriously fucked for years; at the very least you could incur thousands of dollars in extra interest every year because your credit score took a dive from his failure to pay. Even the simple fact that this mortgage and its accompanying liability exist at all on your credit report will be very detrimental to qualifying for your own mortgage later on, even without any late payments, unless your income can easily support both properties. Doesn't matter that you're not the one making the payments; the payment amount will still count against your DTI (debt-to-income) for any lender looking at your credit.

No amount of legal paperwork, contract, etc. is going to protect you from being liable for the whole mortgage if your friend disappears and you're a co-signer on the mortgage documents.
posted by SquidLips at 8:44 AM on May 7, 2016 [6 favorites]

omg do not do this, for all of the reasons listed above.

rental properties are not an easy ticket to profit town -- they can easily lose money. if he's going to rely on the rental income to pay the mortgage, that is a huge risk.

and the idea that you would cosign on a loan, taking on a huge financial risk, in return for that paltry sum is insane. the terms he's offering you are indistinguishable from con artistry.

the best case scenario for your friendship is that he's simply ignorant. even if you think he's well-intentioned, you still don't want to enter into a scam. it's like--imagine if one of your friends was really into a ponzi scheme. like really, really believed in it, and was trying their hardest to get you to invest. you'd still say no, right, knowing that it was terrible idea?

that is how hare-brained this arrangement is.

obviously, if you think your friend is well-intentioned, you don't want to hurt your friendship by telling him that you don't trust him. but you don't have to make it personal if you don't want to. things can happen through no fault of his own that can still turn this into a financial disaster for you: job loss, illness, terrible tenants, changes in the housing market... you can blame those risks when you turn him down.

but you have to turn him down if you want to protect yourself.
posted by Kutsuwamushi at 10:05 AM on May 7, 2016 [8 favorites]

I have been wondering about whether a lender would approve you as a co signer? And secondly, if a sellar would pick a buyer that has to have a co signer? The reason I bring this up is a friend of mine just sold their home in Sellwood and they had 13 bidders. They chose the bidder that offered 60 grand over asking that was also paying cash. The bidder in second place was offering half down half mortgage. These are the people you will be competing against.
posted by cairnoflore at 10:31 AM on May 7, 2016 [3 favorites]

^^^corb's got it right: If you want to pay it forward, do it on behalf of a friend who's in an emergency situation, not one who's asking you to invest in his money making idea.

I don't doubt that this guy is a good buddy, but this proposal is a big bundle of "I'd turn back if I were you." Remember: "No" can be a complete sentence.
posted by virago at 11:05 AM on May 7, 2016 [6 favorites]

Let me spell it out for you in a way that might make your loyalty to your friend less of an issue. I don't think it's a good idea at all.

In the instance that nothing goes wrong with cosigning for your friend, and the deal works out for you, the loan will probably be for 30 years. That's standard. When you decide you want to buy your own home like you said you wanted, you will not be able to get much of a loan, if any.

Here's why: While the original mortgage is still owed, you are liable for it, all of it. That means it's taken into account if you want any kind of loan at all, including car loans, but especially mortgage loans. Even credit card balances and limits are taken into account. The entire amount will be counted against you as long as the debt is still owed.

If you think you could save up enough to pay off the first mortgage or pay cash for a house, this wouldn't be too much of a problem. I doubt that's the case for many these days.
posted by annsunny at 1:21 PM on May 7, 2016 [4 favorites]

Doing this will:

a) saddle you with EXTREME liability in the event that said friend does not make payments. And since you are not on the actual deed, you won't be able to sell without his agreement (and why would he? You'd be legally stuck making payments anyway.)
b) gives you little to no reward for your enormous risk
c) disqualifies you from a plethora of first-time home buyer programs
d) will negatively impact your ability to take out a mortgage for yourself, or indeed any line of credit, for the foreseeable future
e) if he can't afford that much house on his own, why should you underwrite it? the loan officers probably have a very good idea of his income and how much he is able to afford.
f) be a hugely bad idea that you will likely regret for decades and will probably ruin your friendship with this person

If you're cool with all that, go for it.

If not, DON'T.

(I vote for don't)
posted by ananci at 1:39 PM on May 7, 2016 [4 favorites]

Did you know if your friend died you would become the owner of the home? You would be responsible for the lien.
posted by just asking at 2:00 PM on May 7, 2016 [4 favorites]

I have co-owned a house before and then had to try to get it out of my name after divorce (so I could buy a house years later) - it is MUCH harder to fix than you think! You can think the other party will just be fair and sell it to split the profit if you need them to, but that isn't going to happen. They might want to keep it and refinance to just them but not have the money for years, they might agree to sell but say the market in the area isn't good enough right now or that you must go half in for expensive repairs first or think since it was their idea and they have been making more repairs that they should get 75% or all of the profit. You are stuck and it will take years and lawyers to get your name off that damn piece of paper. Please do not do this!
posted by meepmeow at 3:22 PM on May 7, 2016 [4 favorites]

You seem like a kind person wanting to help a good friend out. That's a really generous impulse.

If the complete unanimous cry of "Noooooooo!" from the community here hasn't already convinced you that this is a bad idea, then at least show this thread to your friend. Ask him to respond to the various points raised by all of the smart people here. If he can't give you good answers to ALL of the points, then, well, that's yet another piece of data pointing to NO.

But, seriously, NO.
posted by Jaclyn at 6:49 PM on May 7, 2016 [3 favorites]

Conventional wisdom about making loans to friends: Only do it if you're OK with never seeing your money again. In this case, "your money" is the entire value of the house. Plus you're tying your credit to his; if he defaults, it's your bad credit.
posted by chickenmagazine at 7:58 PM on May 7, 2016 [1 favorite]

Why not offer your friend the same deal he is offering you? You buy a house for rental income that exceeds your availabe credit, he co-signs, and you will give him 10% of the income. If he baulks at the deal, listen closely to his objections.
posted by saucysault at 8:08 PM on May 7, 2016 [4 favorites]

Sorry, can you all speak up a little louder or at least get on the same page? Is this a good idea or nah? :) OK! Thank you. Very good concerns raised from the beginning. I sent my friend the link straight away so that we could discuss together. I was waiting to respond until we had a chance to speak on the phone since he's out of town. I'M NOT GOING THROUGH WITH IT! Fret not. Thank you for looking out and for serving up lots of useful info.
posted by red_rabbit at 8:14 PM on May 7, 2016 [32 favorites]

A little more background for the curious:
He already owns & rents a home and was able to do this at a very young age with very little funds thanks to a co-sign from his step-dad. He's been smart about it and all has gone super super smoothly. So I think in his mind it was just the next step from that positive experience (and yes, he acknowledged that one house isn't a lot of experience). His plan was to buy a duplex (think 2x tenants at 1/2 rent, more feasible for tenants), to release me within a few years, and for us both to meet with a lawyer (one or two) to figure out what % would be appropriate to pay out as a thank you, etc. The agreement spelled out that if he were to not able to make payments that his family would be liable first, then me. TBH neither of us are very experienced in this realm (tho I think to some of you that meant I was stupid & he was a sneaky asshole. Sigh.). Anyway! That's why I came seeking some answers here and suggestions for how to approach a real estate lawyer.
The most salient response for me was asking about his feasibility to afford something above what a bank would grant for a loan.

It's sunk in for both of us that even if his co-sign experience (and my own, w my brother) went 100% perfectly, with no need for the co-signer to ever get involved, that there are many ways that this venture could go NOT perfectly, and it's a very big $ amount with lots of risks both financially and personally, risks that neither of us want to take, risks spelled out by all of you here.

I do like the idea of paying things forward, but I agree that there are better ways to do this. And neither of us liked the idea of any kind of shitty strain on our friendship. So yes--we agreed immediately that neither one of us was comfortable to move forward. He'll go with the loan for the amount he's been granted (I was wrong, he was hoping for up to $550 but was approved for $450, not a small amount, and one which grants plenty of options)! He will not entangle any other friends. It's a way huger thing than either of us had realized. That's that! Thank you for all the comments.
posted by red_rabbit at 8:56 PM on May 7, 2016 [19 favorites]

It sounds like he would really benefit from some education in small business management. He should check with the local Chamber of Commerce for free/cheap classes or links to same.
posted by rtha at 10:31 PM on May 7, 2016 [4 favorites]

For what it worth, I did not mean to imply by my above comment that you, yourself, were stupid. I was just being over-emphatic about how unwise of an IDEA this was. And how many (perfectly nice, but somewhat naive) people I have personally seen get badly screwed over in such situations. I'm glad you decided not to do it, and wish your friend luck.
posted by celtalitha at 2:32 AM on May 9, 2016

You say the agreement would have spelled out that if he couldn't pay, his family would be liable first, then you --- sorry, but this is wrong. The mortgage documents themselves would say that you and he are equally liable, and that's who the bank would come after for their money: you and/or him, the people who signed for the loan. NOT 'his family', people who did NOT sign.

The bank doesn't care about any side agreement between the two of you, only the legally-binding stuff you sign with them.
posted by easily confused at 3:37 AM on May 9, 2016 [5 favorites]

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