Should I Invest with My Friend at Foreclosure Auction???

[clombojones]

​Okay. Here's the deal:

My friend found a foreclosed home at auction that is on the tax rolls for $650,000. He showed me the photos on zillow - and it appears to be a beautiful 4,000+ square foot home in Dallas that could be work $650k. The comps in the paperwork show sales in the same area (from 2013) in the $600 to $700K range.

He wants us to go to the bank together to "get our ducks in a row" and... together... qualify for lines of credit totaling $400,000. His plan is to try to get it for $400,000... and then immediately sell it for $500K to $650K and split the profit.

Even though he went to real estate school 20 years ago - and was an agent a few years back then... I'm wary about getting a line of credit and being on the hook for $400K... with the assumption that it WILL sell for $500K or $650K afterwards. He makes it sounds like a sure thing - but I've been burned on real estate deals before.

What are your thoughts on this? When I told him I was wary about doing this, he got all upset and told me it was a sure thing.

I do want to get into real estate - but I think learning about it first... maybe picking up a book, reading on here, or talking to someone with experience... might be a better first step than running out and getting on the hook for $400K.

Am I too cautious? Should I do the deal?

Or what steps should I take to know whether or not I should do the deal?

Thanks for your help/advice.

I want to do the deal - but things are tight and I can't afford to be on the hook long-term for $400K if something goes south with this property.

[Bill H]

Best way in the world to lose friends is to get them involved in a financial situation which FAILS to pay off as MUCH as they expect.

In one word....NO.

[Rob in Atlanta]

Bill H is Astute and Prophetic.

No is the right answer!  While we are on the topic of NO, how about starting out in real estate with something less pricey?!

Contrary to popular belief, you do hit bumps in the road while investing and if you jump into a very expensive transaction and hit a bump, it will consume you and your business plan.  A small transaction with a bump in the road is manageable and will not consume your business.

Walk before you run.....and run from doing business with family and friends.....this is unless you want to see the devil in them over any money issues!

Hope this helps.

Rob

[AlanMerle]

Hahahaha..Great advice Rob
I completely agree with you..

[dannyspastics]

If this house is on Foreclosure Auction, it doesn't mean it has a good opportunity. may be you should first talk with nearly real estate brokers and clearly i think it is not a good idea to share your investment with someone. so talk with real estate professional and try to buy your own.

[earlvandorn]

You can make a lot of money doing this and your friend might be a great partner. Start out by buying a $100,000 house, or a $50,000 house, or even a $25,000 junker that you can fix up. If you enjoy spending time with your friend you can even do some of the work yourself.

One of my very first foreclosures was a $20,000 double-wide on two acres that I bought with a good friend. We spent $10,000 fixing it up plus another $500 on beer and sold it for $80,000 cash. You just have to keep your eyes peeled for deals like this.

[Gold River]

Hi,

     Same rule applies to tax deed sale auctions as wholesaling and fix and flips.

A $650k home is worth $455k in pristine condition with no deferred maintenance and completely remodeled in the last
5 to 7 years. Now if the people being foreclosed on could not sell the property for either a profit or a short sale it tells
me the house needs lot's of money and work to upgrade it to current standards.

So if the house needs for example $130k in renovation and rehab to remodel it to pristine condition you should not be
paying more than $325k and if your plan is to sell it to another investor to fix and flip you probable should not pay over
$280k figuring your going to add $30k to it as profit as your wholesale margin and send it off to a new buyer who will
pay both sellers and buyers closing cost's in the deal.

So would you for example want to bid up to $280k for a home you think needs $130k in remodeling? If you go to the auction
first you have to be registered and approved by the county to actually bid at the court house steps on a foreclosure, and second
your going to be bidding against seasoned veterans who will raise the bids and drop the property on you!

You will not get anywhere near what you think your getting from this scenario and your taking a huge risk which you can not get
easily out of! I would not do this unless you could literally afford to lose your whole $400k in cash and could walk away and know
you would be ok and could handle this kind of loss? Otherwise your putting your family and friendship at risk!

Good luck,

                GR

[Frank C]

This is not the type of a deal you should partner with someone. I tried one such deal, partnered with a real estate agent who found the deal, a pre foreclosure, about $10,000 estimated repairs needed. But it's only priced at $70,000 to purchase with a FMV of $125,000. This was in 1983. My partner claims it's a sure thing.

Now he was right. We found a buyer who contracted it for $127,000. But one week before closing, he lost his job, the bank withdrew the mortgage commitment. We're stuck with a house we had to close on.

I see a few problems with your plan:

1. The loans you and your partner are trying for is too large. Even if you qualify, the process of reselling it for a profitable price takes longer than you think. We aimed for reselling in two months, but my partner would not accept anything less than $125,000, so it took 6 months to land a buyer, and the buyer 2 more months to qualify for a mortgage, a total of 8 months. Imagine sweating out the interest on a $400,000 loan for 8 months. That's besides paying insurance, utilities, landscaping in the meantime.

2. There is no exit plan. My partner and I was so sure it would sell that we had no agreement on what to do it we didn't sell. My wife insisted on a plan B, holding it for rental if it didn't sell. I originally didn't go through my plan B with my partner, and he wasn't interested in investing in a rental with me. Took a bit of negotiating, but I bought him out, paying a bird-dog fee.

3. This was in 1984, and interest rates were 13%. Fortunately, my wife and I qualified for a $70,000 mortgage, and the plan was to hold it for two or three years, as prices were going up. But the market crashed in 1986, and didn't start recovering till the mid 90's. So I refied to a 7.5% mortgage in 1993. Banks at that time refused a 30K cash out refi, so I kept the mortgage the same.

4. I waited till 2001, Aug 2001 to be exact, to put the house back in the market, this time for $250K. What happened?? Sept 11, 2001 came, and the broker I listed with told me people stopped looking at houses. As my tenant was leaving, I'm not leaving the house vacant, so I took it off the market.

5. If you're wondering, I still own the house, now mortgage free. FMV about $375,000. Wife wants to know what should we do with it? Well, taxes and expenses run a little under $1,000 month, and market rent goes for $2,700 currently in the area. So I tell her just hold on to it. It's a nice little pension.

What's the conclusion??

You got to have a plan B and C for these things. And having a business partner greatly complicate matters. But you never know how things will turn out.

But then, isn't real estate investing great. I stumbled into this deal, did a number of things wrong, and things went wrong all over, wrong buyer, real estate crashes, Sept 11, and I still wound up with $375K equity and $1,700/month income going forward.

[andise84]

why not do it by his self instead.. for me that would be hard if that property wont sold the time you need back your money.

[mcwagner]

I have a client who went into a business deal with a friend on a handshake.  Six months later his friend was in the middle of an acrimonious divorce, the business was out of cash, incomplete so couldn't sell, and his friend couldn't buy him out.  He wanted to know what his options were.  I asked him what the partnership agreement said.  He told me that they never signed it, because he didn't have the heart to force his friend to sign it given the circumstances.  So my client couldn't even finish the project on his own.  He lost a cool quarter mil. 250,000 green american dollars.

Friends is friends and business is business and don't mix the two.  ever.

Business means being able to make difficult, non-emotional decisions about critical issues.  Friendship clouds those decisions with emotional considerations.

I've seen it a dozen times in my 30 year career.  It never.    NEVER.  ends well.  You lose the friendship, the business, or usually both.

[cleverpancakes]

I advice that you should pursue the deal or business on your own.  Partnership has risks in the long run especially if it concerns friendship or any blood relations. It's better to be safe than to regret later on.  That could be a tough decision. Think several times before making a final decision.

[marksmith]

If this house is on Foreclosure Auction, it doesn't mean it has a good opportunity. may be you should first talk with nearly real estate brokers and clearly i think it is not a good idea to share your investment with someone. so talk with real estate professional and try to buy your own.

Hi
I agree with you.It is important to talk with a real estate professional before buying a foreclosure auction home.
Thanks!!