Need help with Real Estate transaction?

Question

I currently own an investment property with a business partner. I am the only one on title since the mortgage is only in my name. I desperately need to get out of this property. My partner has agreed to release me from my obligations. I am giving up all my equity to accomplish this.

We have two options available from what we can tell to get me off the mortgage which is the main objective:

Option 1 - He can actually purchase the property from me to release me from the mortgage. This likely is a bad idea. Essentially, he would buy the house but the proceeds that I receive would end up going back to him at closing. This could easily be looked at as loan fraud and I have not interest in breaking the law.

Option 2 - We add him to title and then he refinances the property removing me from the mortgage. He has been an owner the whole time, it just hasn't been reflected that way on title. He is more than qualified to be approved for the loan.

Is option 2 legal?

To be more specific, my partner can qualify for the loan per his income, debt ratios, etc. However, he doesn't want to come out of pocket 20% for a property that he already owns. If he purchases the property the "proceeds" would be the original down payment which I am giving up.

If he were to purchase he would take out a new loan and then have rights to the downpayment. It would go into his account and certainly look like fraud however that is really not the case.

Option two would allow him to go on title and simply refinance thus taking me off the mortgage and not coming out of pocket.

If there are any attorney's out there I would appreciate your insight.

Answer 1

If I'm understanding this whole thing correctly you are willing to walk away and just want the property AND mortgage to be in your partners name and you will not gain any profit from the transaction.

If this statement is true all that is required is for you to sell the property to your partner for the amount that you owe on the mortgage. He has to obtain his own financing. Your mortgage will be paid off, the property will be in his name and he will hold a mortgage for the property. End of story.

Answer 2

Option 2 will not work. You will still be on the title to the property, and thus the new loan company will want you, as co-owner, to be on the new loan.

What you should do is use a modified version of option 1. Since your partner is not on either the title or the loan for the property, he in essence is not a party to the property. The law would not see him as having any interest in the property. Since you intend to give up all equity in the property as the incentive to have him release you from what is in essence a private agreement between the two of you, all you need do is sell him the property for whatever the outstanding balance is on the current mortgage. At closing, you will not receive any funds, as the money paid by his new finance company will first go to pay off the old mortgage. If the money paid is equal to the outstanding balance, you will receive $0.00. Thus you will not be returning any monies back to him at closing. Just be sure you work out the selling price to reflect all monies that you are libel for at close, including any outstanding tax or insurance liability that would be adjusted at closing, such as real estate taxes which you will owe for the portion of the year that you owned the property.

Since he will have a built in equity value from your selling at a below market price, he should have no problem having all the costs associated with making and closing the new mortgage loan, included in the loan value, thereby costing him nothing out of pocket at close.

You walk away free and clear, and he is now sole owner of the property.

Answer 3

Actualy, Option 1 is the easiest and cleanest option. There are lots of situations where people sell properties just to get out of the mortgage, especially these days.

Just structure a sale in which you get no proceeds back, for instance, just for the amount of the existing mortgage plus closing costs. Or, if your partner wants to get some additional money out, you can try doing a contract with allowances, for instance:

House is worth $150,000
Existing loan is $125,000
Sell for $150,000, and you give your partner allowances for renovations already completed on the property - say carpet, paint, new kitchen, whatever. (Note, it has to be allowances for renovations already made as many lenders won't allow alowances that are to be made) So your partner can get a loan based on a $150,000 valuation.

Option 2 is legal, but you are doing two actions instead on 1. First, you have to put his name on title, then take you off title, both of these options no doubt will trigger an acceleration clause on the existing loan so the loan will need to be refinancaed anyway. It is legal, but it will smell fishy and you might draw some unwelcome interest from the original lender and possibly regulators in today's hypersensitive lending environment. Also, because it is an unusual change of ownership, it can raise questions in the future about the clarity of the title and make it more dificult for your partner to arrange for title insurance for his refinance and future sales.

Option1 is by far the best course in my opinion.

Answer 4

Since your name is on the title exclusively you are in the catbird seat on this one. As far as the LAW is concerned YOU are the sole owner of the property. You could sell out and walk away and leave your business "partner" high and dry and there would be little that he could do. Real estate transactions MUST be in writing and ownership MUST be reflected on the deed and in most jurisdictions the deed MUST be recorded within a short time of execution to be enforceable. Since your name is on everything and his is on nothing, YOU get to choose how to proceed or even if you will do anything at all.

You can sell the property to anyone you wish to sell it to. Once the sale is complete you can do anything you wish with the proceeds. However if you give any of your equity to your "business partner" it will be treated as a gift as far as tax law is concerned and you could be burned for Gift Taxes if the amount of money exceeds the Gift Tax exclusion amounts.

You appear to be in a complex situation and you need the advice of competent counsel on this! Do NOT do ANYTHING until you have consulted with an attorney AND a tax expert! You could wind up in a very difficult position if you don't proceed carefully.

Answer 5

Why would there be any proceeds in option 1. Just because the property is worth $500,000 doesn't mean you can't sell it to him for $100,000. I don't see any loan fraud?

Are the two of you incorporated?

MMMM Option 2 looks like your trying to cover something up....Is your loan assumable? Call your mortgage company and ask. This may be the simplest way to remove you from your responsibilities.

If you are in doubt contact an attorney. They can handle everything for you, even the sale!

Answer 6

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Answer 7

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Answer 8

Option 2 sounds good - Option 1 is legal as long as the banks know what you are doing and the entire financial transaction is reflected on the HUD.

Answer 9

#1 is good.Lender and title company should work with you to get to the proper place and supply all the proper documents