Strange one - buy house w friend, i'm 100% cash...

D

dubguy

Registered User
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Hi,

This is a strange one I think. I have a close friend who is mid 30's and still renting. He is in a steady, pensionable but not great paying (circa 40k) job. I have been encouraging him to get on the property ladder over the last few months as I believe the market is close to bottoming out. He says he wouldn't get a mortgage as the banks have really tightened up and at 40k pa he wouldn't be able to afford a house. He is currently renting at 500pm.

I have money in the bank, earning (not very much) interest, and I have been thinking about investing in property. So, I have suggested to my friend that we could buy a house together, with me putting half in cash and him getting a mortgage towards his half, under the following general conditions :-

1. I would allow the whole house to be used as collatteral against his mortgage.

2. I would have no further liability towards his mortgage other than my half of the house (i.e. if value fell so much it didn't even cover his mortgage, thats down to him).

3. Property would be two bed, he lives in it with a tenant, I get tenant rent.

Thats the gist of it. As I see, it is a way for him to get started, using my half of the house as collateral to get a mortgage. Obviously we'd have to get legal agreement re selling, death etc.

To my surprise, he doesn't quite see this as a good opportunity, for the following reasons :-

1. He feels that bank will want us to be joint mortgage holders, and will view my cash half as just a joint deposit. So I would be liable for his mortgage in event of default (beyond the resale value of the whole house).

2. He doesn't see why I would get the tenants rent. His point here is somewhat confused, mainly centred on the rent being possibly more than I am earning on the money on deposit.

3. He seems to think that the bank, beyond wanting my half of the house, will also want some or all of my current property as collateral. Surely not!

In general he is hinting that the deal isn't generous towards him - which is obviously his prerogative and I've gracefully stopped talking about it :) He works in financial services so I am assuming he has some insight in this, but for the life of me I can't see how it is anything but a good deal for him - he gets the whole house as collateral against his half mortgage, gets him on the property ladder at just the right time.

What dya think? Am I inadvertently ripping him off? Would the banks even allow a deal like this?
 
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Dreadful idea, recipe for disaster and losing a friend. I don't even know where to start.
 
wbbs said:
Dreadful idea, recipe for disaster and losing a friend. I don't even know where to start.
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Ha, possibly :) I had another friend want to go halves on what would have been both our first houses years ago and I chickened out. I still regret that, we would have made a fortune :) And he wasn't offering his half to me as guarantee :D
 
I can only this as an appalling idea from your point of view. If you have a decent income why not look into buying something on your own. Please do go with the idea contained in your original post
 
Dermot said:
I can only this as an appalling idea from your point of view. If you have a decent income why not look into buying something on your own. Please do go with the idea contained in your original post
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I have my own house and could buy another place on my own. I was only suggesting this as a way to get him started. My post is really based on my surprise at his suspicion of the deal. Do banks allow this kind of deal? Obviously commercial property is bought this way all the time (I assume? Will banks lend to one partner only in a commercial property deal?)
 
Well from the point of view of parents giving a gift of money to help a child get on property ladder, the bank usually looks for letter from parents saying it is a gift with no strings and that they have no financial interest in the house. Obviously that would not suit your situation and I imagine it would be more clearcut to have you on the mortgage and deeds. Your friend would not be much more than a tenant still, in theory he still couldn't hang a picture without checking with co-owner if it was okay to drive a nail in the wall. A slight exaggeration obviously but nevertheless he would not own his own home and if that is what he wants then this is no better an alternative than renting.
 
wbbs said:
Well from the point of view of parents giving a gift of money to help a child get on property ladder, the bank usually looks for letter from parents saying it is a gift with no strings and that they have no financial interest in the house. Obviously that would not suit your situation and I imagine it would be more clearcut to have you on the mortgage and deeds. Your friend would not be much more than a tenant still, in theory he still couldn't hang a picture without checking with co-owner if it was okay to drive a nail in the wall. A slight exaggeration obviously but nevertheless he would not own his own home and if that is what he wants then this is no better an alternative than renting.
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I don't understand that, are you saying that joint ownership of any kind is no better than renting? Surely he would benefit from any rise in the value of the house? And obviously would eventually live in the house rent free when his mortgage is paid off? Both of which will never happen if he continues to rent...
 
dubguy said:
I don't understand that, are you saying that joint ownership of any kind is no better than renting? Surely he would benefit from any rise in the value of the house? And obviously would eventually live in the house rent free when his mortgage is paid off? Both of which will never happen if he continues to rent...
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Not joint ownership of any kind, obviously in a relationship situation it is the norm, but owning with a friend who is looking on it as an investment and is not living there, I just think it is too messy. A lot can happen between now and the end of the mortgage, it's just not straightforward enough, if it was me I wouldn't be interested either.
 
To my surprise, he doesn't quite see this as a good opportunity, for the following reasons :-

1. He feels that bank will want us to be joint mortgage holders, and will view my cash half as just a joint deposit. So I would be liable for his mortgage in event of default (beyond the resale value of the whole house).

2. He doesn't see why I would get the tenants rent. His point here is somewhat confused, mainly centred on the rent being possibly more than I am earning on the money on deposit.

3. He seems to think that the bank, beyond wanting my half of the house, will also want some or all of my current property as collateral. Surely not!
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The simple fact that he questions the deal is enough for you to pull out. If/when a dispute subsequently arose, he would be of the opinion "I knew you were taking advantage of me from the start".

While I agree with everyone else who says you should walk away from th is, the correct way to do a deal like this is as follows:

The market rent for the whole house is established - say €12,000.
He pays half of this to you.
He then manages the property as he sees fit. If he chooses not to get a tenant, that is up to him.
If he gets a tenant who doesn't pay, that is his problem, not yours.
He may allow a friend or partner to move in with him rent-free.
If he manages to get €8,000 in rent from two tenants, he gains.

He should also have the right to buy part of your share of the house at the then market value over time.

It would be complex enough for two unrelated people buying a commercial property together. It becomes much worse when it's an investment for one person, but the other person's home.

Brendan
 
I think its a terrible idea. I cant possibly see a bank going for it.

Lets pretend property goes up in value (I feel like laughing when I type that - I have learned my lesson the hard way!).

The property is 100k. You put in 50k cash. He puts in 50k mortgage. The term of the mortgage is 10 years.

After the 10 years when the mortgage has been discharged you sit back and look at your options. The house is now worth 120k. You have spent 50k on it. He has spent 50k plus mortgage interest of say 12k. So the house has so far cost him 62k, and you 50k. In the meantime you have been pocketing 250 euro a month rent from the tenant. So in 10 years you have made back 30k on your original 50k.

You sell it for 120k. So, you spent 50k cash, made 30k on rent and now 60k on the sale - so a profit of 40k for you.

He spent 50k mortgage + 12k mortgage interest and made 60k on the sale so he has a loss of 2k.

Its never an equal situation if one person pays cash and one pays mortgage. Plus the cash payer wants to take full advantage of the rent being paid. Its all in your favour. And you want him to take all of the liability.

If I were him Id run for the hills.
 
truthseeker said:
I think its a terrible idea. I cant possibly see a bank going for it.

Lets pretend property goes up in value (I feel like laughing when I type that - I have learned my lesson the hard way!).

The property is 100k. You put in 50k cash. He puts in 50k mortgage. The term of the mortgage is 10 years.

After the 10 years when the mortgage has been discharged you sit back and look at your options. The house is now worth 120k. You have spent 50k on it. He has spent 50k plus mortgage interest of say 12k. So the house has so far cost him 62k, and you 50k. In the meantime you have been pocketing 250 euro a month rent from the tenant. So in 10 years you have made back 30k on your original 50k.

You sell it for 120k. So, you spent 50k cash, made 30k on rent and now 60k on the sale - so a profit of 40k for you.

He spent 50k mortgage + 12k mortgage interest and made 60k on the sale so he has a loss of 2k.

Its never an equal situation if one person pays cash and one pays mortgage. Plus the cash payer wants to take full advantage of the rent being paid. Its all in your favour. And you want him to take all of the liability.

If I were him Id run for the hills.
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Dear God - I think you may have gone to the same school of economics as him :)

If you think you've made a profit if you have more than your original investment after ten years then I want to borrow some money off you! Obviously there is the foregone profit of whatever else I might have done with the money over the period. At the very least, lets say I'd stuck in a 10 year state bond and get the approx 4% interest rate (after tax!) that would give me 74,000. So selling for 60,000 + 30,000 would be a return of 16,000 over and above base state saving rate over 10 years (actually, taking tax into account I'd probably be about evens w a state bond :( )

From his side, he has paid 62,000 over the 10 years, which averages out at 512 a month. So, for €12 more a month than he is currently paying in rent he has a lump sum of 60,000 at the end of 10 years - enough to give him a good start on his next house. Another way to look at it - if he saved that €12 extra each month, again at 4%, he would have €1800 at the end of 10 years (compounded annually). So by instead putting it into a house he makes a profit of over 60,000 - the other 500 each month is something he is already spending for the same benefit of living in a house.

Finally, I can't see how I want him to take all the liability? In fact, I am offering to take more than my half of the liability by letting him use the whole house as collateral to obtain a mortgage for his half of the loan. If we need to sell and the value of the house has fallen then all of the sale price would be used to pay off his mortgage (not just his half of the sale proceeds).

As I see it, if I was in the situation of effectively never being able to afford a house (he lives in Dublin and is adamant that a single man with no savings and 40k a year will not get a mortgage) and someone offered me this deal I'd be running down the hill to bite their hand off :)
 
dubguy said:
Dear God - I think you may have gone to the same school of economics as him :)

If you think you've made a profit if you have more than your original investment after ten years then I want to borrow some money off you! Obviously there is the foregone profit of whatever else I might have done with the money over the period. At the very least, lets say I'd stuck in a 10 year state bond and get the approx 4% interest rate (after tax!) that would give me 74,000. So selling for 60,000 + 30,000 would be a return of 16,000 over and above base state saving rate over 10 years (actually, taking tax into account I'd probably be about evens w a state bond :( )

From his side, he has paid 62,000 over the 10 years, which averages out at 512 a month. So, for €12 more a month than he is currently paying in rent he has a lump sum of 60,000 at the end of 10 years - enough to give him a good start on his next house. Another way to look at it - if he saved that €12 extra each month, again at 4%, he would have €1800 at the end of 10 years (compounded annually). So by instead putting it into a house he makes a profit of over 60,000 - the other 500 each month is something he is already spending for the same benefit of living in a house.

Finally, I can't see how I want him to take all the liability? In fact, I am offering to take more than my half of the liability by letting him use the whole house as collateral to obtain a mortgage for his half of the loan. If we need to sell and the value of the house has fallen then all of the sale price would be used to pay off his mortgage (not just his half of the sale proceeds).

As I see it, if I was in the situation of effectively never being able to afford a house (he lives in Dublin and is adamant that a single man with no savings and 40k a year will not get a mortgage) and someone offered me this deal I'd be running down the hill to bite their hand off :)
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Oh I dont disagree with the above, I deliberately wanted to make a simple illustration. We never took into account the amount of money you are spending in the same 10 years to keep a roof over your head because you dont live in the house or had a look at things like the costs of upkeep on the property (what cost his time painting or maintaining for example?) or indeed looked at the situation if the house went down in value.

Nor did I look at the complications if one of you died, if he lost his job and the house got repossessed, if he moved in his wife and children and it became the family home in law, or any of the other myriad of situations that could arise, or indeed any of the other myriad of things you could do with your 50k or how he could save 60k anyway over 10 years without the risks associated with being a mortgage holder.

I simply wanted to illustrate how the same property costs him more money than you - so its an unequal investment. Its also an unequal investment because its his home, and your investment. Its messy, and thats why Id be running.

Just on the bolded bit - why has he no savings? He only pays 500pm rent. And another question, why are you so keen to get someone on the mythical property ladder? For a lot of people its that attitude that has them in massive negative equity. If you want to do a good thing for him why not gift him a deposit and leave him to buy his own place?
 
He just might not want to do business with you. I wouldn't be interested in this proposal.

Doesn't matter how much sense it makes financially.

What if he came to you instead of you making the proposal.

Would alarms bells not ring that he has no savings, despite having a good salary.
 
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