What's my risk of buying a house for a friend and sell back to him?
I'm in a situation and need some advice. A friend of mine is in the middle of Chapter 11. He asked me to help to buy his house and in a few months sell back to him, so he can force the bank to lower the principle mortgage currently on that house.
He said he will pay for the down payment and put at least 6 months of payment in my escrow account, so I do not need to pay for anything regarding this deal. All he needs from me is to put my name on the mortgage and he'll "rent" from me. He showed me the contract that he is selling a property under his wife's name and the money would come in a few months which is enough to pay for this mortgage.
People may wonder, why should I do this for my friend. The only tempting reason is because he'll pay me extra 0/mo for the duration of the mortgage until I sell back to him and in the end, he'll pay me some chunk of money as appreciation. Still, this is the first time I'm applying for a mortgage and I was originally looking to buy my first house soon, so I don't know what to do now...
UPDATE: Thanks for all the comments, here are few more details
The price for this property will be at market value around 0K. His original mortgage is around K range.
My friend would pay for all the costs involved in this deal.
This is my feeling, but I felt I don't know him much. He said he used to be a banker, but that's all I know about his business. I'm not sure what I'm getting into or who I'm dealing with...
I also felt the bank went to bankruptcy is little suspicious, any place I can look up for sure? For example, if I learn the bank's name, any place I can look for if the bank is filing bankruptcy?
My friend is filing Chapter 11, but this house is his primary residence (For as long as I know him, he's always live there). He said he cannot "fix" this mortgage using the same methods as with rest of his investment properties.
As I said, he will deposit a few months of payments to my escort account prior to close the transaction, do I still need to worry he runs away? I was thinking worse case, I just sell this property and since I'm not involved in down payment and fees, etc. If I'm sure the mortgage is within the market value, I'm in good position to not lose any money. Thought?
As why not just have his wife "buy" the house, this is slightly complicated. Because his wife is in the process of getting her green card (ETA in 2 months), so she cannot apply for a mortgage now and the majority of money will come in Oct. Nov. time frame.
I also thought about tax related trouble. I think it needs to be written down bwetween my friend and I for him to pay for any potential income tax related to this "rent".
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Also you would need to consider any taxation issues. As he will be paying you rent you will need to include this as income, plus any capital gains tax on the re-sale of the property may need to be paid.
This is fraud, the related legal code is "11 USC 548 - Fraudulent transfers and obligations"; also see the wiki page for Fraudulent Conveyance in the United States.
Highly suggest cutting off contact with this person, and speaking with a lawyer as soon as possible to make sure you have not already broken the law.
Risks:
It might be illegal. Your friend might be deceiving the court about his situation, and you would be helping him.
If he is unable to hold up his end of the deal you will be stuck with a house you don't want and might not be able to sell.
This might be a way for your 'friend' to unload a house at an inflated price, and once you have bought it neither the buyback nor the payments will happen. (Please don't be insulted if this is a really good friend who you trust totally - we have to consider all possibilities)
You will make yourself ineligible for first time home owner programs when you try to by a hose after you get rid of this one.
Will the bank go along with the sale of the house to you?
Is this a short sale? Will the appraisal be enough to make the deal work?
What about when you sell it back to him?
He appears to have enough free cash for your down payment, 6 months into escrow, and 0 per month extra to you. The bankruptcy court might want to know about that cash.
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