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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 $500/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 $300K. His original mortgage is around $60K 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".
  • If people need any additional information, feel free to comment, I'll see what I can provide. – Patrick Aug 24 '12 at 4:08
  • Also, he said I can draft any legal documents for both us to sign to make it more secure, if that helps. – Patrick Aug 24 '12 at 4:08
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    I think understand the plan, but this feels like your friend is committing fraud. I think you will get good answers here, but a lawyer should be on the list of folks you contact. I can't explain why I think this is fraudulent, and I am not saying it is malicious, but I think you and your friend better be careful. – MrChrister Aug 24 '12 at 7:49
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    @MrChrister - I think you may be employing the "quacks like a duck" factor. While I respect sound, logical advice, often one's "gut feel" says it all. My comment would echo yours. – JoeTaxpayer Aug 24 '12 at 14:31
  • Is the price he wants you to pay for it market value? Or above market value? That's a very important question. – DJClayworth Aug 24 '12 at 14:53
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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 $500 per month extra to you. The bankruptcy court might want to know about that cash.
  • Thanks for pointing out the risks. I'll answer what I know. - The money he planed to buy the house back is in his wife's name, and AFAIK his Chapter 11 is for "business" not personal asset.? - That is true, but hopefully with 6 month worth payments in the escort, I can quick sale the house if end up not able to buy back. (Although the timing to decide this is tricky) - I thought there aren't any first time home owner incentive anymore. i.e. the tax credits. Did I miss something? – Patrick Aug 24 '12 at 4:45
  • - He said it happens that his lender is also going bankrupt, so the bank is willing to make this deal going fast. At one time the bank wants to foreclosed it, but my friend's said it's not valid anymore since he filed Chapter 11? - As I mentioned earlier, the cash he has prepared for this house is under his wife's name, so will bankruptcy court be concern about this as well? – Patrick Aug 24 '12 at 4:50
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    Coincidentally his bank is also going bankrupt? That sounds like something that needs to be checked on. – DJClayworth Aug 24 '12 at 14:50
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    If his Chapter 11 is his business and not for him personally then why is his house even involved? – DJClayworth Aug 24 '12 at 14:51
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    @Patrick I'm not familiar with bankruptcy or marriage law, but if his wife's money is safe, then why not just "sell" the house to his wife? – Brendan Long Aug 24 '12 at 16:25
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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.

  • I would also have highlighted an important part of the text in your link: The Bankruptcy Code authorizes a bankruptcy trustee to recover the property transferred fraudulently for the benefit of all of the creditors of the debtor. – Hoki 21 hours ago
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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.

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    That's a good one. – Patrick Aug 24 '12 at 23:07
  • @Victor: This is fraud - why would you suggest matters to account for in committing it? – blunders Aug 25 '12 at 20:09
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    @blunders, I am not from the US so am not aware of the conveyancy laws there, nor was I commenting on the legality of the transaction. I was simply commenting on any possible taxation implication relating to a transaction being undertaken. – Victor Aug 26 '12 at 23:37

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