Giving money to a friend from our OD for 8 months to buy his owner occupier Home?

[Anita]

Hello There


Rather unusual query.

One of my friends from old school ( not a class mate but known through many reliable contacts of my friends) asked for a loan for AUD 150,000 as they don't have enough deposit to buy the house they are going to bid in the range of 1.2 - 1.4 Mil in Melbourne.

They do have a business they run ie 2 or 3 medical centers in the town & they are a bit stretched asked if we could 'loan' & that they are happy to pay for the Interest that cost us at bank for pulling the OD every fortnightly or monthly & agree to pay the full sum loaned by the 9th month .

And we discussed that we would want our lawyer or their lawyer to draft a this arrangement in writing.

I have been just wondering whether I should do it or not. There should be a some form of consequential clause there would n't it ? Is it okay to agree on such a deal ? . They have been reasonable people , we would love to help within a limit. And remainder of our OD will suffice for us to remain calm for 9 months. However , we are a retired couple too & live on cashflow from our rentals & got some mortgages still need paid off & cash flow wise rental yields are comfortable enough but again, who knows what sort of expenses yet to come, in this diabolic political set up. any known/unknown / hidden hiccups you could for see & any advise or comments from your learned audience ?

[artemis]

Suggest they buy a house they can actually afford. Or borrow from their relatives.

It's one thing to have clauses in a contract, but if they don't pay what do you do? There may be remedies but the process will be hugely stressful and expensive, and yet still may not see you paid back.

Recommend you wish them well and politely decline.

[Rosco]

My first thoughts - are you joking!

If you had $2 million cash in the bank, then maybe. But you are going to borrow to lend to them. Does this not sound risky?

If you did go ahead, you would need to see full financial statements to see what they actually have in the businesses and then get extremely good security of the businesses and everything else possible.

Overall I just wouldn't do it.

Ross

[jimO]

i have a bridge for sale

[Learning]

Never lend more money than you can afford to lose. Especially to a friend because if things go wrong you’ll lose both.

How would you feel if they complain about repayments after going on holiday, buying a new car or bringing home a puppy? Once the money is out of your hands it’s your problem if their priorities change.

[eri]

"sorry, my accountant won't allow it

unless my name is on the title"

[Bob Kane]

A friend doesn't ask for a loan.

A successful businessperson running 2 or 3 medical centres would simply tap their regular source of business finance.
If they can't do that then they are max'd out and will struggle to repay you.
You wouldn't want your friend to go under, would you?
Your proposed loan could tip them over.

Friends don't let friends drive drunk.
Same with money.

[ripeka]

This is a high risk proposition that you are considering both in terms of relationship risk and financial risk - stakes would be too high for me.

However if you wanted to explore it further you would need statements of their personal and business financial position, profit and loss information regarding the medical practices and cashflow forecast statements so you could be assured they will indeed have the funds available to repay you in 9 months. and then run all the financials past an independent accountant for an opinion.

[Anthonyacat]

You must consider here, their bank, which has billions of dollars of lending diversified across the country, does not want to lend them that $150k on a house they would have security over. You are looking to lend money to a single undiversified source, unsecured.

If you do still decide to go ahead, at the very least, you'd need to decide on an acceptable premium interest rate, so you're earning something for your massive risk. What do banks charge for unsecured loans now, 12-18%?

[Dunning]

150 k @ 10%(premium rate) for 9 months = $11,250. Lawyers fees $2,000 your left with $9,250

You've paid interest on your overdraft @5.5%(guess)costing you $6,187.50.

That leaves you a profit of $3,062.50, after tax @30% your left with $2,143.75

Actual return on loan for you is 1.9% PA for a high risk proposal.

If the bank won't lend to them, why should you

[kiwidag]

Hello There
I have been just wondering whether I should do it or not?

"sorry, my accountant won't allow it
unless my name is on the title"

All above replies are valid opinions including eri's realistic suggestion which I think you must follow if you proceed down that way. They should pay for all costs including transferring title back to their name when 9 months are over. Your friends would be silly to object to this - I think maybe get them to read this thread (I don't know)?

[Ivan McIntosh]

I really think you shouldn't have a bar of this. It's a terrible return for the level of risk (which is very high). You won't be able to get any kind of security against the property, because if things go wrong the bank will suck up the available equity. The only basis on which you might consider it is after reviewing their business accounts with your accountant and having it confirmed by your accountant that they are generating more than ample cashflow, and taking security over those businesses.

[Learning]

I really think you shouldn't have a bar of this. It's a terrible return for the level of risk (which is very high). You won't be able to get any kind of security against the property...

Just putting it out there, what level of return and amount of security do people expect from their friends?

[Wayne]

Just putting it out there, what level of return and amount of security do people expect from their friends?

Would depend on how much faith you have in your friend

[Ivan McIntosh]

Just putting it out there, what level of return and amount of security do people expect from their friends?

I guess that depends how good a friend they are...from the OP it doesn't sound like they are that close. There are some people in my life that would just be given money to help buy a house no questions asked, eg children, as long as I think they're not over stretching themselves.

Anyone outside immediate family and really close lifelong friends? I just wouldn't lend, because over the years my clients have demonstrated again and again that it's a bad idea to lend to friends and family.