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Business Partner Bought Out: Now What?
I have a builder's loan for $810,000 on a large spec home that is currently on the market for $899,000. Until recently, I had a 50% business partner who had huge financial issues and backed out of the project (I bought him out). He will not communicate with me at all, as our relationship ended badly. His name and my name are both still on the builder's loan with the bank. The bank doesn't know that I bought him out. My lender is asking for financial statements and tax returns for 2009 from both of us. Although my name is now the sole name on the title of the house, my partner's name is still on the bank loan. I do not think that he will provide his personal financial statements to the bank or communicate with them.
I haven't spoken to my banker yet out of fear of what he will do. The bank has $240,000 of collateral (all of it fronted by myself). I have an additional $200,000 in savings (on which I am currently living). I do not have any other assets. I am not currently employed, and have not showed any income for three years. I am a doctor and sold my practice (early retirement), but I am in the process of starting another business because of this. The partner I bought out is a doctor (high-income individual), so without him continuing on the upcoming loan renewal I don't know if the bank will take my $240,000 and call the loan (or foreclose on the house). I have been paying the interest payments on time and have never been late. Do I have any need to worry? Will the bank require me to get another investor who has a recent history of income or money in the bank (which I probably will not be able to find)?
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 You have a complicated situation. it is surprising that the bank doesn't have a lien on the spec house you have for sale. Assuming you are correct, the bank has your collateral and two doctors on the loan. You may have bought out your partner, but the bank hasn't released him of liability.
The bank may ask that person directly for financials, so contact the bank and tell them what has transpired. If the bank doesn't feel the other doctor's position is as poor as you do, they may call the loan, asking both of you to pay it in full. That is why they get multiple signatures and commitments on a business and personal level.
If you can convince the bank that it is better off without the ex-partner, you may be able to offer the property as additional collateral to the $240K they already have. If you know when you believe the home will sell and what the profit will be, as well as a plan B, and how long will you allow it to remain on the market, when would you drop the price, what is the minimum you would accept and how long can you cover the interest payments, you may also see if you can reduce the principal debt to appease the bank, if needed, or if you can introduce a new partner.
Then there is the relationship of the lender and your ex-partner. That may factor into the lender's decision as well. It would seem that the lender has entrusted each of you with approximately $300K of unsecured debt, so there are many variables, but honesty is the best policy and being honest with your lender is important.
Published on BankingQuestions.com 8/11/10
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