I need your opinion BP!!! Semi Ethical dilemma.

16 Replies

Hey BP,

I have submitted an offer on a duplex in my area. All of the numbers add up as far as the property itself but I am torn on how to proceed with the mortgage on the house. Both units are currently occupied with one tenant having lived there for 6 years and the other for 14 years.

I have a pre-approval letter in the amount of 55,000 and the bank is asking for 14,000 down not including an additional 4 - 5k in bank fees, inspection, and title fees. In total I would need close to 20,000 on the safe side to close on the property. This would drain my investment account completely which I do not want.

On the other hand, I can claim i am going to live in the property (owner occupant) where the bank will then drop my interest rate to 3.6 from 4.5 and only require 4,000 as a down payment. I total I would need a little under 10k to close the deal. This would leave me a comfortable amount to seek other properties.

I do not want to put a tenant out, but I have been thinking about saying I planned on moving in and am having the current tenants watch the property for me. I would just collect some money from them but not have a current lease or month to month contract for only one month. After the month I would have them sign a lease or rental agreement and say I am no longer interested in moving in.

Okay it gets a little better I am not a Total outlaw. I really am looking for a new place and have my current townhouse on the market, but have not had any offers. I technically would move in if I could but don't want to pay on two different places and make a huge move.

I am not sure if this is illegal as I would be acting in good faith. There is no time limit I would have to live in the property because it is not an FHA loan. I could stay for a month and then decide to move.

The banker round about told me, without me asking, that they do not check and frankly he does not care because either way the bank gets their money.

But my question is specifically, does my idea sound immoral and is there another option?

Any help would be much appreciated.

Thank you,
Ryan B.

Hi @Ryan Boren ,

From my standpoint (and you have to choose what kind of business you are going to run) it would be unethical. The bank established rules for investors and rules to help people get into homes. I am sure you will be getting harsher tones, but it is sort of like me saying "Hey I go into homeless shelters and get food that I sell for profit to an elderly care facility... I mean they don't check". 

To some a smart business decision... personally to me not the way I am running my business.

Best of luck in your business.

Investors do what you are thinking all the time. The key is intent.

If it is your intent to move in upon the sale of your home there is nothing wrong with your plans. It is not mortgage fraud. The bank seems OK, they do this all the time with investors, so you should not be questioning your decision.

Evaluate your tenants closely and boot the least desirable one based on a full screening of each or choose the unit that requires the most amount of renovation work. Move in do the upgrades and move out to rent. You could also evict the second tenant at that point and reno it as well. Each would in theory get a higher rent after reno.

Do it.

What you propose is called Mortgage Fraud.  I do not recommend it.  If you apply asw an owner occupant, you must take residency in one of the units within 60 days of close of escrow. The lender will check this. 

@Mike Cumbie sums it up well, "To some a smart business decision... personally to me not the way I am running my business."

I agree with him. The fact is a lot of people do make the choice that is possibly on the wrong side of the ethical line but as mom used to say, "two wrongs don't make a right."  Build your business the right way! In the long run you will be happy.

Good luck with your purchase.

I am a new investor and just starting to learn the ropes but I would not do this.

The only work around I think that would be fair would be to do what Greg S. Said (move in renovate and then do the same to the other unit).

I am not sure if the bank will check or not but what if you need to get another loan from the same bank for your new place that you will actually move into?

Yeah... Mortgage fraud. If you used your real name on here (which you should) and have your location correct (which you should) you've now got an online archive of your dilemma. Should you get caught it would suck to have this entered in during discovery. 

Thank you everyone for the fast responses. I do now and will continue to run an honest business. I have just never come across this before, but I know it something I do not want to do. I will just have to cough up the money and rebuild with my 9 to 5.

I do like the idea of renovating one unit as a possibility to do an owner occupied loan, but I am not sure how that would work because I do own my townhouse free and clear. Unfortunately, my HOA will not let me rent it out. If i could it would be a cash flow beast.

How does everyone feel about putting tenants out that have been there for 6 years? I don't want the other tenant becoming fearful or possibly move out as well.

First step... get on your HOA board (nobody wants on them so a pulse is normally requirement 1), fight from the inside get that rule changed :)

I like long term tenants a lot, however if you can make a better cash position with them gone allowing you to renovate one and get a second property flowing along, I would think pretty hard about serving them notice and moving in.


I know it would not be great to kick them out.... but that is not your issue. If the other tenant becomes fearful and possibly moves out that is not your issue either. They have been there 15 years so either they will stay or if they move out you have the chance to renovate and increase rents that are most likely under market.

I know investors who claim every property they purchase will be owner-occupied and often when they already have existing owner-occupied mortgages, but it's not a safe business strategy. I would not personally do it. The risk of getting caught may be low, but you want to set yourself up from the beginning as a reputable investor within your community, with the banks, financiers and partners you establish yourself with and also as part of the greater real estate investor community that we all belong to. You just don't want to be "that guy".

There are virtually unlimited ideas through BP for raising additional capital - from partnerships, to family members to credit cards to 401k loans and many more. I would shop around your local banks (not big banks) and credit unions to find a more favorable financing option and I would look into some of the other finance options like RealtyShares (they're a BP podcast sponsor) before even considering claiming owner occupied if you know you truly are not going to live there. It's good that you're considering what to do and asking for ideas. This dilemma is one that a lot of people who are just starting out face.

@Ryan Boren

Shoot me a direct message. I may have a lender for you...   He only requires 10% on non owner occupied mortgages. He'll also get you the best rate available. Let me know if you're interested. 

Originally posted by @Ryan Boren :

Hey BP,

I have submitted an offer on a duplex in my area. All of the numbers add up as far as the property itself but I am torn on how to proceed with the mortgage on the house. Both units are currently occupied with one tenant having lived there for 6 years and the other for 14 years.

I have a pre-approval letter in the amount of 55,000 and the bank is asking for 14,000 down not including an additional 4 - 5k in bank fees, inspection, and title fees. In total I would need close to 20,000 on the safe side to close on the property. This would drain my investment account completely which I do not want.

On the other hand, I can claim i am going to live in the property (owner occupant) where the bank will then drop my interest rate to 3.6 from 4.5 and only require 4,000 as a down payment. I total I would need a little under 10k to close the deal. This would leave me a comfortable amount to seek other properties.

I do not want to put a tenant out, but I have been thinking about saying I planned on moving in and am having the current tenants watch the property for me. I would just collect some money from them but not have a current lease or month to month contract for only one month. After the month I would have them sign a lease or rental agreement and say I am no longer interested in moving in.

Okay it gets a little better I am not a Total outlaw. I really am looking for a new place and have my current townhouse on the market, but have not had any offers. I technically would move in if I could but don't want to pay on two different places and make a huge move.

I am not sure if this is illegal as I would be acting in good faith. There is no time limit I would have to live in the property because it is not an FHA loan. I could stay for a month and then decide to move.

The banker round about told me, without me asking, that they do not check and frankly he does not care because either way the bank gets their money.

But my question is specifically, does my idea sound immoral and is there another option?

Any help would be much appreciated.

Thank you,
Ryan B.

Don't do it.  Compromising your ethics isn't wise.  Doing what is legal and right is the only way to build a successful long-term business.

"Okay it gets a little better I am not a Total outlaw. I really am looking for a new place and have my current townhouse on the market, but have not had any offers. I technically would move in if I could but don't want to pay on two different places and make a huge move.

I am not sure if this is illegal as I would be acting in good faith. There is no time limit I would have to live in the property because it is not an FHA loan. I could stay for a month and then decide to move."

This OP statement clearly indicates their is no intent of fraud. If he tells his banker he is selling with the intent to move in the bank makes the decision as to yes or no on the loan.

Making the statement "I could stay for a month and then decide to move." I assumed was not intended as his plan but simply a statement referring to the conditions of a FAH loan.

There is no intent of fraud, the bank will make the decision based on having this information and there is no reason it can not be done.

There is no legal or ethical issue.

As for kicking out tenants there is no accumulated seniority with length of stay. Renters move, kick out whichever you choose, they are all the same.

The change to owner occupant and the interest rate you mentioned sounds like an FHA loan in which you are required to move into the property within 60 days and live there for 1 year. If you do an FHA loan and don't move in/live there you would be in violation of your mortgage/mortgage fraud.

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