Hi BP, checking in with a question I probably should have asked this forum weeks ago regarding an issue that came up in the appraisal of a two-family university rental I'm under contract on.
Appraiser noted that a zoning clause in this particular area indicated that if the property were to be "totaled" so to speak, it would have to be rebuilt as a single-family home. Despite being a two-family for almost 70 years.
Initial mortgage loan fell through in underwriting because Fannie/Freddie won't touch anything like that, apparently.
Secured a portfolio loan that's actually better rate, but I am hesitant to sign the commitment since I feel like I don't understand all the possible implications.
The lender said she approved the loan because in their mind, a SFH might actually be more valuable in that unlikely event so it didn't affect their willingness to take on the debt.
I intend to buy and hold for at least 10 years, but I can imagine this issue will affect my ability to sell down the road, since a prospective buyer won't be able to get a conventional FHA loan just like I wasn't able to.
This property should cash-flow really well after some rehabbing to the one unit, but I'm realizing this limitation will also make doing any kind of cash-out refi more difficult as well.
Curious if this throws up any red flags for you veterans of the REI world that I, a relative novice, am not seeing. Would this be a dealbreaker for any of you? How would you all handle?
As always, I appreciate any help/advice you can provide! (Even dismissive, salty judgment of me and my query.) ;)
If the numbers work the numbers work. Have it insured in such a way that you won't lose any of your initial investment should it "become totaled", i.e. a meteor falling on it or it burning to the ground. Then you'll have a marketable SFH lot.
That said, I like having an effective exit strategy, and MFH already has a more narrow band of possible buyers than a SFH. In this case, that band gets even more narrow, so I would want to be sure that I was making good money on the front end to absorb that difficulty on the rear end.
I would probably do some checking on the zoning issue. There are often rights to rebuild exactly what you had so that you did not suffer a financial loss through no fault of your own - i.e., you couldn't put a 3-family MFH up, but you could rebuild the exact same 2-family MFH.
Yes, I think that in the unlikely event that the building actually burned to the ground, it would work out fine. My RE agent said the city told him they've granted variances in the past for similar situations. And my homeowners' ins said they would be pretty flexible on the rebuild in that situation while obviously following whatever zoning applied. Even if I didnt get a variance from city to do same MFH, I could build a SFH home with the same square footage, same number of bedrooms and separate kitchens and bathrooms, would just have to have common utilities so it's technically a SFH.
I'm more concerned about worst-case scenario planning for things I just don't see. Implications for resale as you pointed out are narrowing of buyer pool to more serious investors willing to seek non-traditional financing.
Once purchase goes through, I think the buy'n'hold renting wouldn't be affected in any way.
Thank you @JD Martin for the input!
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