Two houses on one parcel...advice for financing?

37 Replies

Looking to pickup my second purchase for rentals. Came across a really good value of a property for under $200k. When I passed it by our loan broker, he indicated that the underwriters have an issue with the property because it's two homes on a single parcel. Both houses are duplexes and are rented at the moment. Would be an ideal purchase, but it seems like I may not be able to get financing in the traditional way. Any specific suggestions you may have for me? I won't qualify for an FHA or VA loan. I presume that leaves me only with seller financing or private financing. Is there any other options out there? If not, anyone have suggestions for private financing in the Chicago area?

Thanks.

Shawn

Maybe from an appraisal standpoint it could get slightly tricky because an appraiser will base things on comps in the area and if there aren't enough valid comps then there may be an issue.

I faced a similar situation before in that a duplex and a house appeared to be on the same lot. After a VERY close parcel look up it was determined they were actually on two different lots, although if you looked at them you would swear they were on the same lot.

In your case if they are on the same parcel.....simply figure out which duplex is higher value, and have an agreement with the seller that you will buy the higher value duplex for $200K as long as they sign a warranty deed that also gives you ownership of the other duplex as well.

If they are NOT on the same parcel after all then you may need to get 2 separate loans...... 

@Shawn Bass - if it is built as 2 duplexes I don't know why that would be a problem. I own a few of those and one with 3 SFH on 1 lot. Try another lender

Many thanks everyone for your responses.  Will see if I can find another lender or look for ways to work around the two parcel in one lot issue.   Per Brian's comment it is definitely an appraisal issue as they can't find similar comps to compare it to.

Shawn 

Property is nonconforming. It won't pass any Freddie or Fannie algorithm the banks use so you won't be able to get traditional financing

It will need to be CASH or Private Money you use to buy this deal. THEN remember you will have this same problem when you go to sell the property

I have the same issue, with two separate houses on one parcel.  Shawn, did yours go through? Two appraisers so far have asked to be reassigned due to the 'complexity' .  After that, I called the county assessor, they did point me to two properties with the two houses on one parcel sold miles away, so perhaps they can serve as comps for the 3rd appraiser.  If acceptable comps are found, is it generally no longer an issue to obtain a conventional residential loan, as a 2 unit?  The lenders I have spoken with indicate if appraised as a one unit with accessory, it will work well.  I dont know why this wouldnt easily qualify for conv residential as a 2 unit though, since 1 to 4 units can fall under conventional residential loans, with 5 and greater under commercial.

@Alex Forest  - Yes my deal went through.  I was not able to use my traditional mortgage broker I using regularly because they didn't want to put in the effort for a "non-standard" property type.   I ended going back to my bank (Chase) who I have multiple different accounts with and they were highly motivated to get my mortgage business for the rental unit.  So they spent the extra effort to find a similar comp and they were able to underwrite it.  The rate was a bit higher with my bank than my traditional mortgage broker, but at least I was able to get it done.   Completely separate update on this deal was that the seller didn't disclose the property was in a historical district.  We found out after closing and boy has that been a fun set of challenges with the City of Aurora.   I don't know I'll ever do a historical building again...what a royal PITA.   Despite all of that, I think after the repairs / rehab we've done this place will cashflow extremely well.  So in the end it'll be worth it.

@Alex Forest sorry not sure if I answered your question completely.   Yes comps are usually what holds this up.  If you have a good comp nearby that can be provided to the appraiser, you shouldn't have a problem getting it underwritten, but you will need a lender who doesn't want to walk away from a more complex deal.  Sometimes your bank can be that good last resort in cases like this because they are motivated by your other business.  They'll put in more work to win the business.  Best of luck to you on your deal!

Thank you Shawn, appreciate the feedback.  I have done some legwork on this one to try to facilitate the process and help the appraiser.  With the input from the assessor, realtor, and my own research on comps.  I have also heard local banks can be a good Avenue for something like this, in part because they are more likely to hold the loan instead of selling it to a 3rd party market such as Fannie.  If it doesnt fit the narrow criteria, they pass, as opposed to a local bank that will hold and has greater flexibility.

One thing that surprised me is that I identified a local bank that gave commercial loans on very attractive and similar terms, and which would not care about having two houses or need comps. It was 4.75% rate fixed for 10 yrs over a 25 yr amortization with 70 to 75% LTV. Another I found was same rate at 5 yr fixed rate with 85% LTV. Prefer the 30 yr fixed at 4.75%, but comforting having the commercial as an alternative.

Have you explored the use of historic tax credits?  From what I understand they can be significant depending on the situation. I knew a developer that focused on those properties in large part because of them. 

This is not "non-conforming" - I know because I just closed on a property that is IDENTICAL to the OPs with a conventional loan. My property was two duplexes on one parcel. It took a while to find an appraiser that would take the job (and more $$$ for the appraisal), but it came back without any issues. Appraiser compared the subject property to other "similar" residential MF properties. Lender closed the loan without ANY mention that it was two duplexes on one lot.

Originally posted by @Federico Gutierrez :

Property is nonconforming. It won't pass any Freddie or Fannie algorithm the banks use so you won't be able to get traditional financing

It will need to be CASH or Private Money you use to buy this deal. THEN remember you will have this same problem when you go to sell the property

This is wrong. 

 

Originally posted by @Justin Tahilramani :
Originally posted by @Federico Gutierrez:

Property is nonconforming. It won't pass any Freddie or Fannie algorithm the banks use so you won't be able to get traditional financing

It will need to be CASH or Private Money you use to buy this deal. THEN remember you will have this same problem when you go to sell the property

This is wrong. 

 

What kind of loan product did you end up using?

 

Originally posted by @Federico Gutierrez :
Originally posted by @Justin Tahilramani:
Originally posted by @Federico Gutierrez:

Property is nonconforming. It won't pass any Freddie or Fannie algorithm the banks use so you won't be able to get traditional financing

It will need to be CASH or Private Money you use to buy this deal. THEN remember you will have this same problem when you go to sell the property

This is wrong. 

 

What kind of loan product did you end up using?

 

Conventional 30 year fixed - 25% down @ 4.875%. 

 

@Shawn Bass

Subdivide the property into 2 parcels or do a commercial loan then subdivide later after seasoning. Check with local zoning to see what hurdles to jump.

Clint

Justin, was the lender a local bank that holds the loan?  As opposed to one that sells it off to a 3rd party.  Just wondering if that was a factor.  Also, it seems that the lender likes ordering their own appraisal, as opposed to taking one that I would find a d commission.  I wouldn't mind taking the time to find an appraiser that would take it on, paying more, but it seems they would not accept it and want their own.  I am not certain about this, so should verify, but that was how I thought they wanted to handle it.  Thanks everyone for the earlier feedback.

I just wanted to follow up to say 'for the record' in case it's useful for the next person that comes across this thread...mine did close as well.  The appraisal was a challenge.  Start to finish, three appraisers, about 6 appraisal revisions, two contract extensions, and 3 months later, it closed with a conventional 30 yr fixed, 20% down at 4.75%.

I realize that this purchase closed a long time ago, but for purposes of selling, it would help to spend a little to subdivide the lot.

Im late to the conversation but i don't understand the problem. If it is a duplex (multi-unit) zoned it should just have 1 parcel and 2 units on one lot. My duplex I purchased back in 2010 was 1 parcel number and I got conventional financing. I pay property tax on that duplex for just that 1 parcel number. Every traditional duplex i see out here in socal is 1 parcel number if it is zoned multi-unit.

Im in escrow right now for a property (2 on 1 lot) but they are detatched condos (no HOA fees) requiring 2 transaction and 2 parcel numbers. They could actually be sold seperately but I am purchasing them together. So there are those cases too but they are not as common.

Another popular trend now is ADUs that are built on single family residence zoned. Lenders may have problems giving rental income for the ADU since the parcel number does not state multi unit. I think in that case it is up to the appraiser to state that the ADU can be rented out and that way you can get rental income for qualification purporses.

Originally posted by @A Schwartz :

I realize that this purchase closed a long time ago, but for purposes of selling, it would help to spend a little to subdivide the lot.

Agreed. The zoning does not allow for an easy divide. It will take some effort and expense, but if realized will also add significant value.

 

Originally posted by @David Pai :

Im late to the conversation but i don't understand the problem. If it is a duplex (multi-unit) zoned it should just have 1 parcel and 2 units on one lot. My duplex I purchased back in 2010 was 1 parcel number and I got conventional financing. I pay property tax on that duplex for just that 1 parcel number. Every traditional duplex i see out here in socal is 1 parcel number if it is zoned multi-unit.

Im in escrow right now for a property (2 on 1 lot) but they are detatched condos (no HOA fees) requiring 2 transaction and 2 parcel numbers. They could actually be sold seperately but I am purchasing them together. So there are those cases too but they are not as common.

Another popular trend now is ADUs that are built on single family residence zoned. Lenders may have problems giving rental income for the ADU since the parcel number does not state multi unit. I think in that case it is up to the appraiser to state that the ADU can be rented out and that way you can get rental income for qualification purporses.

The issue mentioned above was the appraisal. Appraisers were having a difficult time finding comps. The area I referenced was low density.  Finding recent sales in near proximity that had two houses on one lot were rare in the area. They couldn't appraise each house separately and then add them together for a total. Even the county assessor got creative, grouping the square footage of each house together and reporting it as one.  If you have an area where that housing type is not uncommon, then comps should be easy to find and easy work for the Appraiser. There can be other issues with this type of setup that arise , but appraisals are mostly what was referenced above I think.

Late to this, but how would this work as an owner occupied? Would you be able to get any better deal that way? I know FHA won't touch two separate buildings (at least that is what all my lenders say) but could an owner occupied conventional work in this situation?

We have our eye on several properties with multiple buildings on them but plan to owner occupy.