Legal non conforming options needed

7 Replies

Tldr- Looking for advice or expertise on getting a 90/10 loan on legal non conforming owner occupied property. Bonus points if you know solutions in Colorado Springs.

Long story - under contract on a legal non conforming 4 unit in Colorado springs. Built in 1947, main house has 2 basement apartments, and a cottage. We were trying to get it appraised as a SFH with an ADU but the appraiser said they would only do it as a 4 unit. Problem there is zoning doesn't allow for 4 units on this property. The seller had a VA deal fall through last year that I just learned about today where they tried to get a rebuild letter from the city and the city refused. We are (somewhat) confident we could get a rebuild letter for the cottage and the house, because those existed prior to annexation, but there isn't any historical documentation (we've found) showing that this has always been a four unit. The oldest I've got is the assessor's card from 1966 saying it had 4 dwellings but darn if those 14 years don't make a difference.

So I'm in this strange catch-22 where I can't borrow on it as a single family with an ADU because of Fannie Freddie guidelines requiring the appraiser to determine what the highest and best use of the property is (it exists as a 4 unit today, so it's that), but I also can't lend on it as a four unit because it would be legal nonconforming and in the event of a total loss the collateral could not be rebuilt as is.

The listing agent was against VA (I now know why) but thought this would go through as conventional. I've only got 15% down, 20 if I'm really pushing but was trying to do this as an owner occupied 90/10. I'm locked at a killer rate for a SFH, but my bank can't do 90/10 on a 4 unit and doesn't do portfolio. My contract is for 90/10 and there are other issues that buy me time (closing was expected 30 June but likely could slip if needed). The seller is motivated and looking to 1031 this. I'd like to have my cake and eat it too, but I'm not sure if I can make this work.

One Commercial bank I've talked to won't lend on owner occupied and I was using this deal to bring me back to Colorado. I'm talking to some portfolio lenders tomorrow, but no one has committed to anything yet. My debt to income is no problem. I'm open to creative, legal, solutions, but want to minimize risk and cost.

@Jason Minnich

US Commercial is a broker.  We use every major lender in this space and over the last 30 years I've had significant experience with conventional and subprime lending.  I tell you that so you can put some confidence in what I'm about to tell you; without a 100% rebuild letter, you won't get a loan on this property.  

It has nothing to do with VA, FHA, conventional or non-qm; if the building burns down, you won't be able to rebuild it as it is (or a better way to put it is as the lender is lending on it) and for that reason, they will all tell you no. Please don't go down the rabbit hole of this guy told me this or that and was appraisal money only to be told you need a rebuild letter. The answer is really pretty straight forward; you will need to have either a zoning variance, get the zoning board to change the zoning or punt.

Sorry

Stephanie

Jason,

I live in and invest in Colorado Springs. If you haven't found an answer reach out to me. We can probably network with a number of folks and see about possible options for this deal.

Cheers.. 

Originally posted by @Stephanie P. :

@Jason Minnich

US Commercial is a broker.  We use every major lender in this space and over the last 30 years I've had significant experience with conventional and subprime lending.  I tell you that so you can put some confidence in what I'm about to tell you; without a 100% rebuild letter, you won't get a loan on this property.  

It has nothing to do with VA, FHA, conventional or non-qm; if the building burns down, you won't be able to rebuild it as it is (or a better way to put it is as the lender is lending on it) and for that reason, they will all tell you no. Please don't go down the rabbit hole of this guy told me this or that and was appraisal money only to be told you need a rebuild letter. The answer is really pretty straight forward; you will need to have either a zoning variance, get the zoning board to change the zoning or punt.

Sorry

Stephanie

I really appreciate the feedback. Thus far I've been getting a lot of optimistic statements from people, but the more research I've done the more I've come to accept this is a defect in the property that needs a very specific solution in order to secure a loan.

It annoys me that the listing agent went through all of this a year ago and didn't disclose the defect only saying that it wouldn't go VA. It seems like most of the realtors I've been dealing with in the springs from the sellers side have been very overly optimistic compared to the reality of their product. Hopefully the research I did will encourage them to write a rebuild letter, but if they only write that the house and cottage could be rebuilt but not the basement apartments, is there any way to get it appraised not considering them as additional dwellings or does it really have to be whatever that point in time looks?

It's been suggested to removed the kitchen appliances and board off the exterior access in order to not consider them units for the purpose of the appraisal, but that seems really dumb to me. Especially given my intention is to use the units for income even if I won't need that income to qualify for the loan.

Thanks again for the advice and input.

Jason



Originally posted by @Jason Minnich :
Originally posted by @Stephanie P.:

@Jason Minnich

US Commercial is a broker.  We use every major lender in this space and over the last 30 years I've had significant experience with conventional and subprime lending.  I tell you that so you can put some confidence in what I'm about to tell you; without a 100% rebuild letter, you won't get a loan on this property.  

It has nothing to do with VA, FHA, conventional or non-qm; if the building burns down, you won't be able to rebuild it as it is (or a better way to put it is as the lender is lending on it) and for that reason, they will all tell you no. Please don't go down the rabbit hole of this guy told me this or that and was appraisal money only to be told you need a rebuild letter. The answer is really pretty straight forward; you will need to have either a zoning variance, get the zoning board to change the zoning or punt.

Sorry

Stephanie

I really appreciate the feedback. Thus far I've been getting a lot of optimistic statements from people, but the more research I've done the more I've come to accept this is a defect in the property that needs a very specific solution in order to secure a loan.

It annoys me that the listing agent went through all of this a year ago and didn't disclose the defect only saying that it wouldn't go VA. It seems like most of the realtors I've been dealing with in the springs from the sellers side have been very overly optimistic compared to the reality of their product. Hopefully the research I did will encourage them to write a rebuild letter, but if they only write that the house and cottage could be rebuilt but not the basement apartments, is there any way to get it appraised not considering them as additional dwellings or does it really have to be whatever that point in time looks?

It's been suggested to removed the kitchen appliances and board off the exterior access in order to not consider them units for the purpose of the appraisal, but that seems really dumb to me. Especially given my intention is to use the units for income even if I won't need that income to qualify for the loan.

Thanks again for the advice and input.

Jason

If the intention is to use the third unit for income, then get the zoning variance and the rebuild letter or find another property.  Walling off things and removing the kitchen only creates internal obsolescence that will raise issues with the appraiser.

 

Agreed, I thought it was creative, but frankly depressing. I'm uncertain how likely these letters are to get but I feel like I've submitted a fairly solid justification. I managed to find documentation going back to 1955 showing 4 families at the property, annexation was in 1952 so I'm getting closer to proving this has always been what it is. Right now I'm happy fighting for the letter, I'll ask for a variance if I get the letter and can close.

Jason



Wanted to update everyone. Got a rebuild letter that is technically accurate but questionable at best. I'm open to thoughts or interpretations. The seller is getting fed up with everything but might be open to seller financing but I want to understand if this is a long term defect or if this is actually stating that it could be rebuilt as is. Frankly, it's seems like it's still a good deal and they are talking about carrying it as a 15 year 3% interest with only 10% down. Open to opinions. The 15 year means not great cash flow as is but since I'll be owner occupied I believe I'll be able to AirBNB the cottage which should help for the cashflow too.

Thanks again for looking!

Link to the rebuild letter. https://drive.google.com/file/...