Advice on how to proceed?

Question

Hi, everybody!

We recently got a contract on our very first investment, a two-family unit where we will house-hack in one unit until the small acreage/farm of our dreams comes on the market. We did this because the farm of our dreams WAS on the market, but somebody out-offered us, so we decided to just buy a sound little investment property first and wait for our luck to change.

Well, whoever was trying to buy the farm had their financing fall through. My agent just called me and told me all about it. Apparently multiple lenders refused to do a residential loan on the place due to the number of outbuildings and the presence of too many kitchens. (It has a commercial kitchen in its renovated barn, plus two bunk house outbuildings which each have kitchenettes. The current owners used them to house interns while they were running the farm.)

It sounds like a commercial loan will be the way to go for this property. I'm on an island and buyers aren't a dime a dozen here...I think it's reasonable to expect this farm to remain on the market for at least a few more months. That gives us some time to strategize.

We are members of Navy Federal Credit Union, who offer some great residential products, but I haven't looked deeply into their commercial products yet. But other than NFCU, what other options should I be on the lookout for? We won't have 25% for a down payment until at least mid-2018; I'd like to shoot for mid-2017 to get this property. We're open to considering a number of different strategies, including working with an investor for capital or...whatever else anybody can suggest.

What should we be considering in order to get a commercial RE loan? Anything we should be wary of? If you were trying to buy this property, how would you go about it?

List price is $800K (which is pretty typical for a house + outbuildings on sizeable acreage here) but I am fairly sure the sellers would come down, maybe significantly, in order to get this property sold sooner rather than later.

Thanks for any help or food for thought you can provide!

Libbie Grant · Answer

That's a great idea. I know the buyer who made this attempt tried with some small local banks/credit unions and they weren't able to help them, but they were looking at residential loans (presumably due to the smaller down payment), not commercial. I'll give them a call tomorrow and start talking. Maybe they do actually have favorable terms for commercial stuff...lord knows they're trying like crazy to stimulate the economy on this island.

Libbie Grant · Answer

That's great advice...thank you, Jennifer! I'll start doing due diligence now.

We are currently in the midst of a 90-day close for our residential/investment property. Funky, I know, but the seller hasn't found a place to move yet and our lease on our rental wasn't up for 90 days anyway, so we were fine with it. So I don't mind doing a 90-day close again. I'm in no hurry to get this place...but I do want THIS place if I can swing it!

Sure will be tough to come up with 25% liquid cash on this purchase in just a few months, though, unless something unforeseen and really spectacular happens with my career. (Not likely!) I am hoping I'll be able to find some way to finance it for less down, which I understand is not typical with commercial loans. Income-wise, we could handle the mortgage just fine (particularly since those two bunk houses would STR for about $50K annually, and we'll have about $12K annual cash flow from our first property) but that down payment is a doozy.

Jennifer Lee · Answer

Because your unknown is the financing I think the key is to find the lender, big box banks aren't that helpful when it comes to these kinds of oddball deals. smaller community bank may help.

And to retain your business, they may even refer you to someone that do do these kinds of loan.  Also call boutique loans offices too, that does everything ;p

Shawn Ackerman · Answer

@Libbie Grant Congrats on getting started on your first REI deal.  Your on your way!!  Sounds like your deal has a couple of things that need ironing out, that's fine, they all do.  Persist and you will win!  Good Luck.

Jennifer Lee · Answer

First I would talk and call around for a commercial lender in your area. Then go from there....

Once you have that figured out and it's still feasible, I would contact the agent. Commercial deals are usually 90+ day.  you have a lot of due diligence to do.

If the unit is still on the market, you can get the ball rolling, ask why it fell through in more detail.

On most commercial deals, some due diligence up front maybe needed even before we put offer in. talking to county, talking to tenants and neighbor kind of stuff. Inspecting the building, looking at leases, checking out the land plot or survey.  Making sure what is there now is conforming, that you will still be able to use it as it was, is important.  or if you want to change its use, you are allowed.

And knowing that the deal fell through from financing; you can say, "I m interested, but let seller know I have to figure out the financing.  I want to make sure I can close so we don't' waste time".  Tell them I was thinking it would be residential loan, now I have to switch gears.

If the listor is good agent, and there isn't other interest they may even work with you to get you what you need to secure financing.