(3 unit + 2 ADUs) vs. (2 units + 2 ADUs)

[Kenny Wang]

Greetings!

Scenario A :  The project (in Orange County, CA) I am undertaking is a grand-fathered 3-unit property where I will renovate these units and add two ADUs to the lot. At the end of the day, it will have 3 separate buildings and 5 rental units. 

Scenario B : a ground-up development of two legal units plus two ADUs, all detached. This is the 2 units + 2 ADUs scenario.

I am worried Scenario A might push future financing option into commercial real estate only, which will limit my cashout refi options and the future buyer pool.

From a lending perspective, since a "Land Use Restriction" is required to be recorded on the Deed to limit rentals to be longer than 30 days, the property thus will not be considered a true "5 unit commercial property" and my worries in Scenario A will not come to pass, right?

I guess from an appraisal perspective it could be a different story...

Thanks for reading and please share your thoughts and comments! 

[Chris Mason]

Quote from @Kenny Wang:

Greetings!

Scenario A :  The project (in Orange County, CA) I am undertaking is a grand-fathered 3-unit property where I will renovate these units and add two ADUs to the lot. At the end of the day, it will have 3 separate buildings and 5 rental units. 

Scenario B : a ground-up development of two legal units plus two ADUs, all detached. This is the 2 units + 2 ADUs scenario.

I am worried Scenario A might push future financing option into commercial real estate only, which will limit my cashout refi options and the future buyer pool.

From a lending perspective, since a "Land Use Restriction" is required to be recorded on the Deed to limit rentals to be longer than 30 days, the property thus will not be considered a true "5 unit commercial property" and my worries in Scenario A will not come to pass, right?

I guess from an appraisal perspective it could be a different story...

Thanks for reading and please share your thoughts and comments! 

Actually, BOTH scenarios push this into commercial:

https://guide.freddiemac.com/app/guide/section/5601.2

See:

(a) Ineligible property types

Mortgages secured by the following property types are not eligible for purchase by Freddie Mac:

A 2- or 3-unit property with an ADU that does not comply with zoning and land use requirements (illegal zoning)

• A 1-, 2- or 3-unit property with two or more ADUs
• A 4-unit property with an ADU