How to finance MF with 10% downpayment when property is fully leased

Question

Hi all, we are in the process of buying our first multifamily in Chicago. Building is 3 units and all leases run until 8 more months. We would like to purchase as a owner-occupied, to get a lower rate and to put a downpayment of only 10%.

Our mortgage agent suggested to buy as an investment and then refinance, but is not a good idea since we cannot take cash out (we don't have enough for the 25%).

We thought of sending an offer contingent on one of the units being vacant, but the seller doesn't want to put that into written.

I am curious how other people buy multiunits for owner occupied, since everybody will face the same problem that want to live in one unit and need to break a lease BEFORE the closing.

Thanks for the help

Zack Karp · Answer

@Jose Ignacio Prieto

If buying as a primary, you need to be able to occupy a unit within 60 days of closing. Sounds like you are aware of that already. What I have seen successful in this situation:

1. Push the closing date to 59 days before the end of the first lease that expires (assuming you will be occupying that unit, even temporarily until one of the other units are available)

2. Have the seller offer the tenants a "cash for keys" to break one of their leases early. You might need to fund that, either with a higher purchase price, or something creative.

Otherwise, there are no other options that would allow you to qualify to buy this as a primary residence. One of the units needs to be vacant within 60 days of closing, and there is no bending to this guideline.

Best of luck!

Caleb Brown · Answer

You can't break the lease. Either you wait it out or you do 25% down. Doesn't make sense to do a refi down the road unless it was a few years later or rates were way cheaper.

Andy Nathan · Answer

Is any work needed on the property? If so, a rehab loan might be a good option, especially if the property has a higher ARV (After Repair Value) in the future. With this type of loan, you may be able to put down 10-15%, but keep in mind that the renovation will add to your overall costs later on. Otherwise, the other points mentioned are valid.

Jose Ignacio Prieto · Answer

Thanks all for the replies. We are currently negotiating with the owner, but tenants don't want to leave. They were offered up to 4 months of free rent but nothing.... apparently we will just pass on the deal

Joshua Christensen · Answer

These are all great options. In any case, you need to get the deal into contract and tie it up with the seller.

Offers to Seller.

1. CASH FOR KEYS - Seller to tenant to vacate. Good option above, sounds like the seller doesn't want to do that.

2. EXTENDED CLOSING DATE - extend the closing to 59 days before expiration of one of the leases.

3. SHORT TERM OWNER FINANCE - Ask the seller to carry the note for 12 months until you can owner occupy. Give him the down payment you were planning on, then refinance it as owner occupied when it's time to buy him out.

Gino Barbaro · Answer

@Jose Ignacio Prieto

A lease is a contract between owner and renter. If there are 8 months left, not much you can do in the short term.

An investor can buy the deal, and wait until the lease expires, and send a non renew.

You can always offer one of the residents an incentive to leave, such as cash so you can have a vacant unit

Gino

Jonathan Klemm · Answer

Hey Hey @Jose Ignacio Prieto - Congrats on your upcoming Chicago Multi-family purchase.

First off, I am curious why you want to put down 10% instead of 5%?

I think you have about 90 days to move into the property for an owner-occupied loan but I am not sure if that differs between FHA vs. conventional - @Zack Karp or @Jose Valdovinos could confirm that...

Either way, I'd follow the advice of others above...give the seller two or even three separate offers that work for you. If you have to buy it as an investment loan and then refi, make the terms reflect that.

Chris Seveney · Answer

If they are on existing leases they cannot terminate a lease, only if it is month to month. Do you know when the leases expire? I would make an offer contingent upon one of the units being vacant as you want to live in it as an owner occupant. That is not out of the ordinary.

Justin Moy · Answer

I'd give the seller a few options. It sounds like the deal is more enticing and therefore more valuable if they can deliver a unit vacant. I'd look at when the next unit lease expires and you can either...

Delay closing until it's expired and vacant

Give them another offer that's less enticing to not deliver the unit vacant

When it has to do with financing the playing field is pretty level, every buyer will be able to get more competitive with a vacant unit

Jason Taken · Answer

Negotiate seller financing.

How to finance MF with 10% downpayment when property is fully leased

How to finance MF with 10% downpayment when property is fully leased

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