Why can't a multifamily property be sold to an owner-occupant?

14 Replies

Greetings all! 

I am new to real estate investing. I've been looking into small multifamily (1-4 units) in Baltimore. My strategy would be to buy as an owner-occupant to take advantage of FHA financing.

While trying to set up time to view a property, the seller's agent requested that I send "proof of funds to purchase or lender letter ( commercial loan) as well as proof of funds to close prior to scheduling."

After sending a pre-approval letter, he responds again:

"She will need at least 10% down ( most likely 30%) as this will have to be a non- owner occupied investment purchase. Seller has been thru the ringer with unqualified buyers. She will not allow showings unless prospective purchasers demonstrate they have the ability to purchase her property."

I am just curious:

(a). Is it common to have these kinds of requests before viewing multi-families?

(b). Why does the seller believe that I could not purchase the property as an owner-occupant? 

Thanks a bunch for the insight! 

From what I understand, a 4 unit can be purchased as an owner occupied... Not sure what the issue is.

Because these are commercial loans. No FHA financing on these. It is common to show proof of funds. If you put anything down, make sure it's not "hard".

A commercial loan is different. I have bought homes for myself at 5% that I am going to live in. Honestly unless that property is perfect and at an amazing price to be worth the headache I will continue to look.

You can owner occupy 25% of it. But that doesn't mean that it will qualify for the FHA-203B program. Check with your lender on their underwriting rules. You may also find the basic rules on the FHA website. There are also FHA products for multiunit buildings. But they usually require 20% equity. They also demand strong accounting history.

a) Yes it is quite common for requests such as those before viewing multi-families. The more units, the higher bar of "pre showing qualification". Remember that to show the property, they will most likely need to disturb their tenants, also tipping their hand that they are selling - in many cases the tenants do not know.

b) It sounds like your particular owner has had a number of offers fall through. I wouldn't take it personally - but more as this particular property and/or owner. Remember that FHA mortgages have very stringent requirements for condition of the property, and its possible the current owner has gone through the inspection process and found that the property is lacking in certain areas, perhaps in items that the owner is unwilling to remedy prior to sale.

Last note: you wrote that the owner specified it would NOT be able to be an owner-occupied purchase... was the property fully rented with leases in place? That alone may have been the problem - depending on the tenancy rules in your state (or non-state?).

Happy hunting

@Valerie Moye It appears that the seller is looking for an all cash deal if you ask me, but that's just my limited observation. To answer your first questions it's not uncommon or common, the lender would look at all of these items as well. I believe it goes back to what the agent said individuals who have been pre-qualified but when the bank makes it's final decision they don't meet the criteria of having enough for closing and three months of the mortgage in savings people or the other numerous stipulations. 

To answer your second question you could definitely purchase the building as an owner occupant, although if the seller doesn't want to sell to you they don't have to. I would suggest you find someone in the area that knows the market as well as having an agent that can talk to the other agent. I just had the same problem of trying to purchase a 4 unit in DC and the owner felt that with me being an owner occupant the banks wouldn't have appraised the building at what he wanted. So I lost the deal, but i understood why ultimately someone came with all cash at a higher price. 

It's interesting that the owner is saying that it can't be owner occupied have they said why that is? Is the building 100% occupied and no leases are coming up on expiration. Another cool tool to use that my realtor did was to offer one of the tenants money to break their lease early if that's the hold up. I think you should ask why, sometimes it takes a little hand holding when people have been burned consistently. My last suggestion is to begin looking at some other properties this one might be more than what you bargained for. Again just my suggestion I am interested to hear what others think. 

You would need to make sure the seller's agent know you are wanting to owner-occupy -- I think they are just making the assumption that you wouldn't. And you wouldn't need a commercial loan, you'd need a residential loan (so they're just wrong there, I think) but if it were an investor loan , i.e. non-owner-occ, then yes you'd need that larger downpayment so that's probably what they're thinking of. But yes, you can get FHA residential loans for 1-4 units.

One potential problem would be that you do have to honor the leases of the current tenants. If the property is fully occupied it might be difficult to co-ordinate the timing of a closing with a residential loan with the end of the lease of the unit you want to move in to. 

It's not uncommon for a seller not to show occupied multi-units unless they are certain of the buyers ability to perform.  They don't want to be disturbing the tenants all the time. In some cases they don't even want the tenants knowing that the place is for sale. Any offer you would make would be "pending inspection" and after you'd had a chance to check everything out you can renegotiate the offer if needed. 

Do you have an agent? They should be clarifying your situation to the listing agent.

Interesting. First time I've heard of that. I live in maryland also. FHA can be used for 1-4units and I believe on commerical property over 1million dollars.

"She will need at least 10% down ( most likely 30%) as this will have to be a non- owner occupied investment purchase. Seller has been thru the ringer with unqualified buyers. She will not allow showings unless prospective purchasers demonstrate they have the ability to purchase her property."

It's also possible that there is some misunderstanding here?  It might be on th broker's part of the Seller's part.   You should ask the Broker some of these questions that you are asking BP .   Tell him you do not understand  what his letter means and what the concerns are?    means?

It sounds like this owner wants to sell a property that is leased for months to an investor for cash.  

If you really like the property and feel it can be acquired for a reasonable price, you might want to partner with an investor that can put up the cash. Your strategy could then be to owner-occupy and FHA finance once one of the tenants is leaving. I think this seller is severely limiting their potential market, so I would look at what the numbers(with margins for safety) tell you if you do end up making an offer.

Given how difficult the seller is being with showing the property, this probably isn't the best option for your first property.  I can't imagine that the due diligence will be much fun with this seller. 

I JUST went through the same exact scenario with the seller of the duplex I have a contract with. I will be an owner occupant as well. The seller is actually spoke with my lender (with my permission) despite the prequalification letter.

The seller is a mortgage loan officer who was concerned that I was only putting 5% down on a conventional residential loan. He knew the Fannie Mae and Freddie Mac guidelines would required a minimum of 15% down because it is viewed as an investment property. You would think the my lender would know this but apparently he schooled them.

So, I had two choices. Go FHA (which FHA allows residential loans on 2-4 unit properties) OR put down a minimum of 15%-20% on a conventional loan. I went conventional because I do not want the lifetime PMI FHA requires.

She will need at least 10% down ( most likely 30%) as this will have to be a non- owner occupied investment purchase. Seller has been thru the ringer with unqualified buyers. She will not allow showings unless prospective purchasers demonstrate they have the ability to purchase her property.

I read that like this: "The seller has already tried to sell this to OO buyers who are trying to buy with low down loans like FHA. The property doesn't pass FHA's stringent inspections. So, the buyer needs to be using a conventional or commercial loan and that's going to require a bigger down payment. Don't waste my time with low down, OO buyers. They won't be able to close on this property."

I'm assuming it's something similar to what John said.

They likely already had an FHA buyer or two that did not work out.

You are all awesome. Thanks for the outpouring of wisdom on this issue! I did request additional clarification from the seller's agent, but never received a response. In addition, I realized my agent is also not very experienced with multi-families either. 

All in all, this wasn't the property for me! 

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