is there a vacancy % factor that lenders will not lend beyond

23 Replies

I own a 4plex, which is one of 23 buildings. I recently found out that there could be 30-35 units that are currently vacant out of a possible 92. This is a vacancy percentage of 33-38%. 

Would fannie mae or freddie mac look at the vacancy % and is there a upper limit cannot go beyond?

Terry

Fannie/Freddie would not touch that. They will want to see an economic occupancy of 90%+ for the past 3 months consecutively. You could still buy the building, but would need to use a bridge lender or possibly a local bank or credit union. After you get it repaired and stable, then you could refi it with fannie/freddie or other non-recourse

If you own just one of the 4-plexes out of 23, I assume this it not all part of a single apartment but rather all separate properties with separate owners. Perhaps at one time a condo conversion? And I assume there is an HOA too? If you're trying to buy all of these up you will need to initially buy enough of them to control the HOA. It's too risky if you don't.

But to your original question, yes, all lenders look at the vacancy number. Different lenders will have different tolerances. Fannie and Freddie themselves do stabilized properties so you're talking 85%+ and preferably 90%+ occupancy. You can find other lenders that will lend for more heavy value add properties but your terms will reflect. Potentially you could get a bridge loan that you roll into an agency loan after you stabilize it.

@Todd Dexheimer

@Michael Le

I own (1) of the 23 4plexs, and the management company and HOA has been a nightmare. I was thinking of selling my 4plex, but if I sell, and buyer wants to get a loan, then having a high vacancy factor of 33% will kill any deal.

I think I need to get on HOA board and start making good decisions for past mistakes. There is no excuse for such a high vacancy factor of 33%. Not sure how management company or HOA board can defend themselves on this.

Thanks.

Terry

Don't have anything to add to the above comments other than HUD would also not be a fit. They want 85% occupancy for at least 6 consecutive months.

@Todd Dexheimer and/or @Michael Le just curious, but what might a bridge loan scenario look like? For example, let's say that you have a building that qualifies for a Fannie/Freddie except for occupancy. Bridge loan from a community bank? Private lender? After you have the property at 90%+ occupancy for 3 months, is the Freddie/Fannie process the same? Looking at closing on the refinance in 60ish days?

I'm really curious how this process works (or the pitfalls) if you buy a building with a bridge loan or you pay all cash with the ultimate plan being to refinance into agency debt.

@Scott Skinger  most bridge lenders are going to be a three year interest only loan at high interest rates around 7 to 9%. They are going to have a prepayment penalty as well so refinancing and a few months is going to be very expensive. If you can get a local bank to do it often times they are much more flexible and sometimes have no prepayment penalty's. Local bank would just get you financing at normal rates and terms.  Each bank/credit union is different so you would want to talk with them directly.

@Terry Lao if bad management continues, it will keep hindering potential buyers’ options for financing, therefore, keeping the market value of those units down as they aren’t “marketable” 

Only options for a potential buyer are private mortgage and/or pay higher rate.

I had this scenario myself where I owned individual condos in buildings governed by associations. My problem wasn’t vacancy or dreadful financials for the assoc, it was the high number of investor-owned units (another reason many lenders won’t touch it). 

Ultimately, I sold and am now looking to move that money into a 1-folio multifamily building where I control all of it and don’t have to depend on anyone else.

@Scott Skinger , to add a different perspective from Todd. My experience is that you don't need to go to a local bank to have no pre-payment penalty. I've received bridge loan term sheets from the same DUS lenders that ended up providing me the agency loans. The lenders will waive the penalty as long as you roll it into a Fannie/Freddie with them. So you could end up paying origination twice and there is the high interest rate, as Todd mentioned, but you do get interest only. Pontentially you could get 2-3 years IO on the bridge and then roll into another 2-3 years IO on your agency. Obviously you won't be paying down the principal but your cash flow will be better. If your plan is to increase value and sale after 5-6 years anyway then the principal pay down won't likely be a big part of your business plan.

Originally posted by @Terry Lao :

@Todd Dexheimer

@Michael Le

I own (1) of the 23 4plexs, and the management company and HOA has been a nightmare. I was thinking of selling my 4plex, but if I sell, and buyer wants to get a loan, then having a high vacancy factor of 33% will kill any deal.

I think I need to get on HOA board and start making good decisions for past mistakes. There is no excuse for such a high vacancy factor of 33%. Not sure how management company or HOA board can defend themselves on this.

Thanks.

Terry

As pointed out, you have more than occupancy issues. If ownership of the complex is 50% investor or more then you will have trouble with GSE underwriting. Properties like this, with nonconforming underwriting characteristics, many times become difficult to unload unless you can find a cash buyer or buyer with a commercial lender willing to waive occupancy and OO density limits. I have played in this space as both buyer and seller. In general the best (most profitable) angle, although the most difficult, is to sell the totality of units as a package... which requires everyone to be on board to sell. With 1/3 of the place empty, though, I would be looking to consolidate, stabilize, and reposition the whole property. But that's me. I'm not you;)

@Terry Lao  Each lender will be different, but high vacancy rates is definitely not a good sign for any lenders to poor money into. I would recommend you look for a bridge loan as well. 

These 23 4plexs are all owned by investors, so no owner occupied issues. I just found out about the high vacancies by asking each owner and doing a survey. The management company stated they do not give that information, as it is private. I told management company that this vacancy factor will affect every owner who is trying to sell their building. My survey are from actual owners who would know if their apts are vacant. Total of 23x4 = 92, and so far 25 with 11 who did not answer. Based upon forecasting my estimate will be 30-35. 

If management company and HOA board is suppose to maximize cashflow, appreciation, and value, they are certainly no doing this and should resign.

Terry

@Terry Lao since you are selling just your property, it is your vacancy percentage which matters. You should be able to product rent rolls for the last 2-5 years documenting your vacancy rate. Just because similar properties nearby have high vacancy rates doesn't mean yours does. Very often high vacancy is a sign of poor management not necessarily a problem the new owner will have.

My appraisals generally show a rent comparison. The appraiser will use existing leases as the rent basis if available, or will do market comparison for rents. I don't think they care as much about vacancy. Usually they will require the buyer to have some cash reserves to account for vacancy.

Keep us updated, interesting question.

It depends on the lender, the type of deal and where the money is coming from.  A lot of multi family lenders like to be above 85%

@Terry Lao , from my experience, HOAs could care less about anyone's cash flow. They exist to enforce rules to protect property values, ensure a clean, safe, functional neighborhood, etc. Basically, enforce rules for the common benefit of residents....your cash flow is not their priority. Also, if your building is in CA, good luck dealing with the HOA...they do whatever they want.

Regarding "These 23 4plexs are all owned by investors, so no owner occupied issues." You missed my point. My point was that in this complex, depending on how it is actually declared and platted (w/ covenants, common areas, etc.) I would say that 0% OO is far below the 50% OO minimum, so your (or your buyer's) chance of financing via a Fannie Mae loan is 0%. But I am not a loan broker. That's who you need to engage to confirm the underwriting requirements for your complex.

And as Russell points out, in general an HOA doesn't exist for your cash flow. Check your covenants, by-laws, and declaration to see the scope of their involvement in the complex. The good thing is that this HOA board is made up of 100% investors (since that's the owner make-up) and from my experience these type boards are amenable to constructive criticism, including governance improvements.

I called my lender regarding the vacancy rate and what maximum % will fannie mae/ freddie mac lend up to. An actual underwriter said, " up to 50%". This is good for me as I am able to sell my 4plex. However, if any property had 50% vacancy factor this is a serious sign that there is management and HOA issues, or both.

Can anyone confirm this 50% occupancy rate?  Though I total trust the answer from my lender and underwriter.

Terry

@Alexander Felice

Since you are an underwriter, can you answer above topic question?

Is there a vacancy % factor that lenders will not lend beyond?

Terry

Hi Terry - I'm an agent in Florida, and I have worked with a lender that will on a property that we're working on that is 100% vacant... they're open to doing a 50% ltv, rather than the normal 75-80% LTV, because it's vacant. Let me know if that contact can help you at all... and I personally work with investors form out of state buying investment property in FL... many investors from California & overseas.

@Terry Lao I wish I could be more help here. While I do underwrite for CRE quite often, since I work in SBA lending, one of their requirements is only owner-occupied business. This means I never see passive multi-family buildings, so I'm unsure of their specific requirements.

that said, 50% occupancy is awful and lending on that would seem difficult to say the least.

if your building is one of 23 it seems unreasonable for you to bear the burden of a total vacancy rate. If that were the case then it would create a race to the bottom of who could sell first, Especially with prices out here being inflated. If this truly is the situation then maybe your best bet is to do the same, race to sell yours first while prices are high.

Also, HOA's are a deal killer for me for this reason. try to get on the board if you can


@Alexander Felice

I'm actually not in hurry to sell and my building is performing very well. It is the other buildings, other owners who do not actively participate, HOA board, and management company that should get the blame.

I think these have potential to get to $300k in about two years, which is my exit point. 

I will try to get on HOA board.

Thanks.

Terry

yeah I'm not really advocating to sell, I'm just yapping

sorry I can't be more help my friend.

This property does not fit conventional guidelines. You will have to go alternative financing, stabilize the property then refinance into a conventional loan. You can expect to put 25-30% down with rate around 6-9% on a short-term note from 2-5 years and no prepay with some sources. 

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here