Comps on 3 duplexes. Residential or Commercial?

Question

Hey Yall!

I am currently working on a off market deal. It's 3 duplexes. They are right next to each other with the third duplex being behind one of the others (2 duplexes on the same lot). I work with seller. He is having trouble getting a couple of the units rented and the units are outdated. He hasn't given me a price yet, but he is willing to seller finance.

If I am able to get this property my plans are to bring it up to date and then refinance out of the sellers finance. I will also house hack this property.

My questions is: When I go to refinance would the lender look at this property as commercial or would they look at it as residential? I know the appraisal would be different for commercial seeing as they would use a cap rate.

Christian Thompson · Answer

Thanks @Erik W. That makes sense. There's been a few duplexes they should be able to go off of.

Erik W. · Answer

@Christian Thompson,

In my town, anything over 4 unit, regardless of how they are configured will go via a commercial loan.  However, will be comp'd based on whatever makes the most sense.  So in this case, unless you have a lot of 6 units spanning 3 buildings, it will likely be balanced against duplexes and adjustments made for the added units.

I've had a few challenges getting 4 plexes refinanced recently: there simply are not that many 4-plexes around here!  So the bank will comp against duplexes and double the value.

For six units most lenders I know won't care about NOI, CAP Rates, etc.  They will care your income plus the rents (discounted to 75%) are sufficient to pay the debt service.  NOI / CAP Rates are for BIG properties.  Think 100+ units.

Christian Thompson · Answer

Thank you @Brad Hammond. So my best would be to talk to a lender and see what type of loan they would do and if they would go off NOI/Cap rate or use traditional comps for duplexes in that area?

Brad Hammond · Answer

Hey @Christian Thompson, that sounds like it could be a good deal, congrats on making it happen.  I am guessing the lender is going to comp it depending on the type of loan it will qualify for.  And that will depend on how many units are on a tax lot.  It sounds like there are no more than 4 per lot, so it should be a residential loan/comps.  Either way, they are going to be using a similar way of comping it (cap rate/NOI).