Property used as commercial B&B. Can new owners get resi mrtg?

Question

Hello BP:

I have an interesting situation.

8 years ago, a residential property was purchased by my client and converted to a bed & breakfast and has been functioning as one since.

Client now wants to sell, and, due to the fact that good records weren't maintained, it's being sold/marketed as a residential property.

Someone I work with in REI with quite a bit of mortgage lending background with underwriters advised me that whoever buys the home will likely have a very difficult time getting the deal done with a conventional mortgage, because during the due dilligence phase, the lender will find that the property has been running as a bed and breakfast, and therefore will shy away from it... even if the stated intention is to use it as a primary residence.

Can anyone with background on how the risk factors of these deals are considered and underwritten, or knowledge of common underwriting practices shed some light on this?

I appreciate your time in advance!

Stephanie Medellin · Answer

@Patrick Diamond That's actually a really interesting question. I have seen more often than not that properties such as farms and ranches, condo hotels, income producing properties, or other unique properties were ineligible. Many lenders won't loan on them.

After reading your question, I did a little research and found one of our lenders actually does allow certain mixed use properties according to Fannie Mae guidelines, so there are probably others that don't have that overlay. This doesn't fit the situation you described exactly, so it's still a bit of a gray area, but here's what I found:

Mixed-Use Properties- Properties that have a business use in addition to their residential use, such as a property with space set aside for a day care facility, a beauty or barber shop, or a doctor’s office are eligible per the following:

•  Property must be a one-unit dwelling that the borrower occupies as a principal residence
•  The borrower must be both the owner and the operator of the business
•  The property must be primarily residential in nature
•  The dwelling may not be modified in a manner that has an adverse impact on its marketability as a residential property.

The appraisal for a mixed use property must:

•  Provide a detailed description of the mixed-use characteristics of the subject property;
•  Indicate that the mixed use of the property is a legal, permissible use of the property under the local zoning requirements;
•  Report any adverse impact on marketability and market resistance to the commercial use of the property; and
•  Report the market value of the property based on the residential characteristics, rather than of the business use or any special business-use modifications that were made.

Of course, a day care facility, or a barbar shop next to a home are most likely separate areas, and not within the home itself, whereas a bed and breakfast is the entire home. I suppose it might depend on how much the property was converted. I've only stayed in one bed and breakfast that had shared bathrooms in the hallway, and could have easily been turned back into a regular house.

Maybe the future buyers could apply for a renovation loan, to undo any commercial aspects of the home, such as a reception area and truly turn it back into a single family.

Property used as commercial B&B. Can new owners get resi mrtg?

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