Having trouble getting loan because the tenant is a nursing home

10 Replies

Hey all,

Would love some advice. I'm trying to purchase a residential property that has an existing tenant, which is running an adult family home business from the house, while also living there. It's a large property.

I got a couple of loan applications rejected because apparently, any lender under Fannie Mae has a rule against lending for purchase of a property where the tenant is a caretaker. This is because Washington State has a lot of eviction protections for those kinds of organizations.

My understanding is that if I defect on the loan, the lender would have a really hard time clearing out the house, and they don't want to shoulder the risk of having to deal with that.

That makes sense, but two things don't make sense, and they haven't been able to coherently explain it to me:

1) They say that this is only an issue because I am not operating the business. If I were more than just the landlord/property owner, and got involved with the business, they'd be able to go through with the loan. How is that different? If I defect, they STILL would have to deal with the fact that the care facility is there, so I'd be able to squat a long time, just like the business would if it's not operated by me.

2) How is this any different than if I were to purchase an empty property, and then accept an adult family care home as a tenant after the fact? It's the EXACT same situation once that tenant moves in, and there's nothing the bank can do, since AFAIK they don't get a say on who I accept as a tenant after I purchase the building.

Ok, with that out of the way, I'd love to hear some insights on where to get a loan for this kind of situation (Freddie Mac lenders? Some sort of special circumstances lender?) And should I expect unreasonably high interest rates from lenders that will process the loan? What would the more experience real estate investors here do in this situation?

Thanks!

@Tamas Z. how are the lenders learning that this person is leasing the property?

Also, is the tenant running a business out of the property?   Meaning are they bringing customers into the property?

Hi @Tamas Z. ,

I think this will be a commercial loan scenario, not residential. 

2) How is this any different than if I were to purchase an empty property, and then accept an adult family care home as a tenant after the fact? It's the EXACT same situation once that tenant moves in, and there's nothing the bank can do, since AFAIK they don't get a say on who I accept as a tenant after I purchase the building.

Your right, and that's precisely why an institution doing residential financing will not knowingly go for this scenario.

Commercial loans have annual or semi-annual (or every 3 years, etc) checkups on the health of your business.

This is one example of why/how vacant residential real estate often sells for more than tenant occupied. 

@Andrew Postell well I wasn't exactly secretive about it when they asked; didn't know I was supposed to be (am I supposed to be? :)) But I imagine this is really easy to figure out with whatever investigation they do. I'd rather be upfront about it than go down the path only to have it fail in escrow just before the transaction goes through.

Yes, the tenant is both living there AND running a business out of there, and that business is a nursing home, so they're getting customers who live there.

@Chris Mason I thought the commercial/residential thing has everything to do with the zoning. The place is in a residential neighborhood.

@Tamas Z. thanks for providing that information.  I wanted to know that info in case they found out in some other manner is all.  Always be upfront.  Always.  It helps us know how to give the proper advice and it's the right thing to do.  I just went through some paperwork that you would be required to sign for a conforming, conventional loan and there are some specific sections that address this area:

Under the "Designation of Homestead and Non-Homestead Affidavit":

Paragraph 2:  "Borrower represent and warrants that Borrower does not now and does not intend ever to reside on, use in any manner, or claim Borrower's Non-Homestead Property as a business..." 

Under the Note "1-4 Family Rider":

Paragraph B: Use of Property; Compliance with Law:  "Borrower shall not seek, agree to or make a change in the use of the Property or its zoning classification, unless Lender has agreed in writing to the change."

I'm quoting these sections because this is a Fannie Mae or Freddie Mac loan (if you recognize those names).  So this is not up to the lender.  The lender is just doing what the government agencies are telling them what to do.  In order to do something different you would need a "portfolio" or "commercial" loan.  Those loans come from the lender itself.  Now the lender's own loan might say the same thing but you can certainly shop lenders to find one that might have a portfolio/commercial loan that does allow this.  But if you go to any lender on a conventional loan they will have these restrictions.

I hope this helps in some way.

Hey @Andrew Postell , thanks for digging that up, I really appreciate it. I guess that second part is the clause that says "you can't just accept a new tenant that would start running a business", addressing my "it's no different" thing from my OP (point 2). :)

I do have one prospective lender who mentioned this would be a portfolio loan. That must be what they were talking about.

Thanks again! Hopefully I can get something reasonable.

Tamas - what is the acquisition price of the property? How high are you looking to go on leverage?

Got it. At that size, you're not going to get a small-balance commercial loan from Freddie Mac or Fannie Mae, so it's going to be about finding the right local bank or credit union that's comfortable with the scenario. Good luck - reach out if you need someone else running that process for you and advising along the way.

Thanks! I've actually got a pretty good relationship with the bank I used for a commercial property a couple years back, and they're looking at options. :)

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