Financing a Fourplex Multifamily Property using FHA - A Few Twists
Financing owner-occupied multifamily properties (i.e. up to 4 residential units) has been extensively discussed as an effective way for new investors to acquire their first investment property and take advantage of the unbeatable downpayment requirements (e.g. 3.5% for FHA). In my case, I've finally decided to move out of state to work full-time in a company we started last year far from home. This has now given me the opportunity to run through this model in process of purchasing my new residence. I would like to direct two question to those who are knowledgable about FHA guidelines or those investors who have done something similar in the past. A little bit on property itself: This is a fourplex consisting of three buildings on one lot, two detached 4-bedroom units and one 2/2 duplex. They are all on under one parcel, tax bill, and title. So legally it is a four-unit residential property. I have been talking to a whole bunch of lenders, large and small over the past few weeks on how to finance this with FHA. The main reason for FHA financing is of course to take advantage of the low downpayment option. This is a ~$500k property and I do not have access to the 20-25% capital required for other conventional and commercial loan options. Moreover, even if I did, I strongly prefer to first exhaust the owner-occupied financing option before changing strategy, and of course use my capital for other deals, especially because I do intend to occupy one of the 2-bedroom units (the other three units are currently leased through mid-2014). Now here are the questions:
1) I have been getting the negative response on FHA option from many lenders simply because the units are "detached". I'm told that for FHA all units have to be attached and under one roof. A smaller number of lenders have not rejected this option and claim this can be treated as any other residential fourplex, but nays have definitely outweighed yays so far which makes me a little concerned. Is this "requirement" a fact, myth or a convenience factor to pass on a not-so-standard financing transaction to the next lender in line?
2) Even the lenders who have pre-approved me and agreed to carry this through the loan process have told me that due to the unique features of this property there is no guarantee that an acceptable appraisal can be obtained to substantiate the loan. There aren't that many detached fourplexes in the area with similar distribution of square footage, number of bedrooms, number of structures, etc. to support a reliable appraisal. Some say that it might be appraisable based on income as opposed to comps. Anyway, I'm in the throes of ordering a self-initiated appraisal knowing that I very likely have to pay for another one when the loan process is officially commenced. Is this unusual or counterproductive? Besides that, I wonder how the outcome of this pre-contract appraisal can change seller's opinion on the purchase price coming either lower/higher than our verbally agreed number.
A few side notes: i) One 2-bedroom unit is currently vacant but the owner's property manager is actively trying to lease it out which has put me in a tricky situation; if it rents out then pretty much the owner-occupied option is out, unless somehow we can terminate that lease (I don't feel good doing this to the tenant the begin with, but is it even legally possible for the new owner to terminate an active rental lease or do I need to offer them an incentive, a la cash-for-keys? At least I know they won't move in before the current lease is up in 2 months or so...); ii) We have almost reached an informal agreement on price with seller, although he is reluctant to sign the contract, take the property off the market and carry through the purchase process thinking that FHA is lengthy and not guaranteed on this property, and in the meantime repel all those cash buyer, although the property has been sitting on the market for almost 2 years now! Another reason for me to take the uncertainty out of the process and convince him to pursue the deal
If you've read this post this far, I owe you an apology for its length. I've been wrestling with this project for too long and had to get it out to the community and seek everyone's input on my two points of struggle and any other ideas you might have to handle this acquisition.
Cheers!