What are my financing options on this property?

Question

Hi all - I found a property that is a single lot and has 2 separate standing structures that are 3 bed/1 bath houses.  It appears to be a decent deal:

Ask is $129K

Rent (total) $1500

I reached out to a local mortgage broker I have used in the past to ask about financing and he said they would not be able to finance it with a traditional mortgage because of the fact that it is 2 separate buildings and advised me to reach out to a local bank that does commercial lending.

Reached out to the commercial lender and was told I could get a 5 year ballon loan amortized over 20 yrs.  I am not familiar with the intricacies of this loan type but I understand how a balloon loan works at a high level.

I am wondering what advice someone might have regarding this situation.  I'm thinking the 5 yr balloon might not be a bad idea, but not clear on the risks and not sure what my options would be at the end of year 5.  Could I refinance to another balloon?  I do not anticipate having the cash to make the final balloon payment at that time.

I feel like there is some opportunity here but not sure the best options for my financing.   Thanks for your thoughts.

Stephanie P. · Answer

@brad

If it's two separate buildings, then it's a 2 unit.  Exhaust your "A" paper lenders first and then go to a portfolio lender.

Best of luck

Stephanie

@Brad E.

Chris Mason · Answer

Then you should be fine.

Brad E. · Answer

@Chris Mason

Thanks.  Its the first scenario assuming the zoning is correct.  It is 2 houses built from cinder blocks all tile floors and metal roofs.  They seem to be built for rental usage.

Chris Mason · Answer

It really depends on what this property truly is.

Two houses on one lot can be any of the following, and financing options will be 100% dependent on what it truly is, according to the appraiser.

- Zoning and permitted for 2 unit, and there are two true actual stick built homes on the property. Good to go!

- Zoning and permitted for 1 unit, but someone plopped down a trailer or manufactured home on it.

- Two trailers.

- Zoning and permitted for 1 unit, an accessory dwelling unit is allowed per the zoning, and there's a legal/conforming accessory dwelling unit on it. Good to go!

- Etc.

Your mortgage guy might simply not be interested in it because he's had a lot of experiences in that particular area with people calling trailers houses and the like. I certainly don't know Georgia, but there are certain specific city names here in California wherein someone describes a "3 unit property" and my assumption until proven otherwise, based on my past experiences, is that this supposed "3 unit property" is going to be comprised of is 1 house, 1 trailer that can't be moved, and 1 garage with a solar shower affixed to the outside... no traditional mortgage on that.

Other specific areas and cities, no one does that stuff, so when someone tells me it's a 3 unit property, I can generally expect a 3 unit property the way we define "3" and "unit." If that makes sense?

Tom S. · Answer

@Brad E.  I would ask that commercial lender or other commercial lenders about not having a balloon in 5 years, and just an interest rate change.  I have a few commercial loans are all are 20 year amortization and a fixed rate for the first 5 years.  After that, the rate just resets and they send a letter in the mail stating the new payment (rates have gone up a few times over the past year, but usually the payment increase is small..$20 - 25).  But no balloon or need to refinance.

- Tom

Brad E. · Answer

Thanks @Stephanie Potter

I am not sure of the real value at this point.  I just found the property last Friday.  I do have an agent I can reach out to though.

What kind of lender do you think I would have luck with when trying to handle this as a 2 unit property?

Pretty sure I can get a better rate and term going with a residential loan, but based on my search so far, it doesn't seem like an option.

Stephanie P. · Answer

@Brad E.

To answer your question, you may have an opportunity for a fixed option at a higher interest rate at the end of 5 years or you may have to refinance it completely out of that loan and into another.  It's specific to the lender.

What's the real value of the property?  Are you buying it at a discounted rate so your refinance in 5 years is a viable option?

You don't have to have a balloon.  It can be treated as a 2 unit property.  The problem is going to be finding other similar 2 unit comps.  If comps are available, you may be able to get a 30 year fixed or a 3 year fixed with a 30 year amortization.  Do you have a Realtor friend that can do a market analysis for you?

Stephanie