Seller Sold 5 Unit Property as Fourplex Why? + FHA Refi Question

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Seller Sold 5 Unit Property as Fourplex Why? + FHA Refi Question

Barrett Lund
Member since 2021 · 16 posts · 1 vote

I apologize in advance if this is the wrong area to post this question in, I am still finding my way around the site.

Last year I found a 5 unit property that was marketed as a fourplex with "garage storage". Low and behold I view the property to see that the "garage storage" is actually a fully fledged and functional detached unit. This property also had a "shed" that wasn't utilized at all. When the bank appraised the property the sellers were adamant about not allowing access to the shed or "garage storage" and thus the appraisers didn't even look into these parts of the property, yet the appraisal still came back right at the amount that I purchased the property for. 

I know that the property would have had to been categorized as a commercial property to be sold as 5 units, but clearly the sellers could have gotten more for the property with that being the case? What would be possible reasons they sold it the way they did?

My second question is, is there any creative way I could refinance this property out of an FHA loan into a better loan that accounts for the additional property? The "shed" is now a communal washer/dryer room.

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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
4y

Would they have gotten more?  Would you have still bought it? If you had to get a shorter term, callable mortgage at a higher rate? How much more would you have paid at a higher interest rate for a shorter loan for the same building?

There was a 4plex on lake Minnetonka with an “owner’s storage unit” this had a kitchen, bath and bedroom. They figured they could get more with the easier financing and a built in “cabin” for the owners to spend weekends on the lake. 

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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    4y

    Would they have gotten more?  Would you have still bought it? If you had to get a shorter term, callable mortgage at a higher rate? How much more would you have paid at a higher interest rate for a shorter loan for the same building?

    There was a 4plex on lake Minnetonka with an “owner’s storage unit” this had a kitchen, bath and bedroom. They figured they could get more with the easier financing and a built in “cabin” for the owners to spend weekends on the lake. 

    2Reply
  • Andrew Moore
    Real Estate Agent · Grand Rapids, MI · Member since 2016 · 89 posts · 51 votes
    4y

    My first thought is that those units haven't been approved by whatever municipality it is in. They could have done repairs they didn't have permitted, it's possible that the zoning for that property wouldn't allow for it to be a true 5-unit. 

    My next thought is regarding the pool of buyers that have access to commercial financing is likely much smaller than those who can qualify for a residential mortgage. 

    The only way you can really refinance out of the FHA would be into a commercial loan. I'm not sure what your equity in the property looks like, but they are likely going to require between a 70-75% LTV. On top of that, your FHA rate is probably somewhere around 4.25% on a 30 yr note; you might be hard pressed to find commercial terms that would be as competitive as that. You are probably going to be looking at 4.75-5.25%, on a 15-20 yr pay-off.

    You may need to keep your existing financing in place for some time depending on where your equity is at now, and even then you will likely roll that into a commercial loan. 

    Hope this was helpful. Don't hesitate to reach out if you have any more specific questions, I'm happy to be a resource any way I can.

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  • Barrett Lund
    OP
    Member since 2021 · 16 posts · 1 vote
    4y
    Quote from @Bill B.:

    Would they have gotten more?  Would you have still bought it? If you had to get a shorter term, callable mortgage at a higher rate? How much more would you have paid at a higher interest rate for a shorter loan for the same building?

    There was a 4plex on lake Minnetonka with an “owner’s storage unit” this had a kitchen, bath and bedroom. They figured they could get more with the easier financing and a built in “cabin” for the owners to spend weekends on the lake. 

    I would say unequivocally they would have gotten more, but I probably wouldn't have been able to buy it as I purchased through FHA. The unit did need some repairs (a new toilet and vanity) but beyond that it was good to go. Other units at the property list for $900 while the standalone "storage" unit has netted me $1050 a month. I would also say demand for the property was really high, it sold within 3 days of listing. I am still really puzzled.



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  • Barrett Lund
    OP
    Member since 2021 · 16 posts · 1 vote
    4y
    Quote from @Andrew Moore:

    My first thought is that those units haven't been approved by whatever municipality it is in. They could have done repairs they didn't have permitted, it's possible that the zoning for that property wouldn't allow for it to be a true 5-unit. 

    My next thought is regarding the pool of buyers that have access to commercial financing is likely much smaller than those who can qualify for a residential mortgage. 

    The only way you can really refinance out of the FHA would be into a commercial loan. I'm not sure what your equity in the property looks like, but they are likely going to require between a 70-75% LTV. On top of that, your FHA rate is probably somewhere around 4.25% on a 30 yr note; you might be hard pressed to find commercial terms that would be as competitive as that. You are probably going to be looking at 4.75-5.25%, on a 15-20 yr pay-off.

    You may need to keep your existing financing in place for some time depending on where your equity is at now, and even then you will likely roll that into a commercial loan. 

    Hope this was helpful. Don't hesitate to reach out if you have any more specific questions, I'm happy to be a resource any way I can.


    I can't imagine it (stand alone fifth unit) having been around for over 30 years and not have been permitted? 
    I'd say you're definitely right about the pool of buyers being smaller, but what does the pool being smaller really matter to the sellers if they could have gotten a significant amount more money through that same small pool?

    My FHA note currently is 2.65% but I would believe that the property would appraise for much more through a refi and then increase my equity and maybe allow me to get off PMI.

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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    4y

    My point was you were the highest offer and you just said you wouldn’t have bought it. So unless they attracted another buyer they would have gotten less. You would have had to put down 25% and paid 4.5-5% interest. You probably eliminate 90-95% of the buyers when you need 25% down. 

    This is why many people target the 5-12 unit market. They don’t have the demand of smaller or larger buildings. 

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  • Barrett Lund
    OP
    Member since 2021 · 16 posts · 1 vote
    4y
    Quote from @Bill B.:

    My point was you were the highest offer and you just said you wouldn’t have bought it. So unless they attracted another buyer they would have gotten less. You would have had to put down 25% and paid 4.5-5% interest. You probably eliminate 90-95% of the buyers when you need 25% down. 

    This is why many people target the 5-12 unit market. They don’t have the demand of smaller or larger buildings. 


    I meant I wouldn't have been able to buy it because the price would have been much higher. I would absolutely have still bought the property if it was the same price marketed as a 5 unit property regardless of 4.5-5% interest and 25% down. But your point does help me understand a little bit of the seller's mindset. 

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  • Sam YinPro Member
    Los Angeles, CA · Member since 2021 · 583 posts · 738 votes
    4y

    @Barrett Lund you are forgetting that commercial loans have different criterias... the verifiable gross rents would have to meet certain standards. If rents were low, you would have to put in a great down payment to meet the DSCR.

    Some investors do this, put down 50% just to get into a low grossing property. They have their own reasons.

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  • Andrew Moore
    Real Estate Agent · Grand Rapids, MI · Member since 2016 · 89 posts · 51 votes
    4y

    @Barrett Lund It is unlikely, but it is possible depending on how ownership was transferred that it was not permitted. 

    Going back to your initial question regarding getting the property out of FHA into a better loan; It sounds like you're not going to find a loan program with as competitive of terms as you have right now. If you do refinance, it will likely get much more expensive, and it doesn't sound like the cost of PMI is worth refinancing and dealing with the headaches associated with that.

    I don't see a scenario where you can refinance that property without having to bring a whole bunch of money to the table. And if that is going to be the case, I would just focus on using those funds to acquire another property. 

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  • Barrett Lund
    OP
    Member since 2021 · 16 posts · 1 vote
    4y
    Quote from @Andrew Moore:

    @Barrett Lund It is unlikely, but it is possible depending on how ownership was transferred that it was not permitted. 

    Going back to your initial question regarding getting the property out of FHA into a better loan; It sounds like you're not going to find a loan program with as competitive of terms as you have right now. If you do refinance, it will likely get much more expensive, and it doesn't sound like the cost of PMI is worth refinancing and dealing with the headaches associated with that.

    I don't see a scenario where you can refinance that property without having to bring a whole bunch of money to the table. And if that is going to be the case, I would just focus on using those funds to acquire another property. 


    Appreciate the response and insight!

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