Had to pull out of a deal

[Brian Ellis]

I had a house under contract that I just pulled out of. I was going to use a 203k loan.

I want to share my story, because what ive learned in two weeks is pretty remarkable. I could have never learned all this stuff unless I went through it. 

The house:

Commercial property - 2 family mixed use with a commercial kitchen, and a cottage on the same lot

I reached out to about 5 lenders, and every single one of them said I could not utilize FHA loan on this property. So I called FHA directly and was told it is possible as long as 51% of the property is considered livable, its 4 units or less, and that the commercial space doesn't endanger the occupants. I got in touch with @Philip Ganz who has plenty of experience with this, and he walked me through everything (when everyone else said it wasn't possible). 

I saw the property, and realized it was in pretty bad shape, but had A LOT of potential. I was told it was within a conservation area, so builders have no interest in it. Realistically I am the only type of person who could turn this thing around. 

Asking price - 425k (listed at 600k 6 years ago)

Under agreement for - 350k with seller kicking back 8k for closing costs

ARV - 500k+

That left me with about 100k to work with, which would've been rolled into the loan. I initially wanted to rely on the caterers rent, and the rent from the cottage next door, while living in the main house (using the money to bring it all to FHA standards). I found out the caterer would leave if I had to do that, they would be without a bathroom and lose a lot of space (they used as an "office"). Both the house and the cottage were in rough shape. If I used all the money to fix up the house, but lose the caterer, I wouldn't be left with much to renovate the cottage. So rent would stay low. Now the numbers don't work.

I went back to the drawing board and decided I would benefit more if I used the majority of the funds on the cottage and add a bedroom addition, while keeping the caterer in place and collecting higher rent. I could get the main house to pass FHA and fix it up slowly over time, and still make the numbers work while living in the cottage. But this involved plans, a lot of plans. The conservation area was tough, you basically cant build anything on it, not even asphalt. So initially we would take the large garage that was already on the property and demolish it, then we would take the same footprint and just slide it over to use it as an addition on the cottage. BUT, the town had it listed as a 0 bedroom, and we cant add an extra bedroom. We could however, go to the town to transfer a bedroom from the main house and add it to the cottage. This would involve the town, board of health, and so on. And the seller just wasn't having it. He did not want to sign an extension. This would have been a 6 month project, and im not taking that sort of risk to buy it as is and hope the town allows such plans.

What I learned:

- FHA is possible on commercial

- 203k really isn't that much work

- PMI insurance is extremely expensive

- Learned about commercial kitchens and fire codes

- There are great people out there willing to help

- Learned about conservation areas, what can and cant be done

- I have about 6 new contacts

Im out $900 for the initial HUD inspection, but happy to pay it for the knowledge and relationships. On to the next one!