Buyers can't get financing due to zoning

[Brad Birky]

We are in the process of trying to sell our duplex in Toledo and have run into (yet another) issue. The buyers have reported that they are unable to obtain financing since the duplex (built in 1907) is located in an area that is zoned for single family homes (Toledo zoning was established much later). The issue the banks reportedly have is that IF the property needs to be rebuilt at some point that it would have to be rebuilt as a single-family unit instead of multi-family. 

The real kick in the pants is that EVEN IF the doomsday scenario occurred, since the price point is so low the property would still cash flow as a SFR - but the underwriters don't want to hear that. We know we could apply for a zoning change, but that process could/would take months and we are beyond ready to move onto our next investment.

Has anyone else come across problems like this, where the lender is going down a rabbit hole and denying funds because of something that could possibly happen in the future?

[Russell Brazil]

Nearly every multifamily in the country is in single family zoning, because zoning laws were established after the multifamilies were built.

Have the buyers switch lenders. 

[Brad Birky]

Our realtor suggested several lenders for them, but they claim they continually get the same answer. 

The financing contingency period is up tomorrow and it looks like they are going to back out, so I guess we will put the property back on the market as a cash-only purchase and see what happens. 

[John Burke]

Quote from @Brad Birky:

Our realtor suggested several lenders for them, but they claim they continually get the same answer. 

The financing contingency period is up tomorrow and it looks like they are going to back out, so I guess we will put the property back on the market as a cash-only purchase and see what happens. 

Yeah, it's a real thing. Do you what type of loan the buyer is using?
Here are the Fannie Mae guidelines for legally non-conforming properties:

If the Property's characteristics are legally non-conforming, you must:

• ensure the Borrower executes the Modifications to Multifamily Loan and Security Agreement (Legal Non-Conforming Status) (Form 6275);
• confirm whether, if fully or partially destroyed, the Property's Improvements can be fully rebuilt to the pre-casualty condition per current laws, zoning requirements, and building codes; and if the Property’s Improvements cannot be fully rebuilt to the pre-casualty condition, evaluate if the as-rebuilt Property will support the Mortgage Loan at the current Tier, and document your analysis in the Transaction Approval Memo.

To assess the Borrower's ability to rebuild Improvements on a non-conforming Property to a level that will support the Mortgage Loan at the current Tier, you should consider:

• conducting a threshold analysis to determine the resulting actual amortizing DSCR if the reconstructed Improvements cannot be rebuilt as-is per current law;
• the likelihood of a casualty event (e.g., wind, earthquake, fire, flood, mine subsidence, etc.);
• the percentage of damage to the Improvements at which the Property’s jurisdiction will require the Property be rebuilt to current zoning and land use requirements (i.e., the destruction threshold);
• which Property characteristics the destruction threshold percentage applies to, such as
• market value,
• assessed value,
• replacement cost, or
• unit count;
• for Properties with multiple buildings, if the destruction threshold percentage applies to
• each building, or
• all buildings as a whole;
• the replacement cost to rebuild per current requirements for
• zoning, and
• land use;
• the Property’s continued
• marketability, and
• economic viability;
• the amount and type of Borrower-maintained insurance coverage required per Part II, Chapter 5: Property and Liability Insurance, Section 501.02C: Ordinance or Law Insurance;
• insurance loss proceeds payout, compared to increased rebuilding costs, including from
• building code changes,
• Americans with Disabilities Act compliance, and
• the municipality's local zoning requirements (e.g., green compliance for new buildings, etc.);
• the sufficiency of estimated insurance proceeds from ordinance or law insurance and other coverages to repay the Mortgage Loan in the event of partial or full
• casualty, or
• condemnation; and
• for a Tier 3 or Tier 4 Mortgage Loan, if requiring execution of the Limited Payment Guaranty (Form 6020.LPG) would mitigate the risk of the as-rebuilt Property not supporting a Tier 2 Mortgage Loan.

[Brad Birky]

Quote from @John Burke:

 Yeah, it's a real thing. Do you what type of loan the buyer is using?

I only know it was going to be a DSCR loan with them putting about 20% down

[Gino Barbaro]

@Brad Birky

This is an important lesson on exit strategy. Reason why assets are cheaper, is because there is less demand, or there is some type of issue. When you are buying deals, always focus on our exit strategy. Don't only focus on if the deal cash flows, or the price is great. If you are looking to exit in the near future, there may be issues.

I would go to other community banks or even credit unions to see if they can finance

[John Burke]

Quote from @Brad Birky:

Quote from @John Burke:

 Yeah, it's a real thing. Do you what type of loan the buyer is using?

I only know it was going to be a DSCR loan with them putting about 20% down

Can they get a letter from the city saying they're grandfathered in and allowed to rebuild a duplex if it's every destroyed?

[Mark F.]

I just went through this earlier in the year. I bought a 3 unit in a SFR zoned area as it was considered non conforming like someone else mentioned. I had zero issues with my lender so I'd suggest to you to tell the buyers to switch lenders. Closed and am all good, used the new 5% multifamily product that came out last November 

[Michael P.]

I can be your cash buyer at 75% of list price lol. I own a lot in Toled0.

[Brad Birky]

@Michael P.

Sure, as long as you don’t mind if I go ahead and increase the list price by 25% first! 🤣

[Brad Birky]

@John Burke

Apparently they tried talking to the zoning dept but it was going to be a longer process than they were willing to undertake.

[Michael P.]

Quote from @Brad Birky:

@Michael P.

Sure, as long as you don’t mind if I go ahead and increase the list price by 25% first! 🤣

 Keep us updated, I’m curious how this ends

[John Burke]

@Brad Birky, 
Well that sucks. I had hoped it would be an easy solution for you.