Creative option(s) for fully rented multifamily to be an OO?

Question

Has anyone creatively come up with a way to acquire an already leased out small multi-family to be able to structure it as an OO?

As an example: duplex->fourplex with all units leased until the end of the year, but would like to use the property as an OO ASAP.

Clearly wouldn't/couldn't evict the tenants (nor would you want to start your land-lording on that note).

Not sure if you could (or would want to) "entice" one of the tenants to move or brake their lease before it is up. Let alone of this is even legal.

Are there any options from a financing standpoint that could create OO criteria in the future? I assume you'd have to structure it as an investment property (20-15% down). I can't see how you would qualify if it's shown to be currently leased/occupied, nor would I want to endorse trying to buy it as OO without it actually being so.

Very interested in hearing if anyone has/had a creative solution?

Chris Mason · Answer

The guidelines for what you are refinancing out of never matter unless there's a prepayment penalty or something. From the POV of what you are refinancing out of, all the old lender needs to know is that they are being made whole again, so stfu and go away. Title orders a payoff demand during a refi, just like they order a payoff demand from the seller's lender on a purchase towards closing.

Incidentally, this is also why nomadic owner occupant flipping using conventional 5% down financing works. You sign a thing saying you promise to live there for the next 12 months. When you go to sell in 7 months, title orders a payoff demand a week or two before closing. Are you about break your little promise? Who cares. Joke we made in Iraq: "What the heck are they going to do, send us to Iraq?" Applicable joke here: "What the heck are they going to do? Send a payoff demand? We already requested one." (It's "surprise!" payoff demands that you want to avoid, so the owner occupant nomadic flipper had better move into that place within 60 days of purchasing to avoid that!)

Charlie Fitzgerald · Answer

No.  You either occupy one of the units within 60 days of close of escrow and it's an OO purchase, or, you don't and it's an investment property NOO purchase.

Tom Feret · Answer

Thanks @Charlie Fitzgerald for the reply. That's what my thinking was: either have a creative solution that one of the tenants would be willing to accept, or anticipate as OO.

Chris Mason, I was under the impression that refinancing out of an FHA loan requires a longer 'seasoning' period that 6 months? Is there specific criteria to meet in order to do so (other than having the down payment available)? Does it depend on the individual loan and underwriting?

Albert Bui · Answer

HI Tom,

I've done plenty of these on the lender end and investor end as well.

If you go the FHA route which is the least down payment option you'll only need 3.5% down and will need to adhere to:

- min 3 months cash reserves based on the proposed monthly payment

- gross rents on all 4 units X 75% factor must be equal or greater than the total monthly payment of the property (PITIA - I found out this not include HOA in this formula as we had a fourplex with a HOA once too). Its called the self sufficiency rule.

- you cannot use non occupant coborrower for income purposes or you may have to increase your down payment significantly

As for other underwriting guidelines, its pretty much the same as any other FHA loan.

If all units are occupied you'll need atleast one of the tenants to write a letter to state they intend to move out by the date of closing. Some underwriters will require you evidence the unit is vacated by ordering the appraiser back out to inspect and confirm while others will not, I've had both types of underwriters. I think if you structure the file fluidly to anticipate all these areas the underwriter in most cases will sufficiently be able to document the file with just the letter I mentioned above to proceed to docs.

The self sufficiency rule above is the hardest because in the past all 4 units had to be greater than the full PITIA (principal/interest/taxes/insurance/assessments) but recently FHA changed this rule to 75% of the rental incomes of all 4 units has to be greater than the PITIA which is a much more restrictive rule basically forcing out properties in markets which  have lower rent to value ratios like most parts of orange county, most of los angeles,  most of seattle, Austin core down town areas, Dallas core areas, and other more expensive areas. With the prior rule (prior to the 25% discount) you could buy properties with lower rent to value ratios and still get past underwriting. I suppose this rule is a good thing as it is a protection against ignorance but from FHA's eye's its a protection to them incase the property becomes a REO.

Chris Mason · Answer

@Charlie Fitzgerald

Paying a lender off in full once you decide you no longer want to do what you said you would do is what you are supposed to do.

Incidentally my first nomadic owner occupant flip, I tried to call it an investment property because that seemed like the box it intuitively best fit into (I still feel that this makes the most sense at a 'common sense' level). There was an LOE in there for unrelated reasons where he said in passing that he intended to move in (I think the boilerplate addresses on credit report LOE - "123 Main St is where I live now, until I move into 456 NewProperty Ave").

It was flagged by the underwriter, and ultimately went to the compliance people who required us to restructure it as owner occupied and re-underwrite as a primary residence. They called it "reverse occupancy fraud" to not call it a primary residence and use the applicable guidelines/rate/etc, given that she stated her intent to move in in writing. From there, dropping the down payment to 5% was her idea and we rolled with it to funding, and there's your origin story on my end.

EDIT: Here, link. From Fannie Mae. If you're going to move in, it's fraud NOT to call it a primary residence. Hard money lenders, shed thy tears.

https://www.fanniemae.com/content/news/mortgage-fr...

Quote:

> "What is reverse occupancy fraud? A borrower buys a home as an investment property [...] but instead of renting the home the borrower occupies the home as a primary residence"

So if you're going to move in, it's a primary residence or it's fraud.

Charlie Fitzgerald · Answer

Let's set aside any and all sense of ethics and fair dealings Chris, and just say what they need to hear to get what we need to get?  Fraud by deception is something "they" absolutely will do something about.  Suggesting that others engage in it is irresponsible.

Chris Mason · Answer

Not the best solution @Tom Feret but you could go in with FHA financing on the assumption that some of the down payment money you are keeping in your pocket could be instead used to persuade one of the tenants to sign a cash for keys agreement wherein they agree to move out 45 days or so after close of escrow.

Talk to your lender about it. The underwriter may want to see both the signed cash for keys agreement, and the agreed upon amount of money escrowed, to prove that it's legit and not occupancy fraud (most common type of mortgage fraud).

And then look at refinancing into conventional financing to drop FHA MI six months later. You can come in with cash on a refinance and basically make the down payment "after the fact." The appraisal on this refinance will indicate how much you need to come in with; hopefully you get lucky and get a little appreciation (natural or sweat equity) during that six months.

Creative option(s) for fully rented multifamily to be an OO?

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