Multi Family/Multi Structure 10 total units - commercial or conventional financing?

Question

Long Time reader, first time poster...here goes.

Investor looking at a deal in Oklahoma near our other properties.  Property is one parcel with 6 permitted structures on it, 4 duplexes and 2 SFH, total 10 units.  Commercial Team at our bank says it's not eligible for commercial financing, conventional team saying it's more than 4 units, and does not qualify

Two questions:

1.) What category does this fall under for financing?

2.) Current owner asking for one closing, with all properties, but perhaps they are mistaken and this is not possible?

First time I've seen this, so any help much appreciated!

Thanks

Josh Roman · Answer

@Joe - Thanks for the message - first deal for me like this, but a few quick thoughts to your questions!

We will evaluate the deal both ways (and probably a combination of other ideas as well), and decide what makes the most sense long term.  Splitting the parcel depends on the local government, so hard to say, but our understanding for this specifically is that it is relatively simple / not very costly.

Whether we split the parcel or not is somewhat the reverse of "greater than the sum of its parts". The split would be determined by whether the value to us by selling off a few or not.  I'm sure as owners there could be some benefits on the cost side either one time or recurring...we'll see as we evaluate.

David Chappell · Answer

I dont have any experience with MFH (yet!), but anything under 5 units can be financed conventionally through Fannie/Freddie. Anything more than that can be done "commercially" either through a local bank/credit union or a DSCR type of loan. If it's under one parcel then it should be treated as one 10 unit, which I believe should be able to be financed pretty easily?

Why did your bank say its not eligible for financing?

Alex Hunt · Answer

Hey Josh, yes this “odd property type” will give formal banks a huge headache. Happy to take a look at this with you!

Robert Rixer · Answer

I had a similar case, a 3-unit on the front part of the lot and a 4-unit at the back - all on one PIN. Went through a similar hot potato with lenders, it ended up being Commercial. The one PIN was the deciding factor. Worth looking into if it would be worth more as split lots sold individually.

Joseph O'Sullivan · Answer

Josh,

If you go forward with this purchase will you keep them as one parcel or will you split them into their own parcel for each building?

I'm am just learning real estate and working towards my first deal, so I have no idea what kind or cost or headache it takes to split the parcel.

Based on Robert's comment, it would seem that the building may appraise higher on their own individual parcel than on the single group parcel.

- If I understand that correctly, then I wonder if the increase value offsets the cost paid out to split the parcels up.

One last thought would  whether there are any underlying benefits to keeping it as one parcel, such as city regulations, etc.

- I had a conversation once in my owner's rep day job about new construction of a commercial building on its own parcel adjacent to another parcel owned by the same owner.  The feedback was that combining the parcels allowed them to drop some city requirements regarding installing screening in front of the dumpsters, so it saved a small amount on construction cost.

Interesting topic, but understand if you are just focusing on the deal itself for now.  :-)

Sincerely

Joe

Alecia Loveless · Answer

@Josh Roman I have one that’s two houses with three units on one tax parcel linked to a second tax parcel that has always been on one mortgage. Has been a huge headache for the bank and insurance company.

Yours should be commercial.

Joseph O'Sullivan · Answer

Josh,Thanks for the feedback on your approachSounds like you have a solid plan of attack.

If you think of it, would you mind posting the outcome here when the deal is complete.  It would be a great lesson learned for us newbies just starting out.

Sincerely,

Joe

Josh Roman · Answer

@Alecia -

Thanks, very much appreciated!

Josh Roman · Answer

@Alex - Thanks just shot you an email.

@Robert - good to know - if we go through, this is our path, but current owner wants one close only...i.e. we can't split before.  Certainly the hot potato is leaving a gaping hole in our evaluation! Appreciate the info on the One PIN as it should help us explain to the lenders better (who aren't Alex!)

super helpful both of you. Much appreciated!

Josh Roman · Answer

Hi David,

thanks for the reply - working through a local bank now from the commercial side

Two of our banks (one local, one not) said they can only do up to four units - one of our commercial lenders says we need a commercial loan from an NMLS lender.  Not an eligibility issue so much as who is able to take it on.  Just seemed strange that it falls into neither category...

Josh

Multi Family/Multi Structure 10 total units - commercial or conventional financing?

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