Need Financing Solution- Duplex with ADU

[Meagan Dupre]

Hi all,

I'm under Contract for a lovely duplex with ADU in San Antonio, TX. All was fine with our 20% down conventional loan until today when appraisal flagged it. Apparently a triplex is not the same thing as a Duplex with and ADU. Fannie and Freddie won't buy a Duplex with ADU (makes no sense to me). So here I am, twelve days before closing with no solution.

There is still an internal staircase, so the house could pass for a single family home if we removed the stove upstairs. However, there is a tenant in there. 

The property is zoned single family with a non-conforming use permit. And the city website has it inaccurately recorded as a single family home with two ADUs. 

I got a great deal and hate to put it back on the seller to deal with. They definitely have no clue that the property is not able to be financed (they paid cash 5 years ago).

The lender suggested a Non-QM Lender but it sounds shady. Does anyone have experience with a situation like this? Or if I get a hard money loan can it be refinanced?

This is my first investment and I’m so close to living mortgage free! Thank you all in advance for you knowledge. 

[Chris Mason]

There is a lot of chatter about non-qm in the "DTI not there if we do a standard calculation" space, but have not heard a lot of chatter about using non-qm when the property doesn't check the right boxes.

From what I've seen, commercial lenders REALLY care about zoning, that might be a brick wall too.

Tenant being in place takes the obvious solution of "de-ADUizing" it off the table.

SFR w/ 2 ADUs also can't get Agency financing, so even if you got the appraiser to re-categorize it, that wouldn't do you any good.

No great solution comes to mind. My phone has been blowing up from posts like this, since apparently no one is asking the question "can it be traditionally financed?" when they create these multiple ADU or 2-4 unit with ADU type situations, you are far from the first person to get caught up in this fallout from the (for lack of a better term) "tiny home craze" we presently have underway.

It's worse in California, since someone in the state legislature invented the term "Junior ADU" or "JADU" and wrote it into a law [without first consulting me], but Fannie Mae hasn't added it to her federal-level rule book. Easily half the value in residential real estate comes from the fact that you (or, rather, your buyer) can convert that sticker price to 360 easy monthly payments at a fixed low interest rate, it's super important for homeowners to ensure they aren't giving that value component up when they improve or change a property.... you aren't the only person who would LOVE to offer that price, but only if you can convert 80% of it into 360 easy monthly payments. There's a good chance this is the specific reason that your sellers were the ones who purchased this home in the first place, no one else could find a mortgage on it, obviously the listing agent wasn't going to disclose it at the time but they were likely the ONLY actual legit offer on the table, since they were cash buyers.

When word gets out among cash buyers that these properties can't be traditionally financed (right now they don't realize they are the ONLY real offer on the table, the listing agent isn't going to tell the buyer "we have 20 offers, but yours is the only real one since it is cash, we will take whatever price you are willing to offer, we're desperate"), I'm guessing we will start to see values drop.