Only If Fannie And Freddie Will Buy The Note

I handled a transaction not too long ago where my client was wanting to purchase a duplex in Winterville, North Carolina. Their preapproval was in place, they identified the property, and they had walked it the week before… What could go wrong?

Is it a duplex?

The property was listed as a duplex, both sides A & B. I started to run my comparative market analysis and immediately ran into trouble. The asking price of this duplex was substantially higher than the comparables I was pulling. I contacted the listing agent, and she told me that multiple offers had been received, but they were all declined by the seller.

The agent couldn’t tell me how much the offers were for, but based on what I had been seeing, I had a good idea why… They were for far less than the seller wanted...

I got my broker in charge on the phone and began to dig deep. All of a sudden, he asked a very critical question, “Are both sides of the duplex on the same parcel?” I hopped over to our local GIS and figured out that, in fact, each side of the duplex was on a separate parcel! At that point, I realized I couldn’t use a full duplex that was on one parcel as a comparable! I had to use duplexes where each side was on a single parcel!

Luckily for me, that’s all that was located in that particular neighborhood, so I had plenty of comparables to choose from.

The offer is in!

I was able to confirm that this duplex was, in fact, being sold at a pretty nice discount based on the comparable properties I found. My client submitted an offer, and it was accepted quickly. We sent all the documents to the lender, scheduled inspections, and scheduled the closing.

A few days later, I got a very discouraging text from the lender informing me that the loan my client had been prequalified for would no longer work. Upon further prodding, I confirmed that there needed to be two loans written, one for each property, in order for the deal to go through. What ensued was about a week of back and forth, signatures, and ordered chaos. We had to work double time to make sure we were able to close in a timely fashion. We also had pressure from the listing agent because, come to find out, the seller was under contract to purchase some land and the sale was contingent on their selling this duplex… No pressure… Just breathe…

Luckily, the lender was flexible, and they were able to get the job done. They divided the loan straight down the middle and kept the same interest rate. But that left me thinking… why could they not write that original loan?

Picky, picky, picky!

After some digging and conversations, I found out that the reason the lender couldn't put both sides of the duplex on one loan is because they were selling the loan immediately to Fannie Mae and Freddie Mac after closing... 

And Fannie and Freddie are picky… 

To them, a single-family property is defined as one to four units that are on the same parcel. Because these two units were not on the same parcel, Fannie and Freddie would not buy the loan if they were bundled together. That led the lender to require two separate loans in order to make the deal work.

The cool part about this deal is that my client uncovered a hidden opportunity. Because each side of the duplex is parceled separately, they ultimately appraise for higher. It also turns out that market rents were double what they were getting with the current tenant, so that was even more of an upside!

Hopefully, this helps you out! Here’s the main takeaway: Fannie and Freddie only buy loans where 1 to 4 units are on the same parcel of land. Use this to your advantage and find opportunities in your local market!