All Forum Posts by: Nick Schoch

It sounds like you have good experience and you're ready to expand into multifamily (5+ units).

The short answer to your question is "yes." Generally, you can always find financing but it may not be on terms or pricing you like.

Regarding guidelines, let's use Freddie Mac's Small Balance Program parameters (see CBRE's summary here) since they make a good portion of the market and their terms are similar to many banks.

You'll notice on page 3 that they indicate a minimum net worth equal to the loan amount and minimum liquidity equal to at least 9 months of principal and interest. You said your net worth was $1-2 million. This would suggest that Freddie would be hesitant to lend over $2 million to you. You may be able to mitigate this factor by putting more equity into the transaction and decreasing the leverage (lower LTV, higher debt service coverage ratio).

Regarding your experience, I believe you would qualify for financing if the proposed collateral property fits their guidelines and the deal doesn't have any hair on it. If there is an issue here, you may be able to mitigate it by hiring a professional property manager. In my lending experience, I have not seen deals declined solely because the sponsor has limited experience.

I hope that helps. 

You may also want to read Wells Fargo's free MHC financing handbook.

Any traditional bank that would consider this would likely want to see the seller financing subordinated to their lien. In other words, the bank would have the ability to foreclose and get access to their collateral without having to worry about another lender.

As others mentioned, whether the investor owns the home or just the pad is an important question when evaluating a manufactured housing community or "mobile home park." Lenders generally prefer to lend on manufactured housing communities where the investor owns just the pad. 

For example, review Fannie Mae's MHC financing guidelines. They prefer to see no more than 25% "tenant-occupied homes." In other words, Fannie prefers to see that the investor owns less than 25% of the homes.

Other lenders will often exclude the incremental rent from renting the home above the base pad rent. The idea is to limit exposure from underwriting potentially volatile income associated with tenants that don't have as much skin in the game. Tenants that own the improvements tend to stay longer since it's harder to sell or move the home.

If you own the homes, you're basically operating an apartment where you're still fixing toilets and other issues that can arise from the improvements. On the other hand, if you only rent the pads, you're basically a ground lessor that only has to worry about the common area improvements like roads, utilities, and amenities (if there are any). 

One last thing to consider is sewer/waste lines. Many smaller MHCs/parks are located in rural areas without access to municipal sewer systems. As such, they have to rely on septic systems that require more maintenance. When lending on communities with septic systems, many lenders will hire an inspector to evaluate the condition and remaining life of the septic systems as this is a common issue for older communities. A smart investor would be wise to evaluate this as well.

If you are expecting a loan amount greater than $1 million, you should get a competing quote from an agency lender so you can compare terms. 

Check out Freddie Mac's small balance program parameters here and Fannie Mae's small balance parameters here. 

I would also caution you against a swap if you have never used one before. If your lender is quoting a deal with an interest rate derivative or swap, that means they believe you are an Eligible Contract Participant or ECP. This means you have $10 million invested as an individual. 

If you do apply for a loan with a swap, you may also want to involve a third party who specializes in swaps to make sure you're not getting overcharged. Many lenders will build spread into the swap quote since accounting rules allow them to recognize the revenue from the swap immediately (vs. spread and loan fees are recognized over life of loan). 

Swaps also have an inherent prepayment penalty in that if you unwind it, you'll have to pay the mark-to-market amount to the counterparty. This could work out in your favor if rates go up significantly. Many lenders will try to sell this point while ignoring the risk.

I would recommend a step-down prepayment penalty over a yield maintenance or swap approach. This makes it very clear what your prepayment cost looks like over the life of loan.

Lastly, Freddie Mac's 5-year fixed hybrid deals (20-year term, 30-year amo.) are around 5.11% for standard markets as of Feb. 12, 2019.

I'm happy to discuss further if you'd like. I have articles and an introductory handbook about multifamily finance that you can search for on Google.

1. Get access to title data for all properties in your target geography.
2. Filter by relevant factors like unit count, age, etc.

The more specific you are with your question, the easier it is to help you with more specific answers.

You're welcome. It depends on the lender's policies, but I would suspect that most lenders will want to re-run your credit after 90-days. Lenders would want a fresh report to make sure you didn't take out a bunch of loans in the past quarter.

Regarding rate shopping, your lender shouldn't need to run your credit to provide you a rate quote. I would use Credit Karma or some other service to estimate your score and tell the lender to quote you using that score. You'll have to acknowledge that the rate could change if your score comes back different during the application process.

As I mentioned before, once you have your rate quote, I would compare it to a known index and use that to estimate your rate over time. Say for example you're getting quoted 4.00% on a 30-year fixed investor 1-4 unit loan, and let's say BankRate.com indicates the average 30-year mortgage fixed deal is about 3.75% (these are made up numbers). That indicates that your quote is about 25 bps (0.25%) more than the market 30-year rate. 

Two months go by. You notice the market 30-year rate is about 4.00%. I would estimate that your new quote would be around 4.25% assuming the same 25 bps spread over the prevailing 30-year mortgage rate.

That said, you may be better served by asking your lender or mortgage broker to give you updated quotes. Again, this should not require a pull of your credit report until you start your application. Keep in mind that you should expect the rate to change until you lock rate during the application process.

Does that make sense?

How long do you intend to shop for rates? If you get a quote today and then follow the underlying index, you should be able to get a good idea what your rate will be without having to ask for more quotes until you're ready to move forward.

Regardless, my understanding is that multiple inquiries in a short period of time won't affect your credit score. From here:

Will my FICO® Scores drop if I apply for new credit?

If your [FICO Scores] change, they probably won't drop much. If you apply for several credit cards within a short period of time, multiple inquiries will appear on your report. Looking for new credit can equate with higher risk, but most Credit Scores are not affected by multiple inquiries from auto, mortgage or student loan lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on your credit scores.

Do you have an existing relationship with a bank that also lends on commercial real estate? If so, start by asking your primary contact there about their offering.

Next I would reach out to a few other banks and credit unions that lend in your area to see if they have a competitive offering. 

After evaluating the balance sheet lenders in your market, I would reach out to some of the agency lenders (Fannie Mae and Freddie Mac small balance programs) to see what their offering would look like. It looks like David's program is the Freddie SBL program.

Once I have an idea of what is available, I would compare the basic terms in a worksheet and start working with the lender that looks like the best fit.

Alternatively, you could hire a commercial mortgage broker to do the leg work and bring you options.

A lender or commercial mortgage broker should be able to prepare a letter that provides a seller confidence in your wherewithal and ability to purchase. 

If you are purchasing all-cash, your bank should be willing to draft a letter that confirms the amount of funds needed to support the purchase without revealing your total balance.

If you are purchasing with debt, most lenders will insert a caveat into any letter that says they haven't yet approved the loan. You will need a relationship with a lender to get this letter. I wouldn't be surprised if it was a hassle to get one from your average Wells Fargo branch teller.

I would expect a mortgage broker would be your fastest option and they will be able to provide you a better understanding of your financing options and purchasing capacity. If this is your first foray into 5+ units, it will be worth your time to talk to someone who specializes in this type of financing.