All Forum Posts by: Mark Cison

I've grown to accept the 25% rule with the non-occupying co-signer. Two lenders who are experienced with these loans failed to inform me, this was brought to light once I paid for appraisal, put earnest money down, payed for architects floor plans and FHA consultant to do the work writeup. So I'm already in too deep.

My parents were able to take out a Home Equity Line of Credit on their primary residence to cover the down payment. Also, grandparents are retired and have Social Security income and agreed to co-sign. So the deal is still alive and we are working on the final closing date, it looks like we'll be alright. 

Fingers crossed though.. It's been 5 months now since going under contract and the sellers are beyond impatient. Hopefully they won't pull the deal before we finally set a closing date... aghhhh

Thank you all for the swift and accurate responses. After conducting my own research and making some phone calls, this indeed checks out and is true. 

I am AMAZED that my broker had no clue and after informing me, the FHA 203k consultant and my attorney were perplexed when I passed along the news. In their defense, I believe them because the deal would not have gotten this far otherwise... no one involved would have put in their time and effort had they been aware. Naive on my part? I guess experienced individuals would have come a long ways.

I myself researched FHA guidelines, articles and forum posts for almost a year on my own and this was never brought to light or made obvious.

I don't want to make a big stink about the rules because rules are rules. Cool. However, I wish I knew or was made aware before we got this far along in the process. 

Not all is lost though, the appraisal comes in tomorrow. 

The equity is there for us to borrow the 25% down payment against one of the paid off properties, so we might do that and say screw it, lets go commercial. This eliminates the high PMI right off the bat.

An alternative approach is using the after repaired appraisal value vs. the total loan amount and using that equity as leverage to get the loan via conventional + construction with a lower down payment.. and pay the difference via the equity loan on the paid off property. We can potentially have another viable renovation loan option (correct me if I'm wrong and forgive me for assuming!) 

This is starting to gravitate away from me being a first-time-home-owner type of situation towards starting-a-business-with-my-pops type of situation. 

Silver lining???

Whether this deal goes through or not, it's an important lesson to learn and arm yourself with for future deals. Equity is leverage to buy more property to get more leverage to buy more property to get more leverage to buy more property. 

Whats the point of having properties that you pay taxes for out-of-pocket every year? Take that sitting money that's a liability and invest a portion of it towards an asset (or assets) that pays for itself and pays for your liabilities and THEN some. Yes, that means you can take your Cancun vacation this thanksgiving weekend after all. 

Hot Damn. 

Then why even do FHA at that point when you can do conventential.

And this is the LTV of the purchase price plus work write up in total correct?

That defeats the whole purpose of FHA in order to use 3.5%. My understanding is LTV is determinedly by the appraisal. If the appraisal comes back more than the total loan amount, isn't there a possibility that a 75% LTV can be met? So if the appraisal comes back at $750,000 divided by the total loan amount $565,600, that equals 75%.

Would this then green light the deal? Or am I missing something.

Thank you

So... I was slapped with a mortgage denial from the lender. The whole FHA 203k project is fantastic on paper, with the total purchase price + 203k standard rehab totaling to 565k on a 2 unit to 3 unit (legal) conversion. The mortgage broker last week told me that all the necessary vetting and requirements, such as income verification, W2's, taxes, DTI, etc etc was approved and looked great.

Project scope:

- 2 to 3 unit conversion with an addition added in the back in order to utilize the maximum square footage allowed on the lot. The floor plan schematic equals to 3600 sqft max floor space for an RT-4 zoned lot with 3 units total which is what the self-certified architect confirmed himself and ultimately what the zoning allows for. 

- Purchase price = 173k.. The property is in a fantastic neighborhood but is in crap condition, which is what I was looking for to build that sweet equity.

- Construction costs with material + labor + contractor fees, with the final work write up APPROVED and signed off by the 203k consultant = 336k with the 15% contingency, totaling = 406K (plus architect fees, closing costs and permits).

- So, 173K purchase price + 406K construction costs (with all the bells and whistles I wanted) = to about 565K total loan amount.

Here's the kicker:

With my DTI I could not get the loan, I was about 100k shy. So I used my father as a co-signer. Since he owns 3 properties.. his primary residence, a business building, and a summer home which have been all paid off for years now, he virtually has zero debt with about $1MM in total assets and NO MORTGAGE. Also no credit card debt, no car loans, and no other personal debt. Plus, he is a union contractor and is making a fantastic income. Our DTI's together are well below the limit in order to close this deal as far as DTI goes.

Not to mention, the total rental income from the 2 larger units on my property = 4k a month. After I move out in the 1st year, the third garden unit has potential to rent out for around $1500.00 a month. This amounts to $5,500 a month in total rental income with 3 units minus my overhead of $3664.00 a month (Principal + interest + property taxes + home owners insurance + PMI) = to about $1800.00 a month profit minus some minor expenses like garbage, commons area, etc. Oh and need I forget that the after repaired value is looking at around 700 - 750K for the total property. If you seriously doubt these numbers, I suggest you take a look at the Chicago market because these numbers are not made up and the mortgage broker + lender approved it and verified it. I would never get this far if that wasn't the case.

BUT..

When I was told the "Conditional Lender Approval" was coming today, I instead got a call from the mortgage broker with bad news. Apparently, FHA HUD recently changed their rules... and I mean recently recently, that a 'non-occupant co-signer/borrower' now only applies if it's a single family residence. So, in order to fall under FHA guidelines, the co-signer/borrower has to also "live there" along with the primary home owner for the first year if it's a 3 or 4 unit building. but not if it's a single family residence... maybe a 2 unit under the right circumstances.

If this is true, the mortgage broker, the 203K consultant and my attorney never brought this to light and it points to a system where they were not properly informed because had they been, this deal would've been killed in its infancy. In the mortgage brokers defense, they were shocked and could not fathom this "new rule" and thus, no one would waste their time or effort if they knew otherwise.

I cannot find or verify this information on any website, wether it's a .com or .gov site, to be true. This is a crossroads situation and I want to find out if there's any foul-play, misinformation, or downright manipulation at work here by any involved parties.

Everything about this deal makes sense. The contractor documents along with his profile, references and proof of insurance all checked out along with my DTI + my fathers DIT. But the new so called "rule" is totally left field and it seems suspicious that I cannot find this anywhere online adds to the fact…

I wish I could make this story up but I don’t have the ingenuity, nor does my rage, to do so. 

What. The. F.....

I got a serious quote for 700k brand new build. 3600sqft plus duplexed basement equals to total 4800 sqft. All brick 3 flat with garage. 

For gut rehab, I got quoted 50-70k a unit at around 1000-1200sqft. 

Both quotes are with labor and materials. 

Hi All,

Thanks for the great responses! 

Just to note, I apologize for sounding "emotional" but that's not the message I wanted to convey. I'm frustrated because I had a plan but I'm learning that the competition is high so I'm exploring other options/possibilities. 

My desire to knock down and build anew is because 1. I have to live there for at least a year 2. I like the modern designs of new buildings I see popping up all over the city 3. I believe new constructions can demand higher rents because everything is brand new. I also don't have to worry about random issues popping when things break (boilers, A/C, plumbing, etc..) I have been working in carpentry and construction with my father my whole life, we are willing and more than capable of taking on a project like this. Obviously we need to hire help and that's why I have my contractor but a lot of the work we will complete ourselves. 

Since losing two deals I'm looking at other options now and considering ditching the new build entirely. For example, I went to look at a property in East Pilsen on Sunday with my architect. 1901 S Ruble St. Its a 4 flat, two separate buildings on one lot. Each unit is 700 square feet, 2 bedrooms 1 bath. Architect says I can duplex the basement with the first floor but only in the rear building. Along with that, we would do a total rehab of all units. I offered 255k and the sellers countered but I'm staying firm. They are currently charging $600 rent per unit but the interiors are horrid. 

The math looks good but that's if I would charge around $1000-$1150 per unit after rehabbing all of them. After looking at rents in that area, those numbers look pretty solid and realistic. 

Thank you!!

Hi folks!

Over the last few months I've been on a mission to purchase my first investment property. During this time, I've been frequently using BP as a resource to help me along. You guys have some truly amazing advice and I Iove reading the forums, I'm excited to finally join the community. =) 

I'm a Chicago native born and bred, I know the city and it's neighborhoods very well but there's still a lot I don't know so I'm hoping you guys can help shed some light on the market trends in these specific areas. 

I'm going with an FHA + 203k loan and would prefer a 4 unit building but I will also gladly go with a 3 unit. I've narrowed it down to two possible scenarios, either purchase an existing 3-4 unit and do a gut rehab or purchase a 2-4 unit and completely demolish to build a-new. To clarify, my mortgage broker verified that both scenarios fall within the FHA guidelines and signed off on the approval letters for my offers so far, so we're all good on that aspect.

The primary neighborhoods I've been looking at are Tri-Taylor, Pilsen and Bridgeport. I'm set on these three areas because I feel like their great or soon-to-be-great neighborhoods where I can purchase/rehab/construct a property for a decent price while enjoying the higher rental incomes you see in Logan Square or Ukrainian Village (give or take). Also, these neighborhoods are mostly zoned for RT-4 and have moderate to low taxes which is exactly what I'm looking for. 

A standard Chicago lot is 25 x 125 which equals 3,125 square feet. Under RT-4 zoning, I have to allocate at minimum 1000 square feet per unit. So I'm limited to building a new 3 flat but the upside is I can duplex the basement with the first unit, effectively doubling the square footage of that unit because the basement area does not count towards the total building square footage. Here is an example of exactly the type of building I want to build or at least very close to it: 

2523 W Flournoy St.

Now the really frustrating part to my real estate adventure so far is that I put on offer on a 2 unit building in Tri-Taylor that was utterly distressed and needed a complete gut. They were asking 90k for the property which was perfect because I can demolish that building and construct my modern 3 flat. So I offered 90k and the listing agent responds saying the highest bid is slightly over 100k. Okay, so I offer 115k. Well the property went contingent, they accepted an offer that was lower than mine because it was cash. A week later the property goes back on market so I offer 120k! I wanted this so one so badly and they still refused my offer and went with the second highest cash offer instead. The property went contingent again and is now gone. This is the second property I lost where my offer was the highest but the seller went with the second highest offer because it was cash and they can close much sooner vs. my FHA loan which takes about 2 months to close.

So... this forced me to consider looking at higher priced properties to do the same exact project above. It also forced me to consider buying an existing building and just rehabbing it. I have not seen any deals as good as that in a neighborhood as good as that before or since losing this property. I feel that even if another deal surfaces, I'll probably lose that one to cash investors as well. Maybe the competition isn't as cut throat when listing prices are mildly higher? I wouldn't know...

So my questions for you wonderful people here are:

1. Has anyone carried out a project similar to this? I want to know ball park costs to build a 3 flat like the one above with the range of specs I mentioned. I want higher tier finishings but nothing too extravagant. I want to come up with a limit on how much I can spend acquiring a property. I'm now looking at properties in the 200-300k range..

2. Does anyone have experience being a landlord in these neighborhoods? Market analysis has revealed that for 2-3 bedroom apartments in the 1000-1250 square foot range have rents going for $1700-$2000 and even higher. These are of course either new construction units or beautifully rehabbed units with very good quality finishings. Can anyone confirm this? Are there people in these neighborhoods that can afford higher rent rates or would I have a hard time finding tenants?

3. Are there certain sections or blocks in these neighborhoods that are better than others? For example, in Pilsen is it better to stay more east by Ashland and Halsted or are the areas by Western Ave just as good in terms of crime and affordability?

4. Am I in over my head or is what I'm trying to do totally feasible and realistic? Should I consider just rehabbing an existing building because its more cost effective? I would love some advice on what would be the best route for me to take in these neighborhoods. 

5. Are there other options I could potentially take advantage of that I'm not aware of? 

Lastly, here's some financial background to give you some context: I have 25k to put as a down payment. So technically the highest I could go with FHA + 203k loan is about $700,000 total costs at closing since 3.5% down of $700,000 is almost $25,000. But I don't NEED to go that high, I want to keep my total costs around $450-$500k all said and done. I know I have to live there for at least one year per FHA guidelines so I'm shooting for a scenario where the rental income from the first two units will hopefully cover (or at least almost cover) the mortgage + PMI + Interest + property taxes + homeowners insurance + all other potential costs such as waste management, etc... Then after a year I move and I'm hoping the rental income from the 3rd unit will start yielding a profit.

I finished college about a  year ago and have a great career working as an IT professional. But my student loans are astronomically crippling so I'm simply trying to make a profit of around $1000-$1500 from my first investment property in order to help pay off my student debt. I feel that an investment property is my best shot at achieving a little financial freedom now and total financial freedom in the future with the possibility of acquiring a few more buildings down the line. Most importantly, it would help reduce stress because I'm currently scraping by making these payments.

My agent, architect and contractor have all been very helpful but at this point I feel overwhelmed and don't know which outcome would be the wisest and most lucrative. I also want to avoid over paying for a property and then be left in more of a financial hole than I began with. I'm still extremely motivated to do this, I'm just looking for a nudge in the right direction =DDD 

Apologies for the long post! I hope I did not confuse anyone, please feel free to ask if you need me to clarify anything. I look forward to hearing your advice and I truly appreciate your time and help, thank you so much!!!

Cheers