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July 20, 2009
Financing "Unhabitable" Property
My husband and I want very much to buy a multifamily building in bad shape and gut it (he's an architect). We've found several promising properties, but every mortgage broker I've spoken with has said that under no circumstances will a lender provide financing for a building that is "unhabitable." And, if it's livable but in terrible shape, the appraisal will likely come in way under the sale price. We're looking in the $700K range, and are able to put down 20-25%, as well as financing the construction to the tune of $180-$200K. Our intention would then be to refinance. But it seems this makes us developers and no one's giving money to them these days. If anyone has any advice or has dealt with lenders under similar circumstances, I would LOVE your help.
Comments
You'll need a 203k mortgages and may have to leave extra $$ in an escrow acct. Good luck.
Posted by: jack slade at July 19, 2009 10:00 PM
We bought an uninhabitable property three years ago but paid all cash (using ever dime of equity we had in our then-present home) because we were told that the only loan we could get for it in that state would be a construction loan, which were expensive even then. We were able to get a mortgage on the building only once there were completed bathrooms and kitchen -- and this was during the "boom boom" years, so it seems unlikely you could do any better today.
Posted by: GoodProspect at July 20, 2009 8:45 AM
Same scenario for me. I'm going with Aubrey Nurse from Wells Fargo and using their Purchase and REnovate Program. It's not a cheap loan by any stretch - the upfront cost are steep but I felt comfortable with it as it's a loan that most lenders are not offering.
Posted by: couldashouldawoulda at July 20, 2009 9:40 AM
My post on this didn't go through.
We did this back in the boom, financing beyond the purchase price so we could renovate. Hard then, harder now to find a lender who will do this and to know the right way to deal with appraisals. You will get a clear picture of what's out there by talking to a few savvy mortgage brokers. I would call Adam Dahill (he's a regular ehre), Norman Calvo of Universal, and Alan Trachtman of Trachtman and Boch. Between them you will get an informed picture of what, if anything, is out there.
Posted by: slopefarm at July 20, 2009 10:13 AM
Your best bet is an FHA 203k loan as stated above. This loan will absolutely let you buy a shell and renovate but it does have a limit and it has to be owner-occupied.
Posted by: wilso26941 at July 20, 2009 10:19 AM
I have family members going after 203(k) purchase + construction loan for very little money (less than 400K). Th bank pre-approved the laon but is now finding all kind of ridicules reasons to stall and not close on the loan. 2 months into the pllication process, they were asked to write personal eassys on why they want to buy and live in the house (vs living in a cave I supoose or maybe they think homelessness is prefer for a family with small children). They also implied they would report them to the IRS if any discrepency is found on the application. The stress is mounting and so far the loan application is 3 months in the making with no end in sight.
The bank is M & T bank... avoid at all cost. Very unprefessional and probably using illegal tactics to avoid closing on the loan. A simple "Denied" would have been enough if they don't want to extend the loan.
my two cents.
One of the way to do this is buy the house in cash and then take out a construction loan. You can apply for a 203(k) loan up to 6 months after closing.
Posted by: ClintonHillGal at July 20, 2009 10:20 AM
This is absolutely no big deal as long as the 'multifamily" is three or four units or less and you live in the property. You get an FHA 203K construction loan, which is wrapped into the mortgage.
You will pay slightly more than for a conventional mortgage (1 to 2 percent), and the FHA has to review the construction process and they disburse payments in three stages. You also have to pay some small fees for the oversight ($100 per period, I believe). You can read all about it on government web sites.
There are tons of houses like this in Bushwick and Bedstuy. The ones in Bushwick are $250,000 to $350,000 for a two-family. I saw a really cute one in a good location near the L but it closed a few weeks ago. You may have to outbid flippers buying with all cash.
These places are listed on the MLS. There are a few companies that seem to deal exclusively in them. One is Tom Marco Real Estate at (718)998-7100.
Posted by: mopar at July 20, 2009 1:30 PM
You can directly to Wells Fargo, which does these kinds of loans, or find a mortgage broker who has experience with FHA construction loans.
The loans are more complicated, and they take longer to close (sometimes three months), but the brokers make more money on them.
Posted by: mopar at July 20, 2009 1:32 PM
"If anyone has any advice or has dealt with lenders under similar circumstances, I would LOVE your help."
Put plans on hold. Rent. Don't fight the massive deleveraging. You will lose. Wait 'til the NY Case-Shiller YOY passes back up through zero. That'll be your bottom.
***Bid half off peak comps***
Posted by: Brownstones Half Off at July 20, 2009 1:49 PM
BHO, *hello,* these properties are already massively "delevereged." They are multi-family Victorians going for less than $350,000. Stop being so kneejerk. OP, don't listen to BHO. BHO, you can move to Detroit.
Posted by: mopar at July 20, 2009 2:23 PM
They'll fall further, mopar. NYC "Unemployment" [the reported one] is 10% and spiking. Interest rate hikes will add insult to prices already injured by the collapse of the unsustainable Ponzi/Madoff effect of "RE only goes up" (housing will be cheaper even at higher rates). Stop being a jerk. OP, listen to BHO. Even if I move to Detroit.
***Bid half off peak comps***
Posted by: Brownstones Half Off at July 20, 2009 4:59 PM
Hey ETBK,
we are just finishing with the loan process on a similar deal and as is mentioned above your best choice by far is Wells Fargo's construction 203K program. From the #s you've stated this should be a relatively easy process. Call Aubrey Nurse @ 718 780 9105 and leave him a message if he's not there (in fact was just in his office earlier today). Really busy guy but he knows these loans cold and will give you the best if not the only loan option around these days. Good luck and tell Aubrey Dr. T sent you.
Posted by: pierre de taille at July 20, 2009 5:04 PM
No, these particular properties I am talking about will not fall further. They are already cheaper than renting. They are selling.
BHO, I think you need to make a distinction between foreclosed "uninhabitable" properties going for less than $100 per square foot in subprime areas, and regular properties in excellent condition in neighborhoods with excellent public schools that are upwards of $500 and often more than $700 a foot.
Posted by: mopar at July 20, 2009 6:27 PM
Pierre, congratulations. Did you find a place in Clinton Hill?
Posted by: mopar at July 20, 2009 6:30 PM
BHO, the fact that interest rates are likely to go up considerably is all the more reason to buy as quickly as possible -- assuming the property you're buying is already "deleveraged."
Posted by: mopar at July 20, 2009 6:33 PM
Thanks mopar, we got something in Fort Greene which has always been our favorite neighborhood in all of Brooklyn. Will post photos on the renovation blogg in a couple months. Good night zzzzzz :)
BTW your point on interest rates is spot on!
Posted by: pierre de taille at July 20, 2009 10:04 PM
Nowhere in Brooklyn is there a bottom now, mopar. Nowhere. And you and Pierre are spot off about interest rates. Mortgage rates dropped and the market still tanked because of a tightening in lending standards. Higher rates will complement the downward price pressure already in place. Because of affordability, everybody would have to downgrade their market area to a lower-income nabe. But there's an income hierarchy that looks like a triangle (a few high earners on top and many low earners on the bottom). There'd be only so many buyers left above to absorb the void in the buyer pool below at each price level, in downward progression. Prices would have to drop to fill these voids. Higher rates will compound the collapse. The rush to buy is pure broker/seller/banker/investor propaganda.
***Bid half off peak comps***
Posted by: Brownstones Half Off at July 20, 2009 11:29 PM
We just went through a similar process on an unihabitable 7 family. We ending up having to go for a "bridge loan" (read loan shark) so that we could get it inhabitable and as soon as we can we plan to refinance. I'm not sure if that will work for you with 20% down (we had a higher %) and it is a higher initial interest rate, but may be worth looking into? If you'd like the contact for the one we used (who I did a lot of research on and we've had a good experience with) post here how I can get ahold of you and I'll be in touch. Good luck either way and don't listen to the naysayers! :)
Posted by: amybnyc at July 20, 2009 11:33 PM
Two constraints with a 203k: the renovation will need to be wrapped into the mortgage, at least the issues that FHA concerns themselves with; and the loan limit is around $729k (at least for single family). So with a $700k property and $200k in repairs, you would have to borrow $700k and contribute your $200k as a down payment (>3% min). But yes then the $900k+ appraisal could be a real problem. What about looking for something similar but that's closer to a bank's definition of habitability? There may be places that need extensive work but the water and electricity is currently technically functional and there's a kitchen and a bath etc. You might be able to find something similar in terms of potential return on improvements but without the habitability issue.
Posted by: BHS at July 21, 2009 3:36 PM
I've got to agree with BHS. The market is still way to high.
350K in Bushwick sounds cheap, but not if you consider how cheap they were five or ten years ago. Your also talking about a neighborhood where your wife (not to mention you and your kids) probably won't feel safe walking alone at night.
Also, as the higher end market tanks, the lower end will tank as well. When a real estate market tanks, everything goes down, not just one segment.
I'd wait another two years or so for the market to drop another 50%. What's so bad about renting for a couple more years?
Posted by: IronBalls at July 22, 2009 8:00 AM
Congratulations, Pierre. Can't wait for the photos.
Ironballs, what do prices of five or ten years ago have to do with anything? The dangerous reputation of Bushwick is massively overblown. I live in the area near Ridgewood and it's full of delightful families. I don't walk around by myself late at night when there's no one on the streets, but that's a rule I follow everywhere, not just in Bushwick. Around 10 or 11 on a Friday or Saturday, the streets are teeming and it's great fun to walk around and get an ice cream or whatever.
Prices are already cheaper than renting. And only going up. This area is going to be massively expensive in a few years. It's gentrifying rapidly. That's a reason not to wait.
Posted by: mopar at July 22, 2009 5:25 PM
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