FHA Mixed Use Property

[Deleted member 148126]

I just received an order for an FHA loan. The property is a storefront with two apartments on top. Which form should I use or does it have to be a narrative report?

 

[glenn walker]

I just received an order for an FHA loan. The property is a storefront with two apartments on top. Which form should I use or does it have to be a narrative report?

A 1025 Small Income Form- And no FHA and Fannie do not accept narrative reports. Note : Unless you have someone who has done these assist you I would run and not walk. They are three times harder than doing a 2 to 4 unit, its rare to find any similar comparables, it will be reviewed by Underwriter, reviewer and when sent to your HOC they will review it with a fine tooth comb. these are in my opinion the highest risk appraisals FHA does. You r zoning, legal or non-conforming, highest and best use analysis, how you extract your adjustments, and finally "your competency-you cant tell a HOC reviewer that its your first one and expect to get a free pass. With that being said below is some of what you will be dealing with.

FHA loan rules permit the purchase of properties between one and four units. For mixed-use property, commercially zoned residential property or other non-traditional purchases, HUD 4000.1 states: “The non-residential portion of the total floor area may not exceed 49 percent (Note may now be 51% check 4000.1. The appraiser's site analysis must “accurately reflect the attitude of the typical purchaser” according to the FHA Loan Handbook. “Predominantly commercial or business locations, or locations subject to noise or other influences adversely affecting the use and enjoyment of the typical owner or occupant should be avoided. The appraiser must address the effect of the applicable zoning ordinances on the value of the property."

In general, the property to be purchased with an FHA mortgage is a home first; the non-residential use of the property must be "subordinate" to the residential qualities of the home.
What does that mean specifically?

The FHA also says the use of such property as a residence (in an area with commercial zoning) must be legal, or "legal nonconforming". That phrase is a term to describe a property that may not meet certain state/local standards, but was “grandfathered” to allow its existence/use under certain qualifying circumstances. Those circumstances will vary depending on the nature of the law, local requirements, etc.

The appraiser's site analysis must “accurately reflect the attitude of the typical purchaser” according to the FHA Loan Handbook. “Predominantly commercial or business locations, or locations subject to noise or other influences adversely affecting the use and enjoyment of the typical owner or occupant should be avoided. The appraiser must address the effect of the applicable zoning ordinances on the value of the property."

 

[Deleted member 148126]

A 1025 Small Income Form- And no FHA and Fannie do not accept narrative reports. Note : Unless you have someone who has done these assist you I would run and not walk. They are three times harder than doing a 2 to 4 unit, its rare to find any similar comparables, it will be reviewed by Underwriter, reviewer and when sent to your HOC they will review it with a fine tooth comb. these are in my opinion the highest risk appraisals FHA does. You r zoning, legal or non-conforming, highest and best use analysis, how you extract your adjustments, and finally "your competency-you cant tell a HOC reviewer that its your first one and expect to get a free pass. With that being said below is some of what you will be dealing with.

FHA loan rules permit the purchase of properties between one and four units. For mixed-use property, commercially zoned residential property or other non-traditional purchases, HUD 4000.1 states: “The non-residential portion of the total floor area may not exceed 49 percent (Note may now be 51% check 4000.1. The appraiser's site analysis must “accurately reflect the attitude of the typical purchaser” according to the FHA Loan Handbook. “Predominantly commercial or business locations, or locations subject to noise or other influences adversely affecting the use and enjoyment of the typical owner or occupant should be avoided. The appraiser must address the effect of the applicable zoning ordinances on the value of the property."

In general, the property to be purchased with an FHA mortgage is a home first; the non-residential use of the property must be "subordinate" to the residential qualities of the home.
What does that mean specifically?

The FHA also says the use of such property as a residence (in an area with commercial zoning) must be legal, or "legal nonconforming". That phrase is a term to describe a property that may not meet certain state/local standards, but was “grandfathered” to allow its existence/use under certain qualifying circumstances. Those circumstances will vary depending on the nature of the law, local requirements, etc.

The appraiser's site analysis must “accurately reflect the attitude of the typical purchaser” according to the FHA Loan Handbook. “Predominantly commercial or business locations, or locations subject to noise or other influences adversely affecting the use and enjoyment of the typical owner or occupant should be avoided. The appraiser must address the effect of the applicable zoning ordinances on the value of the property."

Thanks for your help. I would prefer to have it assigned to someone else.

 

[Russ Kitzberger]

Concur with Glenn, 1025 form for FHA. Concur as well that this project might sit in underwriting, review, etc for several months (or years if loan is sold) and if you do not get into complex methods, it may be difficult to develop a compliant analysis and report. This may require CG license in your state as well, it seems Maryland allows some commercial under res licenses though, ask your attorney.

Thanks for your help. I would prefer to have it assigned to someone else.

If you do not have access to lease data for the commercial portions or cap rate data, might be difficult as well. Not subscribing to the Lease rate data service and cap rate data would be the easiest out.

Practically speaking, I would be hesitant to accept a fixed fee engagement for this sort of project, there are too many variables and items that can creep up during your investigation stages of the project.

 

[Tom D]

also, you cannot do it as a certified residential. it has commercial which you are not qualified to judge or comment on. res can never do mixed use.

 

[glenn walker]

also, you cannot do it as a certified residential. it has commercial which you are not qualified to judge or comment on. res can never do mixed use.

NO FHA & Fannie do not require a CG on small mixed use properties-FHA & Fannie consider them to be residential with owner living in at least one unit and the commercial or business portion to only be used by him. IE he lives in one unit, rents the second unit and uses the commercial or operates his business portion for his own use.

The commercial portion in theory generates no rent or income because its supposed to be only used by the owner. The only portion that will generate any rent is if the owner rents the one or two units he doesn't live in. The final opinion of market value also has to be based on the Sales comparison approach and the commercial portion has to be subordinate in size to the residential portion.

Like I stated they are a PITA-I no longer do them and most never make it through underwriting anyway

 

[Tom D]

glen, oh west coaster, the state of Pa will burn you badly, and i do love reading those bulletins, for doing a mixed use appraisal. you are a reviewer. how is a residential appraiser qualified to do a h&b use of the commercial part of that appraisal, that was the question the board asked the res appraiser? but, yous do as yous please. in theory, it generates no income to the owner user? sure it does, it saves him the money he would have to pay if he rented somewhere else. that is income he gets to keep.

 

[Tom D]

dear board, the commercial part of this mixed use property does not produce income for the owner occupant user, therefore i considered it residential use. filed under slick comments.

 

[Sadie]

also, you cannot do it as a certified residential. it has commercial which you are not qualified to judge or comment on. res can never do mixed use.

Certified residential can appraise commercial with a transaction value under $250k. More the problem, FHA has limits on how much of the property can be used for income production. ((b) All other types of real property having a transaction value of less than $250,000.)

 

[Sadie]

glen, oh west coaster, the state of Pa will burn you badly, and i do love reading those bulletins, for doing a mixed use appraisal. you are a reviewer. how is a residential appraiser qualified to do a h&b use of the commercial part of that appraisal, that was the question the board asked the res appraiser? but, yous do as yous please. in theory, it generates no income to the owner user? sure it does, it saves him the money he would have to pay if he rented somewhere else. that is income he gets to keep.

Oh dear Tom D. Read up on what each level of appraisal license can do. (b) All other types of real property having a transaction value of less than $250,000.