Multi-family, Three Or Five Unit? Two Units Below Grade

[Roak]

I'm in need of expertise in regards to a multi-family property that I'm looking to purchase in Michigan. I need to know if the house will be considered a three unit, which will qualify for residential funding, or if it will be considered a five unit pushing me into a commercial loan.

The house was originally built in 1929 as a duplex, and was converted to a five unit complex in the 40's. It is still zoned residential.

1. One of the five units will be owner occupied.
2. Of the remaining four units, two of them are below grade in the basement.
3. There are four electrical meters, one for the entire house, and three sub-panels (no specific unit is separated)
4. The current owner has a residential loan, and has had another previously.
a. He told me that appraisers always included the rental income, but never counted the two units below grade.

So is it a three or five unit? Let me know what other information is required to come to a conclusion on this, any guidance would be appreciated.

 

[Michigan CG]

The first question is what is legally allowed? Are five units permissible under your zoning? If not, is the property grandfathered?

Sounds like the appraisers before created misleading reports. You can't count the income of something they say does not exist.

 

[The Warrior Monk]

The first course of action I always take with these type of assignments it to determine what the current legal use is. The easiest way to determine that is to contact the appropriate department at the governing municipality and find out what the current Certificate of Occupancy (or equivalent document) states.

If that doesn't exist, then other courses of action need to be taken which will depend on the information available. I do not recommend simply looking at current zoning and taking a best guess. That should be done only after all other avenues are exhausted. And even then, the appropriate extraordinary assumptions should be utilized, which should be discussed with the client to determine if those assumptions are appropriate for that particular assignment.

 

[ucbruin]

Is this a "must have" property for you?

 

[Roak]

The city requires the completion of an annual rental application, which then grants a license to rent. The property is current with that license, and it does declare all five units. The zoning is still residential; I have a feeling that it is grandfathered in. I agree, the previous appraisers may have written the property up incorrectly. I will reach out to the city before moving forward as Dave suggests just to cover my bases.

This is a must have property for me; I love the darn thing. With the current rent roll I should be able to get either loan, but a residential multi-family loan is more favorable.

 

[glenn walker]

You have five units especially when the city requires the annual rental information. May not be a good deal 5 unit loans are not real advantages to borrow, I have previously owned some 5 and 6 units and I hated them because they are hard to refinance and because they don't fit into the 1 to 4 Fannie-Freddie Mac loan box . The other advantage to a 3 or 4 unit is they can be sold to a buyer who is going to be owner occupying one unit but on a 5 unit there is no such thing as owner occupied or conforming loan. The last 5 unit we owned was very difficult to sell because of the financing issues and we ended up carrying the mortgage . Unless you are stealing this property I would highly suggest you reconsider and look for a 3 or 4 unit property.

 

[Mike Kennedy]

The city requires the completion of an annual rental application, which then grants a license to rent. The property is current with that license, and it does declare all five units. The zoning is still residential; I have a feeling that it is grandfathered in. I agree, the previous appraisers may have written the property up incorrectly. I will reach out to the city before moving forward as Dave suggests just to cover my bases.

This is a must have property for me; I love the darn thing. With the current rent roll I should be able to get either loan, but a residential multi-family loan is more favorable.

Which City? Confirm with Municipal Building & Zoning Officials (not clerks) whether or not the current, apparent 5 unit residential use (legal, non-conforming) TRANSFERS on sale or is CANCELLED if the property sells to a New Owner. Don't assume, Confirm (or have your attorney do so on your behalf - IN writing requesting a written reply).

 

[hastalavista]

This is a must have property for me; I love the darn thing. With the current rent roll I should be able to get either loan, but a residential multi-family loan is more favorable.

(my bold)

Glad you found such a property! And, looks like you'll buy it regardless of what it is classified as (so, it is a win-win).

Keep this in mind: The difference in the loan rates is due to a lot of reasons, but the bottom line is that lenders have determined that 5 or more units is more risky than 4 or less units. That's why the loans for 5 or more are priced higher than 1-4 unit loans.
You are planning on keeping it as a 5-unit property, and that is how it functions. So, the right thing to do is to get the loan that is designed for this type of property (which is what I'm inferring is your intention. We read sometimes on this forum where a buyer wants advice on how to misrepresent the property to get a favorable loan).

Congratulations and good luck on with your dream property!

 

[gregb]

It is important for the party who orders the appraisal to make sure that if the subject property is indeed a five unit residential income property, then typically an appraiser with a commercial appraisal license would be engaged to complete the assignment in most cases.

 

[Roak]

Thank you for the great information, it's much appreciated. I completely agree that a five unit property is not the best for resale or getting a loan, but I plan on keeping the property as a long term investment, so I'm comfortable with the purchase. In the future if my plans change I could always look at converting to a four unit for resale, the layout of the property makes that feasible since it was originally a duplex.

The house is in the city of Royal Oak, MI. I will have my attorney send a letter to the city municipal building & zoning officials based on your input Mike, that is good advice. Denis, thanks for the kind words. If the appraiser and bank say it's a five unit, then a commercial loan is the direction that I'm going in. I was getting conflicting feedback from the current owner vs. the bank, and you guys cleared it up, five unit it is.