I refinanced a 12-acre estate in Sonoma County in CA years ago. The owner insisted it was 100% residential with no commercial interests – but, when I showed up, he had a huge sign over his barn advertising his drywall and plaster firm, he had work trucks and industrial supplies all over the lot, and he had a prominent winegrape harvesting company on site, harvesting his 8 acres of cabernet grapes.
So, there was no way in hell that property would ever get residential financing – in its current state. He then removed the sign, moved all of his trucks, and told the grape harvester to take a hike – and he was then able to get residential financing – but ONLY because he cheated on taxes. 😊 If his tax returns had shown the income from the grapes, it would have revealed the commercial nature of his estate and likely prevented him from getting residential financing. Note: A few bucks of income from an acre or two of grapes probably would have been OK, but the income from 8 acres was substantial.
I once did a purchase loan in a very high-end neighborhood for a property that looked OK but was selling for almost $1 million less than nearby similar properties – and the underwriter said… “Hey… wait a minute…something must be wrong with this property.” The buyer and seller tried to convince us that this was just because the property was “dated” and in need of a lot of cosmetic repairs, but we all suspected there was more going on. And sure enough – there were major foundation issues – that were only discovered by the underwriter after she did some serious digging (there were no references to them in the MLS listing).
I tell both of these stories because we get questions about similar properties all the time from agents and borrowers alike.
Will It Finance?
Barns:
Barns on properties are totally kosher as long as they are in decent condition (dilapidated barns can be “health and safety issues”) and are there to house commercial interests. Barn owners should not, however, expect a lot of value to be attributed to them on appraisal reports – even if the barns are high-end and good quality. This is because it is difficult to support such valuations and lenders also don’t want to be in the business of effectively financing barns.
Farms:
Hobby farms that do not generate income are kosher too when it comes to residential financing. The key is to make sure there is no evidence of commercial activities when the appraisers visit.
Tax Returns:
If “hobby farm” owners show income from activities on their hobby farms on their tax returns, that can often kill transactions – as such income is usually a clear indicator of commercial activities. There are exceptions if the income is minimal and/or if the owner can convince underwriters that the income-producing activities have permanently ceased.
Land To Value Ratios:
This is another consideration when evaluating “farms,” as land is becoming much more valuable in areas immediately outside of DFW, Austin, and the Bay Area. Underwriters like to see that the value of the land relative to the value of the property as a whole is under 50%. Heejin and I looked at a 2,200-square-foot home on a 15-acre property in Celina, TX, and 80% of the value of the property was the land – given that the home was tiny and dated and that Celina itself is booming. The odds of getting residential financing were slim to none.
Sloping Floors/Foundation Issues:
If these issues are clearly visible to an appraiser, there is no way the appraiser will not flag them in the appraisal report. This will make standard residential financing nearly impossible, and often make Hard Money financing the only option. If the structural issues are NOT visible, sellers still need to make sure there are no issues mentioned in MLS, on the internet, or in public records somewhere. If there are comments that mention structural issues somewhere, underwriters and/or appraisers will likely find them, making standard residential financing impossible. The only way to get standard financing for such properties will be to show proof (contractor sign-off, appraiser re-inspection, etc.) that the structural issues were fixed.
Selling Way Under Market:
If issues are not disclosed on the MLS and not visible to an appraiser, but the property is selling significantly under-market – both the appraiser and the underwriter will ask why. So, buyers and sellers alike should be prepared to come up with a plausible explanation that does not make standard residential financing impossible. Major cosmetic and landscaping issues can sometimes be plausible explanations, as long as the purchase price is not ridiculously under-market.
Comments In MLS:
I mentioned this above but am hitting it again it is so important. Once agents mention specific structural issues in MLS or elsewhere online, those comments now live forever and will preclude residential financing in most cases – until the structural issues are fixed. Many agents wisely use vague comments like “this property is a fixer; reports available upon request.” In the “olden days,” we would sometimes coach agents to clean up language from the MLS that might concern an underwriter, but that is no longer reliable because the comments of concern often surface somewhere – even after they’re deleted. NOTE TOO that if properties are purchased with hard money with the intention of refinancing into better financing later on, the appraiser for the refinance and the underwriter will still focus on the MLS comments from the time of purchase.
Litigation:
Litigation involving a condo complex is often a deal killer no matter what unless it does not impact the phase of the project where the subject condo is located in any way. Litigation involving a residential property is only an issue if it is referenced in MLS, as per above, or if the litigation is public via a “lis pendens” (public notice of litigation involving property) or similar.
