One of our clients is buying an investment fourplex in Texas.
He intends to completely gut and rehab all four units as soon as we close.
The problem is that one of the units has no kitchen because the tenant is using the entire unit for storage.
As a result, the appraiser cannot give any value to the unit until a kitchen is installed.
In light of this, we have three options:
- Leave the unit “as is” with no kitchen, and appraise the property as a triplex. But, this would result in a seriously low appraisal and much more cash to close (to cover the appraisal shortfall).
- Obtain “hard or private money” financing that does not require a kitchen in every unit. But, this financing is far more expensive from a points, interest rate and down payment perspective.
- Complete the kitchen prior to close. This is a requirement for any buyer pursuing “conforming” (Fannie/Freddie) financing.
We are pursuing option #3 because the buyer wants the extremely competitive Fannie Mae financing that is available today.
The buyer, however, is very frustrated that we are “forcing” him (and the seller) to install a kitchen when he is just going to tear it out right after close.
But, it ain’t us requiring the kitchen; it is a hard and fast Fannie and Freddie guideline.
We all understand how absurd it is to waste money on a temporary kitchen but we have no choice because we have to have a “salable loan.”
If we don’t comply with all Fannie/Freddie guidelines, we can’t sell our loans after we fund them and that can cost us hundreds of thousands of dollars.
Hence, we constantly have to satisfy seemingly absurd conditions.
What Kind Of Kitchen? (It’s Subjective)
The good news is that we do not need a “fancy kitchen;” we just something barebones to satisfy the appraiser, our underwriter and ultimately Fannie Mae.
This means a spot for a refrigerator (if no actual fridge), a cheap stand-alone oven/stove, a counter or table, and some dirt-cheap “Home Depot special” cabinets.
The bad news is that there are no hard and fast rules for what constitutes a kitchen.
So different underwriters sometimes condition for different things (as no underwriter wants to be responsible for an “unsalable loan”).
For example, FHA underwriters will almost always require the appraiser to make sure the stove is hooked up and working while conforming underwriters will only sometimes do so.
In addition, some underwriters require cabinets, and some don’t.
Agents and buyers often ask us for detailed descriptions of what they need to install, but all we can ever do is provide a list like the one above, ask them to make the kitchen area look as “nice as possible” and hope for the best.
Despite all of Fannie’s and Freddie’s rules, much of lending remains all too subjective.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167