How to Finance Unique Properties
I've got a buddy who's an architect that caters to the shall we say, eclectic home buyer. Not that his customers are all a few eggs short of an omelet, it's just that their homes could make the cover of Architect magazines or are converted drug stores, lofts or dance halls. If you are one of those lucky few who can find an old movie theater in a west Texas town that screams "turn me into a home," you'll soon find that conventional lenders can't help.
Even if one can get construction money to remodel an old barn into a residence it might be difficult to find a permanent mortgage to replace the construction funds.
Finding a way to obtain financing on such properties falls outside the box. Many times way, way outside. Agency loans (Fannie Mae, Freddie Mac) and other pools of money (RFC) insure that if a lender makes a loan under certain guidelines (theirs) then that lender can pretty much be guaranteed that loans' ability to be sold in the secondary markets.
These sales, sometimes individually (flow) or packaged up and bundled in millions of dollars of loans (bulk) provide liquidity in the markets resulting in, among other things, more competitive rates. These are about as close to a commodity in mortgages as they come. So what?
Such loans have two "underwrites", one for the individual (can they afford the home, do they have good credit) and one for the property (are there similar ones in the market area indicating a demand for that product to establish a market value on which to base the loan?).
If indeed the borrowers can provide at least three other comparable sales in the area of similar fashion and the property meets zoning requirements then it's more likely to get conventional financing. But most of these properties are anything but conventional. So what to do?
One is to take current equity out of other property to build or simply to find a "portfolio" lender. A portfolio lender, usually but not necessarily a retail bank, does not intend to sell the loan at any time and can therefore make any type of loan it wishes. In these instances, the bank is making a loan more to the individual and caring less about the property type. More akin to the days of the Bailey Savings and Loan. Making loans to individuals. These loans are usually of shorter term, say three or five years and can certainly be extended and such loans may not be available to everybody. Banks usually make these loans at the request of a bank customer in good standing or to individuals a bank may want to establish a relationship.
If this is you. If you've dreamed of renovating an old hotel and turning it into your dream home, understand at the very beginning that if you need money for the project, start looking now. You can find it, just in not as many places.
Written by David Reed
August 23, 2002
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