Last year I was looking at property in the Cincinnati area. I realized that many of the old forlorn city neighborhoods were rapidly coming back to life and this was a good time to buy and improve property. I found a small historic building with a shop on the ground floor and three apartments upstairs. There was a modest back garden and a detached garage that could have been converted to a workshop or guest cottage. It was for sale at a ridiculously low price – about as much as a nice car. The place needed work, but I was prepared to tinker with it incrementally and on a tight budget.
In theory there was a willing seller and a willing buyer. But then came the banks and regulators. No bank would grant any kind of loan for the building. Full stop. In spite of newly revised guidelines from federal regulators that theoretically accommodate mixed use buildings under certain circumstances, banks weren’t interested in participating. If this had been a four unit residential building with no commercial space the banks might have granted a conventional loan. But…
There are parameters for an “investment property” loan which is how banks view multi-family buildings. The minimum loan amount for a non-single family home is $50,000. On a multi-unit investment property you are required to put 25% down. To meet the $50K minimum loan amount you would need to purchase a building for $67K or more. If the sales price is below $67K banks shrug. Keep in mind, I know a young couple who bought a single family home within walking distance of this building at the same time and price point with almost no down payment with a low fixed interest thirty year federally backed mortgage.
The same exact bank will loan a marginally qualified borrower $50,000 to buy a fancy car that will lose most of its value in the five years it takes to pay off the debt. But it won’t lend a similar amount for a building that’s held up for a century. I could have paid cash for the building, but once I realized that all future sales would be stymied by the banks I switched tactics and bought a single family home instead.
Back in the 1990’s I bought an inexpensive piece of land in rural Hawaii and built a little mortgage free cottage. It was never meant to be anything fancy. But it has served as a great vacation cottage near the beach that I could eventually convert to a retirement home.
Over time the area increased in value and new homes of higher quality were built all around the cottage. The cottage wasn’t for sale, but a Baby Boomer couple from California admired the place and offered a good price. They were pre approved for a mortgage so we proceeded. Unfortunately the mortgage fell through when Quality Control “randomly” selected the loan for review and found it does not meet Fannie Mae’s requirements for salability.
The first red flag was the size of the house. It’s only 480 square feet. The second red flag was that it’s a studio with no separate bedrooms. The third red flag was a lack of comparable sales in the area in the last three months. There were three comparable cash sales within the last year demonstrating what the market would support, but Fannie Mae wasn’t interested.
Again… there were willing buyers and sellers in the “free market” yet the banks and regulators rejected the sale. What gets built, bought, and inhabited has a lot to do with what larger institutions demand. The market is seriously stacked in one direction. Three bedroom ranch houses, strip malls, garden apartments, and suburban office parks are approved without hesitation all day long. Everything else is intentionally excluded.