Buying condo in commercial building

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Alvim
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Buying condo in commercial building

Post by Alvim » Sun Apr 26, 2015 6:32 pm

Hello bogleheads,

I'm looking for thoughts on an unusual real estate transaction. I came across a beautiful condo in a mixed-use building (i.e., a building with >50% commercial tenants). The asking price is reasonable, if not under market, but my mortgage broker buddy is telling me the financing will be more complicated. He says such a mixed-use condo doesn't meet Fannie Mae or Freddie Mac guildelines. He says a 7/1 ARM may be the only option. If I were to proceed, my main concern is resale since potential buyers may have similar problems with financing.

I think it is worth mentioning that the condo is located in a very high HCOL area and within walking distance of a major university. There were several residential transactions in the same building in the last few years and most were all-cash purchases. I would plan to live in the apartment for 5 years at least and then rent it.

Thoughts?

- Alvim

ncole1
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Re: Buying condo in commercial building

Post by ncole1 » Sun Apr 26, 2015 6:36 pm

IMO, you should be concerned with resale unless you plan on living there for 10+ years. Being a landlord is not necessarily easy especially if you move to another city.

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Steelersfan
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Re: Buying condo in commercial building

Post by Steelersfan » Sun Apr 26, 2015 7:03 pm

Meeting Fannie Mae or Freddie Mac requirements may or may not be an issue depending on where you're located. In my area (major metropolitan city not on the East Coast) few condos have bothered to get qualified since there are plenty of regular mortgage sources operating here and they're offering regular mortgages. Our downtown is seeing lots of new condominiums in mixed use buildings and they seem to be selling well, so those folks are getting mortgages as well.

But since your advice is coming from a mortgage broker, it may not be so true in your area. Maybe check with another broker or two?

Trader Joe
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Re: Buying condo in commercial building

Post by Trader Joe » Sun Apr 26, 2015 7:31 pm

Alvim wrote:Hello bogleheads,

I'm looking for thoughts on an unusual real estate transaction. I came across a beautiful condo in a mixed-use building (i.e., a building with >50% commercial tenants). The asking price is reasonable, if not under market, but my mortgage broker buddy is telling me the financing will be more complicated. He says such a mixed-use condo doesn't meet Fannie Mae or Freddie Mac guildelines. He says a 7/1 ARM may be the only option. If I were to proceed, my main concern is resale since potential buyers may have similar problems with financing.

I think it is worth mentioning that the condo is located in a very high HCOL area and within walking distance of a major university. There were several residential transactions in the same building in the last few years and most were all-cash purchases. I would plan to live in the apartment for 5 years at least and then rent it.

Thoughts?

- Alvim
Sounds like a very bad idea. Stick with residential properties.

Carefreeap
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Location: SF Bay Area

Re: Buying condo in commercial building

Post by Carefreeap » Sun Apr 26, 2015 7:41 pm

I've never seen them work out well for the owner, typically hard to sell probably due to financing.

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Watty
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Re: Buying condo in commercial building

Post by Watty » Sun Apr 26, 2015 7:46 pm

Be sure to look at how the condo association works with the two types of owners. The association rules could have been written up by the commercial owners to greatly favor the commercial owners.

Alvim
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Re: Buying condo in commercial building

Post by Alvim » Sun Apr 26, 2015 7:57 pm

Carefreeap wrote:I've never seen them work out well for the owner, typically hard to sell probably due to financing.
Could you be more specific? Any specific issues you have heard about? :)

Rebecca_S
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Re: Buying condo in commercial building

Post by Rebecca_S » Sun Apr 26, 2015 8:59 pm

I live in a condo in a mixed use building where the commercial units have more value than the residential ones. We didn't have any problems getting a mortgage in 1999 when we bought or 2005 when we refinanced; our neighbors haven't had problems getting mortgages that I am aware of. I know that some things have gotten more difficult since then but if you have a reasonable down payment you should be able to find a lender.

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wjo
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Re: Buying condo in commercial building

Post by wjo » Sun Apr 26, 2015 9:14 pm

Watty wrote:Be sure to look at how the condo association works with the two types of owners. The association rules could have been written up by the commercial owners to greatly favor the commercial owners.
This. Financing may be more limited, but far more important are the association rules of how the building is governed, who is responsible for what, what are the reserve and insurance policies, etc.

I live in a mixed use building and management of it is challenging, to say the least. The interface between the residential and commercial side is always time consuming to navigate, even when there is good will on all sides.

If you don't know how to evaluate this, I wouldn't think about purchasing.

And if the price seems pretty good, there is likely a good reason.

WhyNotUs
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Re: Buying condo in commercial building

Post by WhyNotUs » Mon Apr 27, 2015 9:29 am

If you need a quick sale it will be an issue. I would expect to receive a modest discount to market compared to a condo in an all-condo building at this time.
Over time mortgage protocols change and there were issues coming out of the great recession in mixed use buildings with over 25% commercial. It maybe that in 5 years the market will have changed and Freddie and Fannie will be back, or not.
My guess is that in 7 years, barring another real estate meltdown, it will be easier to get a loan but that is a WAG.
I own the next hot stock- VTSAX

Carefreeap
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Re: Buying condo in commercial building

Post by Carefreeap » Mon Apr 27, 2015 10:30 am

Alvim wrote:
Carefreeap wrote:I've never seen them work out well for the owner, typically hard to sell probably due to financing.
Could you be more specific? Any specific issues you have heard about? :)
One of my friends on another board owned one. IIRC it took her and her husband over 5 years to sell it, ultimately losing about $40k. This was during the Great Recession. The mixed use condos seem to be lowest on the totem pole for desirability with both buyers and lenders preferring straight residential or commercial buildings.

The other example is a building which was built in the 80s in my old neighborhood. Units seem to take years to sell or go into foreclosure. Enough go into foreclosure and just like any other HOA with fewer and fewer paying owners the building upkeep and reserves take a hit.

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