This isn't about Social Security. It isn't about Medicare. It isn't about the Graying of America.
It's about a torpedo that's coming towards us. It's silent, it's fully armed, and it's not on the radar. But it will be very soon.
This is not a single family home. It's an Assisted Care Facility cleverly disguised as a single family home. You've seen them in your neighborhood too. You won't find a sign out front. It's a "stealth operation". These homes are staffed by professionals and regulated by health officials. They are owned by local "Investors" and not by large corporations.
For the residents it offers them a great alternative to the often cold linoleum clad enclaves of the standard issue nursing facility. Oh, and it's usually cheaper too!
Captain, I have an unidentified blip on Radar and it's closing Fast!
But here is what you don't know. Hell, they don't seem to even know. Many of these local "Investors" bent the
rules when they bought the home. To maximize their cash flow they bought with little or no money down. They would need their precious capital to rehab and convert the home for it's new use. Cash flow is critical to any business venture. To make the numbers work many of these investors used a form of the Payment Option ARM. Since then , they've been making the minimum payment (more net income). From a short term business standpoint there is absolutely nothing wrong with this plan. Almost.
Emergency Evasive Maneuvers
They bought a couple of years ago. Flash forward to today and we have a series of serious problems.
FRAUD
They bought a SFR with the intention of running a business in it. They committed Mortgage Fraud. Plain and simple. When they bought the home the application showed it as investment property. That means a rental home. That means collecting rent from a nice "Single Family". (That's the important part of Single Family Residence).
It does not mean running a full time business within it's walls.
Chances are that nobody will end up in jail for this, not the applicant , the loan officer, the appraiser, or the real estate agent. What happened in the past is oft times brushed away. It's the present and the future that they are more concerned with. This time around you can bet that NO Underwriter will let this file pass across their desk. "Not on my watch", said one underwriter I recently talked to. You can't use a home loan for a business property.
COMPS
They bought a 3 bedroom / 2 bath home and converted it. They split large rooms into smaller separate units in order to house more beds. Since their residents are confined to wheelchairs they won't need to park their car in a garage. Look, more bedrooms!
Now they are going to have serious comp issues. How can you compare properties accurately when this is now a 7 bedroom / No Garage 2,500 sq ft home surrounded by other tract homes that are the 3 bedroom / 1 bath and only 1,100 sq ft?
LOAN TO VALUE, STATED INCOME AND TAX RETURNS
Because they used a POA with a 5 year recast their payments are due to jump dramatically soon. Due to declining values in even the best neighborhoods, their 10% equity that they had is probably gone. The documentation they provided last time on their stated income loan isn't going to fly this time. Full Doc this time. Unfortunately there will be no hiding the fact that this is NOT a Single Family Home any longer. They'll have to refinance with a Commercial Loan this time and that will put the kabash on their positive cash flow.
Three OPTIONS
Typically a homeowner in this predicament has the choice of options. They can refinance, sell, or stay the course. Unfortunately this is a business and not a homeowner. Their future is determined by cash flow and revenue.
A refinance is out. They cannot refinance into a comparable commercial loan and still maintain positive cash flow. It doesn't exist.
Sell? Remember this is now a business and no longer a home. They'll have a hard time selling this as a business at any price. What would be in it for a potential buyer?
Stay the Course? For how long? If your business had a major operating expense jump 275% overnight how long do you think you could "stay the course"? Not very long.
ABANDON SHIP!
When this speeding torpedo blasts a hole in the side of the ship and the Captain and his mates are rowing away, who's going to be caring for the passengers left behind?
Where do they go?
What kind of care can they afford?
Who is going to help them?
My guess is that we'll be needing a new kind of Assisted Care then, specifically designed for Granny Dumping.
This post brought to you courtesy of Mike Mueller.
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Mike,
Wow!! sounds liek another Forclosure in the making :0(
What is happening here?
Tom Weiss
very interesting... and it makes me remember a few comps that were raised on an investment property refi last year.
certain areas in my "territory" have a knack for alternative usage with lots of legal and hush hush variances...
the nice thing is that I'm hearing more and more about the legitimate facilities popping up
I see some of them as non-conforming usage - but the same as many residential areas with bordering commercial zoning where a house on a corner gets a variance to be used as office or even a daycare center and the entire yard is fenced in...
Thomas - Add all these factors to the current problems out there. This one comes with a little extra baggage than the standard issue Foreclosure - people who need help to exist daily.
David - Many are above the law on the zoning issue - it's the home loan that isn't going to fly this time around.
Mike,
Tucson has seen a lot of this, as has the city of South Tucson. Thanks for spotlighting the issue.
Mike in Tucson
Mike,
I am just Lost for words. I guess there is nothing that can be done, what do you think?
Tom Weiss
Mike... I agree... it was a nonconforming usage - aka Subprime city
now, there are not a lot of homes for that loan.... commercial won't touch it because of residnential zoning
residential will just have to be someone who doesn't care how they're using it...
Mike - Thanks for the visit. As a very knowledgable mortgage guy what do you think will happen to these "Investors"?
Tom - I don't see much of any resolution. Foreclosure? Then all these people will need to find another place. Short Sale? The same thing. You really can't sell to another person who wants to keep the business. They'll have to use a Commercial Loan and that just doesn't make sense cash flow wise. Here's the question - Are you selling or refinancing a business or a home?
David - What about the comps - How are you going to make the comps work even if you find a lender who doesn't care about the biz?
Mike,
It would have to be Listed as a Business, in order to do it Right, as we know. I would think that trying to Refi as a Business would be no help either way. Maybe there is a State Program that can help in this Situation, if not, then the bank may want to help instead of Foreclosing.
Tom Weiss
WOW, How simple would it have been if they would have followed the logic to the end:) instead of being blinded by the money.
What an insightful post. Torpedo, huh? How about juggernaut??
For these home owners, the end will be cash investment buyers who will use the properties for rentals, or abandonment.
Actually, the 203(k) would help some folks finance the remodel. But, they aren't going to pay what the owners probably owe.
Bad scene. Bad scene.
Mike... if someone pushes the envelope, you can go after the clients. You can prove fraud. And possibly the appraiser depending on how he listed this wrote up this property. How is it zoned? Is it zoned residential? Mixed use? Lenn did mention 203-k....
Mike - Last year I was involved in 2 of these transactions. Although not for the elederly the business was for the mentally ill.
The private investor with the cash - I never personally met - He paid cash for 2 homes (tract homes) and had to apply with the municipalities for zoning.
For him this worked well - but he did not finance. Part of my thinks it was hard money.
Mike, This is pretty sad and scarey! Thanks for bringing this to our attention.
Rich - I'm surprised. Maybe there's zoning issues? They are all over the place here. They might have a zoning variance making them legal from the cities point of view but the issue is that they were financed with a home loan and they are not a home, anymore.
Tom - the banks made the loan originally because it was a SFR. They never would have funded had they known they'd be foreclosing on elderly people. That's bad PR. That's why some commercial lenders will not finance churches. Who wants to throw God out?
Chris - I honestly think that many of these are not business people. hence the "Investor" in quotes. The few I've actually talked to are retired or semi retired hospital workers. They know the LVN business and how to work with Elderly. Do they know much about mortgages? Not really. Does that let them off the hook? Not in my book.
Jeanean - I'm giving them the benefit of the doubt. If anything I'd blame the professionals they trusted to buy this property in the first place. (that would be the loan officer and Agent)
Lenn - I thought the Torpedo was a good metaphor. I was thinking silent, unknown, yet devastating. Yes the 203-k plan would help with the remodeling but we're going to have valuation issues. And still that get's the building back to being a residence - but what about the patients? Where did they go?
Joan - They won't be. They can plead ignorance of the law.
Maggie - Absolutely! Since you've talked to some of these people, would you say they were financially knowledgeable?
Michael - the Elderly are going to be the victims here. The Investors might lose some bucks.
Jeff - Nice to see you back and active again. The original appraiser went out and did an URAR on a 3 bdrm / 2 bath with a nice garage. It was a home when he was there. He can't be to blame. He had no knowledge what they were planning on doing.
On a 203-K as Lenns mentioned, the max loan is somewhat based on the refurbished value - right?
Margaret - Dramatic might be the right thing to get you to read and understand. Zoning has little or nothing to do with it. It's the refinance, the sale, or the holding. They have painted themselves into a corner and I see no way out.
Rebecca - see, no issues with Zoning. It's all about the financing. Cash is safe in this instance.
Judi - thanks for visiting but shouldn't you be doing something else? Like HONEYMOONING?
Mike - Not sure what you mean by that.
Missy - It's probably happening in your backyard too.
Monika - That's a big 10-4!
Sharon- That's a little different but tragic all the same.
Karl - Imagine my surprise to see that you were not in AK but UT. I'll bet it happens in Utah as well.
Lisa - I'm with you. Maybe not for a much longer time than most expect it to.
Maureen - Yes they do (probably) . I grabbed a quick snip of guidelines for a typical lender below. While they do not specifically mention a business
Paul - I'll hazard to guess that many of them are in jepeordy.
Catherine - Yup! It's still a business. If I bought a house and converted it to a restaurant (as some people do) would you expect to finance that with a home loan? Just because people are sleeping there doesn't make it permissible.
The key to all this is that when they bought a couple of years ago they were financing a regular home. The guidelines were lax, the lending was lax. They even had a certain amount of equity. Today, none of that remains the same.
Here's Fanni Mae's guideline section on Investment Housing criteria:
A 1 to 4 unit residential property, other than a Primary Residence or
Second Home that is suitable for year-round rental and occupancy.
What about Mixed Use?
And here is something on the definition of Mixed Use:
Mixed Use properties are defined as residential properties which are also
being used for commercial purposes.
All of the following must be met:
• Must be a one-unit, Primary Residence
• Borrower must be both the owner and operator of the business.
• The mixed use of the property represents a legal, permissible use of
the property under local zoning requirements.
• Property must be primarily residential in nature.
• Market value of the property must be primarily a function of its
residential characteristics, rather than the business or any special
business modifications that were made.
• The mixed use of the property should have a minimal affect on the
value and marketability of the property.
• There must be no significant structural changes to the home and the
footprint of the home must be typical for the neighborhood.
• Careful review of the mixed use neighborhoods must be done to
determine the influence investor properties have on the property
values and marketability in the neighborhood.
• The appraisal must reflect the “highest & best use” as residential
property.
That first line "Primary Residence" is going knock most every one of these out and into Commercial. The rest of this guideline is somewhat subjective. I've talked to a couple of Underwriters now and all say it falls under the same as a Bed and Breakfast. (Those are commercial loans)
What a mess! Not heard about it happening in my area. These poor people (residents, I mean).
The real losers here are the grannies and grandpas. Where do they go?
What about the neighbors in the neighborhood when the investors form a company to transfer ownership of this operation? That newly-formed company will probably go bankrupt and foreclose, taking the hit so that their credit is not torpedoed.
So many innocent losers in this game. Zoning appropriately for these operations to exist in the first place would probably help some.
Perhaps part of mortgage reform should be to visit borrowers 3 months-1year after closing for an unannouced inspection. It would not help in this instance, but the original investors might have gotten the appropriate loan for the appropriate property that was zoned appropriately had they known an inspection would take place after closing and that they could be prosecuted for fraud if they didn't pass the inspection.
Cynthia - If it's not in your area I'd be interested to know why not? What is your area doing that is different from the rest of the country?
Karen - That's a great idea but unfortunately impractical from a Lenders standpoint. They don't have the manpower and I would even argue that they don't care. Especially if it's a currently performing asset and they have securitized the loan. If the loan recasts and the owners default - the numbers are small compared to the bigger picture. We have plenty of regular homeowners going under already. This is such a small segment of the problem. But other than that - Great Idea!
Gosh Mike, I never even thought of this. This is an eye opener. Besides the financial aspect of what will happen this brings to the forefront the need to find affordable housing for the elderly in all areas of the country.
There should be some special subsidies to assist in loans and set up for such by the government whether state, county or federal or all three.