Peter Vilmos is a partner at the Orlando, Florida, office of Burr & Forman. His
legal practice involves complex commercial litigation with issues ranging from
construction-related matters to business and banking disputes; first-party
insurance matters; environmental, health care, noncompete and trade-secrets
litigation; and real estate issues. Vilmos also serves as counsel
to developers, general contractors and an array of subcontractors.
Reach Vilmos at (407) 540-6622 or firstname.lastname@example.org.
The housing bust and the recession that followed left an indelible mark on the manner in which the average person or family purchases a single-family home. Gone are the days of no income-verification loans. Regulators now agree that it makes good business sense to know whether the person borrowing money actually has the ability to repay it.
In this environment, commercial mortgage brokers should analyze the impact and
role of construction financing as it relates to projects in the multifamily sector and also
examine how closing more loans will raise the satisfaction levels of the lenders and
borrowers they do business with.
To avoid any appearance that the federal government is careless with taxpayer
money, new lending restrictions typically require homebuyers today to make significant downpayments on residential home purchases. The problem with that new
normal — although it makes perfect fiscal sense — is that most individuals on the
lower end of the income scale do not have enough available equity to meet the newer
lending requirements. As a result, many of these potential buyers cannot qualify for
a home loan, even if they have the income to accommodate the calculated mortgage
payments, taxes and insurance.
With the likelihood of a home purchase decreased, many of these potential borrowers
are forced to rent instead of buy. There are other factors that go into this, beyond the difficulty of saving for a downpayment. Those include larger amounts of student debt among
millennials and the increased relocation flexibility renting offers.
Low-income homebuyers will likely continue to find it difficult to qualify for a mortgage because of a lack of available equity to invest in a home purchase. Under current
lending requirements, there is little that mortgage brokers and originators can do to
assist. This does provide an excellent opportunity, however, for the construction of
multifamily rental properties.
To develop these projects, borrowers — in this case, owners or developers of multi-family properties — not only need a commercial mortgage loan, but they also typically
need construction financing. For most of the last 10 years, this required both a short-term
construction loan and permanent financing upon completion of construction, but some
lenders have recently reported that single-close, construction-to-permanent loans are
making a comeback.
Lower inventory supply
The increased flexibility of a construction-to-permanent loan is important, especially
in a market of generally rising home values. Mortgage brokers should recognize the
recent availability of construction-to-permanent loans and, in the right circumstances,
make them available to clients working in the multifamily rental sector.
This is relevant because, in a rising-rate market, the value of the completed and improved property often exceeds the acquisition and construction costs. The increased
property values greatly enhance the loan-to-value (LTV) ratio. The additional equity in
the property makes the conversion to permanent financing attractive to the lender and
buyer, as well as the mortgage broker who is looking to satisfy both parties.
The typical inventory of existing homes for sale is usually enough to last for about
six months. Across the country, however, available inventory is significantly lower than
that. In central Florida, for instance, recent reports indicated the market was at an extreme low of 3. 42 months of housing inventory supply. That’s simply not enough available inventory for all the willing homebuyers to purchase the homes they want.
This reduction of supply has the correlating effect of driving up home prices. Higher
prices, of course, drive away some potential buyers. Add in the fact that interest rates are
on the rise and this situation is bound to self-regulate one way or another: Either the allure
of higher prices will entice more sellers to list their homes, which will increase available inventory and likely drive down home prices because the available inventory will increase,
or potential buyers will decide to avoid the marketplace. If rates go high enough to chase
away a significant number of buyers, then prices will likely decrease. Until the housing
market does adjust over the longer term, however, the demand for rental housing and
multifamily construction projects is likely to remain strong.
find it difficult
to qualify for
because of a
lack of available