What the hell are the financing options for non-traditional homes?

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Offbeat Homie Kathryn asked us a question that we can't answer. But maybe you can?

Industrial
By: edwinguerraCC BY 2.0

I'm wondering if you/your fabulous readership would have any advice about getting financing for nontraditional living spaces. Banks seem to be incredibly reluctant to finance anything other than a traditional home mortgage, but that's not at all what we want!

My husband and I have dreamed for years of purchasing a small building in our adopted city. We've never been drawn to traditional neighborhoods, and feel like our souls are slowly dying, as we're currently trapped in Suburbia.

We have the perfect neighborhood in mind, and are eying a particular building that we could easily inhabit while doing renovations at the same time. We'd convert the top floor into a swinging loft where we'd reside, and the bottom level would be studio and manufacturing space for my husband's freelance art business, possibly with a storefront gallery.

Yet, we're having a terrible time finding funding for such a building. We're certainly not rich, but I'm established in my career, and could walk into pretty much any bank and get a "normal" residential mortgage of $150K. But no banks will even talk to me when they learn that we want to purchase a building for our primary residence instead of a house. They immediately want to know how much rental income we'll be bringing in (none — we just want to live in the damn thing!).

We've considered trying to get a business loan, but organizations like the SBA try to encourage us to rent a space for my husband's business instead of buying a building, so the doors seem to slam shut there as well. No one seems to understand that we just want to live in a nontraditional space!

So many cities make noise about building artist communities and being artist-friendly. Everyone knows artists make neighborhoods nicer! In days past, it was quite normal for people to live above their shops. Why is it so difficult for banks to catch up to current trends, and be willing to fund live-work scenarios? What financing options are out there for people like us who aren't at home in a "normal" home?

Live/work spaces? Industrial lofts? Or maybe one of those cool fire station homes? Do you live in a home that's not technically a home? Tell us all about your financing options for non-traditional homes!

  1. I know the Earthship movement has a database called 'pockets of freedom' that lists places where you can get easy permitting and zoning for nontraditional living spaces, but I don't know about financing. Maybe look for some nontraditional architects/realtors in the area where you want to live? They probably have cross-industry connections that could help you.

    I also found this:

    http://www.realtor.com/advice/how-to-finance-a-nontraditional-home/

    TL;DR: It suggests seller financing and/or a rehab loan.

    • And if you can get one, a rehab loan is probably the right loan anyway, given that you'll almost certainly have to do work to bring it up to housing code.

    • Technically, it would have to be zoned for mixed use, if you want both commercial and residential in the same building. 🙂

    • You're absolutely right that zoning could be a barrier. Fortunately, the area we've been focusing on is primarily zoned multi-use, and all the buildings we've looked at have allowed residence as well as retail/light manufacturing. We've definitely kept an eye on that!

  2. OP, my best advice would be to talk with an experienced mortgage broker and skip going directly to the banks. If you're dealing with a property that's already zoned for mixed use, you're probably going to have to go with a commercial loan which is pretty different from getting a personal mortgage. If the property is not zoned for mixed use currently, then there's a whole other host of work that needs to be done to have the zoning changed. In other words, I'd strongly recommend getting a real estate agent that has experience with commercial properties.

    Good luck!

    • I agree. An experienced mortgage broker with work in both commercial and residential lending will find the best fit for your situation.

      • We had originally thought that a mortgage broker might be the way to go, but haven't had much luck yet. They seem to ask the same questions as the banks (how much rental income will you be making from the property?). It is, however, highly possible we just haven't found the right broker!

        • It's been a loooooong time since I was in the real estate area, but I'm guessing you'll need a mortgage broker with commercial experience. I do remember mixed use properties were a pain in the butt for people to acquire, but there are generally very few of them on the market, so I'm guessing people hang onto them once they get them.

          If there's some sort of business association for that neighborhood, you could reach out to them and see if they know a commercial mortgage broker, especially if there's a decent number of mixed use properties in the area.

        • Does your husband's business & gallery make any money? I'm not a lawyer, but it occurs to me that if his business is set up as a formal entity (corp or LLC) as opposed to a sole-proprietorship/informal freelance set up, you (the couple) could rent to his business entity. Contact a lawyer that works in real estate and business entity formation and THEN go to a mortgage broker. (They ask about how much rent you are going to get because it counts towards your income for qualifying for the loan and most people buy a space like that for income to offset their housing costs.)

  3. I think it also depends on where you are/live. My place is a live/work townhouse where the first floor is zoned commercial (it was purchased with a traditional home loan). My best advice is to go to a place in your location of choice and find someone who has the setup you want and talk to them. Find out what it took, how long, and who they went through.

  4. Working in business I see the flip side of this much clearer. Zoning laws are in place and extremely important because of safety. Should something go wrong in your shop below, or the commercial buildings on either side of your residence, you could lose not only all of your personal assets, but all of your business assets as well- in one accident. Financial institutions often shy away from these investments because of those risks.

    From a business perspective, there are noise, air, parking, and many more restrictions to take into consideration when a residential dwelling pops up in a commercial area. Also, residential buildings mean that people will be around the business after business hours. That could mean added security costs, insurance liability, etc. This is why zoning laws can severely impact real estate prices.

    Lastly, while it's sweet that people say artists make areas better- it could easily be argued that using commercial space as residential rules out the possibility of a larger business moving in and employing people. Jobs have a huge impact, if not the largest impact, on communities. Though of course it could be argued that nearly anything moving into a vacant building is better than prolonged vacancy. Just wanted to shed some light on the other perspective as well.

    Best of luck in your endeavors and kudos to you for questioning the status quo!

  5. You might want to look into the FHA 203k loan. It's a loan that allows you to finance the rehab costs into the mortgage, but you have to use certified contractors and vendors, so if you're intent was to fix it up yourselves this may not be the best fit….

    • After reviewing FHA loans for an appraisal management company for several years, I'm not sure this is a good idea. 203k loans are notoriously difficult to get even for single family homes. Getting one for converting part of a commercial building would be downright impossible (and it would be impossible to appraise, especially for determining the economic life of the property).

  6. I don't know about large cities, but where I live, most of the small cities & towns in the region have downtown areas with a few buildings for sale with shops below and apartments above. Most of them need a lot of TLC but also have a lot of potential. The banks are familiar with the buildings & their multi-use purposes. While the big banks won't do much, I have been told that the bankers at the regional banks & credit unions are supportive of the need to shore up these downtown areas, so it can be easier to work with the them. (Unfortunately, interest rates may be higher at the smaller institutions.) Also, real estate and the cost of living in smaller cities is usually much more affordable, lowering the amount of funding needed.

    Most cities have economic development offices. There are sometimes loans and grants available for establishing businesses, the purchase &/or rehabbing of empty buildings in the areas of town that they are trying to re-develop. If the building is older, you could also check with the local historical society to see what funding may be available to preserve the building. They may not have funding available, but would know of other sources. If the main commercial purpose is for the arts, check with your local arts commission for funding sources. There are also often other community oriented foundations that offer grants for all types of projects.

    I second the advice to talk to a lawyer about the business entity. I also recommend talking to an accountant. There may be tax advantages to different types of business formation. While you are at it, ask about the advantages or disadvantages and requirements to establish the business and/or rehab project as a non-profit endeavor. While that may limit your future use/income/personal profits from the property, and create a lot of paperwork, it may open up more funding options.

    If you are unable to get the funding for this project, right now, don't give up. You could consider purchasing a small (tiny?) house & a small commercial property. You would have separate loans & likely need more money down. However, living in a more traditional space for a few years would let you build your equity & business. Then when you have a proven track record, you could go to the banks with with equity & rental income from those properties, while you take on the dream project. I have known two couples who have gone this route, and while it took longer than they wished, they were very happy with the end results. They diversified their income, created a more stable financial base for themselves, and were still able to follow their dreams.

    Best of luck. I hope you will post in the future to let us know how it turns out.

  7. I forgot to add that some states are offering loans, grants, & tax rebates for energy efficiency upgrades as well as sustainability improvements such as solar panels & wind turbines. These programs are usually administered through local governments and power companies. You may have to piece together your funding though several sources, but if you do your homework & put it all together as a solid business plan, the banks may be more open to the idea. Your local community college or Small Business Development Center (not SBA) may be able to help with this.

  8. Another concern that a bank (or any other mortgagee) would likely have is that you cannot purchase traditional homeowners insurance for this type of building. If you're doing any type of major renovation, structural or otherwise, this complicates it further and adds to the risk, especially if you don't have licensed contractors doing the work. Requirements will differ by state/province, but just something to keep in mind.

    I also agree with using a mortgage broker. They have a wider variety of lenders to choose from. They tend to deal with the banks too, but often have access to different rates. Once you buy, go to an insurance broker instead of directly dealing with an insurance company. Again, we have access to many companies, including specialty markets.

  9. I'd strongly recommend finding an experienced mortgage broker who knows a good bit about alternative lending.

    A private mortgage might be an option, but you'll pay higher rates, fees, etc. Your trouble may be just finding someone to take the risk – a mixed-use property can be tricky to get rid of in the unfortunate event that you were to default on the mortgage, which is a big part of why lenders are reluctant to go near them.

  10. If possible, maybe you could treat this property (on paper) as a small business. I've seen quite a few greenhouses with a "utility" room or office built into them that later serves as living space. There are also a lot of Barns and garages with rooms built atop of them.
    My property has quite a few large boulders. One of which I am building an earthbag hybrid home just behind. I'm using a lot of natural wood for posts and beams as well. Sort of a hobbit like place.
    It's a shame there aren't more people looking into super adobe, or earthbag homes, etc.
    A town across the lake from me lost about 200 homes in a fire last year. If they were living in a earthbag community, the homes would likely not have been lost.
    There is a family on you tube I believe it is under "my little homestead". Check that out if you get a chance. Lots of info on a variety of building options …not typical thinking inside the box, and very inventive and creative.

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