Up In Smoke (Almost): Music School Owner Buys Ex-Grow-Op
Just after Christmas, a friend of mine confided in me that his colleague had found the perfect home to live and work in, but was having a tough time buying it. I agreed to try and help out.
“You’re the fifth mortgage broker I’ve spoken to,” said the gentleman over the phone. “I don’t want to waste your time.” I listened to his story, considered it, and offered to give things one more shot. Having attempted to get approved so many times, the client readily couriered me a thick package of the usual required documents – and some unusual.
As it turns out, the client and his wife had been circling this Fraser Valley home for over three months. It had been listed in the summer, and was even price-reduced once before the listing expired. Nonetheless, the couple apparently managed to negotiate a private sale afterward – subject to them attaining financing. And finding a mortgage had been extremely tricky.
Why? Well first off, he had been “BFS” for less than two years. That’s mortgage lingo for self-employed (Business For Self). In actuality, my client had been his own boss in the same general line of work for many years as a music teacher. His new venture, however – a growing online music school – was just over eighteen months old. I work with many lenders that are sympathetic to self-employed homebuyers – including ones, like my client, who apply for mortgages on the basis of their “Stated” income (their real, gross monthly income) as opposed to their “Reported” income (their net taxable income after deductible expenses are subtracted, more on that another time). Nonetheless, self-employment for less than the magic minimum tenure of two years caused a lot of those usually sympathetic doors to close.
Strike two? The house was once a condemned marijuana grow-op. The previous owner had actually purchased the house in its condemned state, then painstakingly walked through the half-year process of remediating it and getting it signed off by the municipal authorities for safe and healthy re-occupancy. I had 28 pages of documents diarizing it. But despite having been fixed by the book, and despite the previous owner having lived in it with his young family for the ensuing 10 years incident-free, the house still had enough stigma attached to it for almost all mortgage lenders to pass.
There are a handful of conventional lenders who, in your author’s personal opinion, “see the light” when it comes to how comprehensively an ex-grow-op can be cleaned up; however, the dilemma was that my client’s new line of work was too new. I argued that he was in the same general industry forever; that he had less than half a year to go until the magic 2-year tenure; that he had diligently saved up a six-figure down payment; and that his credit score was sensational. Lots of “no thank you’s.”
Finally, I came up with a solution. A well-known Mortgage Investment Corporation (MIC) in Vancouver agreed to finance the purchase. Their rate and terms were not as competitive as that of a traditional bank or credit union’s mortgage. Nonetheless, the loan had the right features: It was interest-only payments for a period, which would assist in my client’s cash flow while his business grew. Most appealing to him, it was structured such that the first payment not be due for three months. This gave my client enough time to vacate the commercial space he had been renting for years, and move his instruments and equipment into his new home studio. Paying interest-only to begin is not ideal; but my client now owned the home/studio he had coveted for months (and he had been throwing commercial rent payments out the window anyway!). Finally, the mortgage was Open, which would allow us to eventually transition to a cheaper, traditional lender penalty-free as soon as my entrepreneur could document “2 Years BFS.” We would do this in two phases, but get the place now.
When that stack of documents first arrived at my office, my first reaction was to empathize with the previous mortgage professionals who’d tried this purchase on. Easier, I guess, for them to pass and move onto more academic files. But challenges like these get my wheels spinning; I enjoy them immensely. And as I leafed through the package I realized: this guy is extremely organized and solid. Upshot? Not only was I afforded the opportunity to start a long-term relationship with a fascinating and high-quality client – I also had the satisfaction of phoning him with the good news that I had found a way. It was a real pleasure working with him.
This purchase had almost gone to pot; so needless to say, the good news was music to his ears. Sorry, I couldn’t resist.
TS
