Who buys a duplex in Los Angeles, and how they pay for it

A duplex buyer either plans to live in one unit and rent out the other, or is an investor who wants both rents, and the financing on the offer tells you which. The owner-occupant borrows with FHA, VA or a conventional loan made for homes of 2 to 4 units, and needs a unit to move into. The investor may pay cash, borrow on investment terms, or be buying through a 1031 exchange, and doesn't need either unit empty.

Owner-occupants and investors look for different things

An owner-occupant is buying a home that helps pay its own mortgage. They'll look at your unit as a home, they need one they can move into, and their loan requires them to occupy it. Your tenant's rent helps them qualify. If the appraisal comes in under the price, though, the loan gets smaller.

An investor is buying two rents and whatever the lot might allow later. They'll read the leases and check the rent control status before they look at the kitchen, and two units rented at fair rents may suit them better than one sitting empty. Freddie Mac's small balance multifamily loans start at five units, so that kind of apartment loan isn't open to someone buying a duplex. An investor may pay cash instead, or borrow on investment property terms.

FHA loans

FHA insures lenders against losses on mortgages used to buy one to four family dwellings, according to HUD's handbook chapter on its home mortgage insurance programs. For the down payment, HUD sets a minimum required investment of at least 3.5 percent of the adjusted value.

The buyer also has to move in. HUD's handbook language requires the borrower to establish occupancy as a principal residence within 60 days of signing the security instrument, and at least one borrower has to live there. Those rules are in Handbook 4000.1.

One FHA test that a duplex skips is self-sufficiency. For three- and four-unit properties, HUD requires net rental income to at least equal the monthly mortgage payment, including taxes, insurance and mortgage insurance, so the building must be self-sufficient. A two-unit property isn't held to that test. FHA does have its own method for counting the other unit's rent toward the buyer's income, and the buyer's lender applies it.

VA loans

A veteran can buy your duplex with a VA loan and live in one unit. VA says its purchase loans can buy multi-unit properties of 2 to 4 units, and VA's lender training material says the veteran must occupy one of the units as a primary residence. VA guaranteed loans can be made with no down payment. VA's entitlement and limits page says a veteran with full entitlement has no loan limit, provided the lender's financial guidelines are met, and that with remaining entitlement the lender uses it to decide the most it will lend without a down payment.

VA sets its own rules for counting the other unit's rent, in the credit underwriting chapter of its Lenders Handbook, and the veteran's lender applies them to your rent roll.

Conventional loans under Fannie Mae's rules

Fannie Mae's guidelines spell out how a lender treats a 2 to 4 unit home the buyer will live in.

• The appraisal. Rental income on a 2 to 4 unit property is documented on the Small Residential Income Property Appraisal Report, which supports the appraiser's market rent with comparable rentals.
• How much rent counts. When the lender uses current leases or the market rent on that report, it multiplies the gross monthly rent by 75 percent, and the other 25 percent is treated as absorbed by vacancy and maintenance, under Selling Guide B3-3.1-08.
• Which unit counts. Rent on the unit the borrower occupies generally can't be used to qualify, according to Fannie Mae's general rental income rules, so it's the other unit's rent that helps.
• How it enters the math. For a 2 to 4 unit principal residence, the net rental income is added to the buyer's qualifying income and the full monthly payment is counted in the debt-to-income ratio, as the section on rental income from the subject property describes.

For you, that means your tenant's lease can end up in your buyer's loan file.

What the lender's rules mean for your sale

Your buyer's lender will look at the leases, the rents and the appraisal before it lends, and you can prepare for each of those before you list.

• A lender may count rent from a current lease, so a signed lease at a documented rent will do more for your buyer than a verbal arrangement.
• An owner-occupant has to move in within the loan's rules, so if you live in one unit, plan your move-out for closing. If both units are rented, recovering one under the RSO after closing is a regulated eviction with its own conditions and costs, and the RSO's owner occupancy rules set them out. Shaya isn't a lawyer, so before anyone counts on getting a unit back, have a landlord-tenant attorney look at it.
• A financed buyer's appraisal has to support the price. If it comes in low, the buyer has to bring more cash, renegotiate, or cancel if the contract allows, so a price backed by nearby sales of duplexes and small buildings holds up better in escrow.
• An FHA, VA or conventional offer from an owner-occupant depends on the appraisal and on the buyer being able to move in. A cash or investor offer depends on the rent roll and the rent control status.

Shaya doesn't buy duplexes himself. He can look at yours and tell you which of these buyers it suits today, and what would bring more of them in.

Investor buyers

An investor compares your rents with the market and asks whether the duplex is under the RSO, what happens when a unit turns over, what shape the roof, plumbing and electrical are in, and whether the lot has room for an ADU.

Some investors are buying with the proceeds of their own sale through a 1031 exchange. The IRS gives them 45 days from the sale of the old property to identify replacement property in writing, and no more than 180 days to receive it. A buyer on that clock needs a seller who can move quickly, with leases, rent history and disclosures ready to hand over. If you're exchanging your own rental half, the same deadlines apply to you.