Lenders beware – the financing of Bed & Breakfast facilities can result in a Repurchase or Indemnification Agreement Request.
Recently, a client asked our Firm about financing opportunities for a Bed and Breakfast establishment. Usually located in resort areas, Bed & Breakfasts are private homes offering overnight accommodations that include private bedrooms and either a private or shared bathroom(s). Typically, breakfast is included but no other meals.
Owners of some Bed & Breakfast establishments can generate enough income for it to be their sole source of income and others operate them as a secondary means of income.
Since the dwelling itself can appear as a standard residential property, there is some confusion among appraisers, underwriters, Realtors, etc. as to the acceptability of such properties for FHA, VA, Fannie Mae & Freddie Mac financing.
Unfortunately, the GSEs and Agencies ALL have the same policy which is that Bed & Breakfast establishments are not considered to be primarily residential in nature and are thus deemed ineligible.
FHA’s policy on this topic can be found in their Handbook 4155.2 Section 1.A.1.b and is reiterated in Mortgagee Letter 2009-11 which deals with HECM for Purchase transactions.
In fact, I remember a case in which a field review was performed on an appraisal (related to a HECM transaction) involving a Bed & Breakfast (B&B) facility and the appraiser took pictures of the property from an angle that did not capture the B&B sign and failed to mention in the report about the room rentals and all of the commercial brochures of local tourist attractions contained in the foyer. This appraiser was subsequently removed from the FHA Roster for a period of time and reported to the State Licensing Board.
Although the concept of combining HECM financing with room rentals from a B&B seems like a winning proposition, it could very well end up as an Indemnification Agreement for your firm if the appraiser and/or underwriter are unaware that such establishments are deemed ineligible for FHA financing.
The only alternative is to find other types of financing for B&B establishments. The good news is that there are some viable options available – including Small Business Administration (SBA) loans. A Google Search revealed several financing options for B&Bs with different LTV and underwriting criteria.
The acceptability of B&Bs for GSE and Agency financing is just one more rule that appraisers and underwriters need to be aware of. Stay compliant my friends!