Has anybody ever dealt with...

[Backyard Imports]

OK, so not quite a garage issue but I figured because of the experiences many of you have had with building, someone may know.

Has anybody ever dealt with a bank/mortgage company as far as tearing down your existing house and building a new one?

A little backstory... We purchased our current property about 2 years ago. This property includes two houses and two large outbuildings. After purchasing the property we were informed by the county that the 2nd house was not supposed to remain as it was installed (it's a double wide) on a temporary permit and had to be removed. After speaking to the county I called our mortgage company. They told me that we couldn't remove it without being in default because it was part of their interest in the property and what they loaned against. Using this as leverage we were able to get this issue resolved without removing it but it brings me to my question. What might our bank say if we tell them that we want to tear down the main house and build a new one? I know that, in the end, it will be better for them because if we were to default they would have a brand new house to sell. However, having worked with banks in the past on building loans, I know that they don't particularly care for "owner/builders" because they have seen too many projects not get completed (so I was told). I have had to fight with them because they didn't want to lend money unless we hired a GC that could guarantee a completed project.

So, back to the question. Has anybody done this before and had to deal with a mortgage company? We plan on building the new house for cash, so we don't need any additional loans against the property. I am just curious about what I might have to deal with before I actually broach the subject with them.

Thanks in advance.

 

[kd3pc]

Given the info provided, You would likely be best to pay off what you currently have and secure a construction loan that converts to a mortgage to do your new stuff.

The bank is going to fight you every step of the way, regardless of the intent, the intelligence or the better good you are trying to convince them of. You are not going to convince them that tearing down their interest and replacing it will be in "their" best interest. There will be a lot of work they need to do, and tons of inspections and escrows by them as the project plays out. Each of those will cost YOU money.

The bigger the bank the bigger the fight.

By changing this - you may well inherit/renew the zoning battle for the mobile home with the town

FYI, it sounds as if "something" is missing in this story, as very few people tear down and replace, unless there is some "real" need to do so.

I hope you have a lawyer, and are prepared to fight the bank and the locality.

 

[Radix2]

Or if not paying the whole thing off, pay enough and refinance the loan so that the real estate alone covered the remaining principle.

I think you have the issue in hand, about the only thing to do is gather some appraisals on what the bare land is worth to have some idea where you are vs your outstanding balance.

 

[rktinc]

As a former banker. First! get away from the Mortgage company. Go find a locally owned, small town, bank where the ownership is local. Then (IF you have a good history, building plan, and can communicate your goals) the local bank will handle everything locally therefore eliminating the big bank/mortgage company idiots. The best way to deal with it it to pay it off and use cash. The second best way is to stay local. Don't get caught up in the interest rates or other trivial things as YOU control the effective rate of the loan by your payoff rate over the course of the loan.

 

[ard]

Why would you tell the mortgage company?!?

I've pulled a dozen permits over the last 24 years and never discussed a word with any of the mortgage companies.

You call and ask and you are ABSOLUTELY going to get a 'no'.

Maybe I'm missing something, but this is one of the sillier things I've read. Just do it. Mortgage company will never know a damn thing.


Edit: Read the post: OP DOES NOT NEED A LOAN. IS DOING IT FOR CASH.

 

[Backyard Imports]

FYI, it sounds as if "something" is missing in this story, as very few people tear down and replace, unless there is some "real" need to do so.

Before purchasing this property we had built a brand new house. We loved everything about it. My wife's job forced a small relocation and we had to sell it so that she could avoid a 2+ hour commute (each way). We compromised on the house in favor of lot size and location. The house was built in the mid 30's and had never been updated in any way. We figured we could just completely gut and remodel it but the original construction is very limiting. We have been trying to design something around it but have found that it would be less expensive to just build new. We want to build the exact same house that we had built before.

 

[Backyard Imports]

Or if not paying the whole thing off, pay enough and refinance the loan so that the real estate alone covered the remaining principle.

I think you have the issue in hand, about the only thing to do is gather some appraisals on what the bare land is worth to have some idea where you are vs your outstanding balance.

We don't have quite enough to pay off the note. It is currently at $249k on an appraised value of $511k.

We built our other house 4 years ago at a cost of $143k. We have a budget of $165k which we think will cover the increased cost of materials since then.

 

[Radix2]

We don't have quite enough to pay off the note. It is currently at $249k on an appraised value of $511k.

We built our other house 4 years ago at a cost of $143k. We have a budget of $165k which we think will cover the increased cost of materials since then.

Any idea what the lot is worth?

Seems like even without the old clunker it should be over the $249. Of course, banks have different LTV criteria for vacant land vs owner occupied.

Surprised/not suprised they were quibbling over the mobile home...

 

[myredracer]

Well, I'm not in the US but have an interesting story on this subject.

I bought a 5 acre property with a small & crappy old farm house that I intended to demolish after the new house was built. The wind would blow through it in the winter it was so bad. City hall blackmailed me by forcing me to pay a $5K deposit that would only be returned after I got an occupancy permit for the new house and had to agree in writing to demo the old one. A few years later when the new house was almost finished I started to demo the old one. Nearly every stick of wood had rot in it and nothing could be salvaged even if I wanted to. It had no redeeming qualities of any kind and was a POS. Rural property here cannot have 2 dwelling units, period.

So the old house is almost down to the foundation and I see a car pull into the driveway. A guy gets out and snaps photos of me and what's left of the house and leaves. O ****... Is the guy a neighbor I pissed off, a PI of some kind or what? So I phone up city hall later that day and ask about getting my deposit back. Turns out the guy was taking photos of what supposed to be the complete house still standing. City hall wanted the house inspected to see if it had any heritage value and needed to be left untouched!!! WTF?? A few days later I went in and applied to get my deposit back - nobody said anything and I got my $$ soon after.

Moral of the story is that the world is a crazy stupid place and not much goes the way it ought to. Pffft....

 

[theoldwizard1]

OP - my gut says, if the mortgage company claims that structure has value, ask them to revalue the property WITHOUT that building. They will likely require you to have the building removed within a period of time and the site inspected.

 

[Backyard Imports]

I appreciate the responses.

Has anybody done this, or know of anybody who has done this, in the U.S.? I am really curious as to how they went about it and the issues that arose.

As far as value, if our land was completely vacant it would be worth more than our current loan. Land around here is at a premium and we are sitting on 5 acres. A wet 3 acre lot up the street half a mile just sold for $178k and a 26 acre lot that is not subdividable just sold for $1.4 million!!

 

[pmiranda]

My first thought is to get a cash-out refi or home equity loan based on your current appraisal (even a crappy house is worth more than an empty lot in most places), do the tear-down and rebuild, and call it good.
The risk is that if you don't complete the rebuild and something happens (you die, the materials are stolen, etc.), then somebody is still on the hook for the loan value.
I'm probably missing some important fine print on the loan.

 

[Motown]

My wife had a co-worker that torn down the original home and built a new one. Never told the mortgage company a thing.

 

[Radix2]

I appreciate the responses.

Has anybody done this, or know of anybody who has done this, in the U.S.? I am really curious as to how they went about it and the issues that arose.

As far as value, if our land was completely vacant it would be worth more than our current loan. Land around here is at a premium and we are sitting on 5 acres. A wet 3 acre lot up the street half a mile just sold for $178k and a 26 acre lot that is not subdividable just sold for $1.4 million!!

It is done all the time, I have torn down houses on investment property to build new. The difference is there was not a secured owner occupied mortgage in place.

If the numbers are as you say, you explore refinancing with a new lender without having them place any value on the building, get the $249 and pay off your current lender. They may require you to demolish and not live on the site as part of the contract - as noted above, a local bank may prove helpful in non-cookie cutter specifications.


As far as just not telling anyone. I am sure your current mortgage has covenants describing your duties as a borrower... actions like removing a residence will would put you in breach of those duties and subject you to various remedies.. Sure, maybe it is likely nobody notices - but then if you are getting permits, liens, etc, many of those documents go to the Owner/lien holders and it is possible they do call you on it.

It sounds like you are in a sound financial position and there is no reason to take a risk or hide anything you are doing. Investigate you options to refinance under different terms and move on.

 

[Radix2]

I guess one other comment is to be darn sure of what you can build before you tear anything down. Based other posters in Wa., it looks like you have a pretty aggressive zoning and permit regime - make sure that you don't need anything grandfathered in, your proposed is all compliant, new wetland, EPA studies, run-off rules.

Seem like I saw a western Wa build here where there were 60k in permits and studies... that would sting...

Sometimes leaving only a single wall standing puts you in a completely different status from a new build.

 

[FearTheH]

As others have said, I would get your permits for construction through your locality, and just start to demo the home. Especially if you're going to cash flow the entire thing, then your mortgage company needs not know anything of it and if anything arises down the road you were just making improvements to the property.
If the double wide is habitable, live there during construction and address removing it afterwards...I'm surprised they're concerned about it not being there since usually a loan on a mobile home is usually extremely hard to get seeing as they depreciate in value. Any improvements you make should make should make the mortgage people pretty happy since it's adding value to the property and if you end up folding at some point then they will come out on top.

 

[kd3pc]

i have done a couple and only got involved with the mortgage company, as there was a "due on demand" clause which basically said that if the mortgagee "materially changed, caused change or allowed change" on the secured property, the mortgage was called and due in full immediately.

Of course the homeowner "knew nothing about the mortgage" in his conversations with me.

You might want to read, or have read by your attorney (see previous post) to determine what the consequence of doing this without notifying your mortgage company.

Bests.

 

[Pig9r]

Sounds like nothing that 5 gallons of diesel fuel and a match can't take care of...

If any of the other options don't work, you do have about 250k in equity. Perhaps you could get a separate home equity loan to help cover the gap of what you can spend out of pocket and the cost to build then refinance the original and home equity loan once it is done. Question is then will it appraise for the total loan amount?

 

[poppinjohnnies]

I'm a community banker and we often deal with these situations. As RKTinc stated earlier, ditch XYZ mortgage Co and deal with a local community bank. While I'm normally reluctant to jump into financing an owner built project, I do so quite often. Why? Because I work and live in the community and I usually know if that particular customer has the ability / experience to finish the project as planned. If the structure being torn down was used as value / added value on their appraisal, then the mortgage co. definitely will have a problem with it being removed. It doesn't have to make sense - that's just the way it is. Common sense does not prevail with the big shot broker/ lenders.
Normally if we have someone who is purchasing a property with the intent on replacing an existing structure w/ a new one, we request that the appraiser omit any potential value for the structure that is to be removed. (pretend it isn't there because the intention is to remove it in the first place - nothing shady, just common sense) Most of your mortgage brokers can't / won't leave their comfort zone to provide this "outside the box" service for their customers. They're salesmen, just like the ones at the car lot. Collect commission check & move on.
You're at 49% LTV (loan to value). I'll bet that there's a community banker close to you who would be more than happy to help you out. Then when / if the next project comes along, you can walk in and actually speak to the same friendly person.

 

[DCarr2]

Something I have learned from reading posts like this as well as life experience:

The less they know the better. This goes for banks and local Govt's especially.

For instance, prior to buying my current home there was a 40x80 ft cindre block barn on the property that had a major foundation failure and the building was in serious risk of falling over onto the newer pole barn (my new shop)

being that the sellers own a successful demolition company they offered to tear it down for free, prior to closing. Hey that works... that saves me buckets of money. they pulled the permits demo'd the building all good right?

well the local building inspector happened to be on vacation during all this, and the sub (borrowed from a neighboring town) issued the permit...

jump ahead 4 months and my towns BI shows up wanting to know why i hadnt pulled a permit to demo the building, i calmly explained it was done prior to me closing on the property. He actually was snarky about this and said that if I am lying that id face fines and such...

I told him to look through his paperwork and what not.

needless to say, about 6 weeks later I get a letter in the mail complaining of the steel beams and concrete block piled on the propertry and how its a danger and could be a place for rodents to live and such, and to call with any questions, they also wanted it cleaned up with in 30 days.


So I called, and asked how the BI came to such realizations and he said well I stopped over to look... so I said 'well you cant see any of the items you listed in your letter from the road, which means you were trespassing on private property for no reason. I said, your complaining about something no body can see unless they break the law by trespasssing like you did, and are harasssing me about something the previous owners did with out bringing it up prior to closing (a BI was here prior to closing)


long story short he said to put up caution tape. instead i put up posted signs.

 

[Backyard Imports]

I guess one other comment is to be darn sure of what you can build before you tear anything down. Based other posters in Wa., it looks like you have a pretty aggressive zoning and permit regime - make sure that you don't need anything grandfathered in, your proposed is all compliant, new wetland, EPA studies, run-off rules.

Seem like I saw a western Wa build here where there were 60k in permits and studies... that would sting...

Sometimes leaving only a single wall standing puts you in a completely different status from a new build.

I have already done my diligence there. I have spoken to the county, wetlands are not an issue, the house is a plan that has been built in the county in the last year so they are familiar with it and it passes muster.

As far as leaving a wall standing, they changed that rule to one where you have to leave a certain percentage of the original building for it to qualify as just a remodel.

i have done a couple and only got involved with the mortgage company, as there was a "due on demand" clause which basically said that if the mortgagee "materially changed, caused change or allowed change" on the secured property, the mortgage was called and due in full immediately.

Of course the homeowner "knew nothing about the mortgage" in his conversations with me.

You might want to read, or have read by your attorney (see previous post) to determine what the consequence of doing this without notifying your mortgage company.

Bests.

I haven't went over the fine details of the mortgage but I am sure that something to this effect is in there. It is standard language and the reason they were throwing a fit about the manufactured home. The mobile added no value to the property (in their opinion and the appraisers), and they wouldn't have lent if it was actually title eliminated, but it belonged to the mortgage as far as they were concerned and could not be removed without causing a "due on demand" situation.