Advice for dealing with moving for an acquisition and buying a home?
August 24, 2023
by a searcher from Brigham Young University - Marriott School of Management in Grapevine, TX, USA
We are getting closer on a deal that would require us to move halfway across the country, exciting and stressful all at once. The reality is starting to sink in that this could be it and we are now starting to look into how to move and purchase a home. Any advice from people who have acquired a business and then had to move and buy a home? How did you prove income to the mortgage lenders? Did you have to rent for a period of time first?
I'm also still currently employed and could maybe sell our home and buy a new home while employed and then fully close on the business after moving. Thoughts on feasibility of this option? Not sure how mortgage lenders would view that situation, and it would obviously introduce some risk if we didn't get the acquisition across the line after moving our family.
Appreciate any thoughts or advice!
from University of Pennsylvania in Portland, OR, USA
We bought a modest home near our business about a year after buying the business and before selling our original home. No lender would give us a mortgage because we had less than two years of income from our business, despite our personal strong financial position and good cashflow in the business. Even the bank that handles our business' accounts (and had for the former owner for 20 years) rejected us. They said "come back after two years and we'll give you whatever you want." We ended up tapping into other investments to make a cash purchase.
We are now selling our original home in close coordination with the SBA lender and the process is relatively smooth. It is a cashflow drain, however. The difference between the selling price and the mortgage balance minus closing costs is pledged toward the loan principal unless there is a replacement asset of equal or greater value. Costs to prepare the home for sale (paint, carpet, et al) and taxes on our appreciation (we owned it 16 years) come out of pocket and can't be deducted from the proceeds.
This less-than-two-year-old legal entity issue hit us several different ways after the acquisition. One example - the business had been buying ~$100,000 / year from Home Depot via technicians carrying company HD cards. When we applied for a HD account I asked for $20,000 and the lender capped us at a paltry $2,000 limit. I eventually networked my way to a Finance VP within HD who explained that the bank issuing the cards handled approvals and was instructed to limit any business under two years. He encouraged me to re-apply and request a limit over $50,000 which would trigger a review by the HD finance team instead of the bank and he would approve it because he recognized the history of the business and the strength of our balance sheet, not just the age of the legal entity. It worked.
I have probably a dozen more stories of fighting for exceptions in the early years of business ownership. Expect the same.
from United States Naval Academy in Colleyville, TX 76034, USA
1. First your second play, selling your current home and buying a home in your new location while on your current W-2. The bank is going to ask a lot of questions about this because your job is still in old location. If you aren't completely honest with the bank and something happens with the mortgage you're opening yourself up to risk that the bank comes after you. Note, I've actually done this but I was 100% open with the bank about the what/when/why of doing it and we structured it as a second home and with a lien on our investment portfolio. Everything was above board.
2. Talk to your acquisition lender and explain what you are trying to do. I was working on a deal that would require moving and I worked with a bank local to the acquisition to structure a lending package that included a mortgage to buy a home. We had it set up well, ultimately the deal fell through.
3. Also note that you need to talk to your acquisition lender anyway, if you're doing SBA they will have a lien on your house and the SBA lender needs to understand what's going to happen.
4. Don't be afraid to rent for a few years, it's not the worst thing in the world. If you're moving to a new place it gives you the chance to learn more about the location, where you want to be, etc. In the meantime you can be working with banks to understand what they will be looking for in their self-employed underwriting to set yourself up for that purchase.