I want to inform you of an issue that I, as a buy and hold landlord and former zoning official, have been seeing pop up again and again as the effects of the real estate bust linger on. This is the issue of the non-conforming use. A non-conforming use can quickly turn a great deal into a nightmare for the uneducated investor.
Zoning & the Regulation of Land Use
First, some background…. most jurisdictions in the United States have some form of zoning regulations in place. Zoning can regulate many things but for our purposes, I just want to focus on the regulation of land uses. Zoning limits or restricts the use of land. Certain zones may only permit single-family dwellings and thus forbid apartments and commercial uses. Or the opposite may be the case.
Many older communities have areas that were developed before zoning was in place. Often times these areas contain a mix of uses not found in more modern areas. These older areas may have tri-plexes next to single-family homes which are next to the corner grocery or café, etc.
The Issue: Rigid Zoning Codes & Non Conforming Use Limitations
The issue lies in the fact that most zoning codes are very rigid and were put in place after these areas were developed, and thus do not recognize these mixed uses. So a mixed use area could be zoned for single-family only. This does not mean that a tri-plex in a single-family zone has to stop being used as a tri-plex. The tri-plex becomes what is called a legal non-conforming use and becomes grandfathered. Because the tri-plex predated the zoning regulations, it can legally continue to be used as a tri-plex as long as that use continues uninterrupted. There is the catch!
Non-conforming uses are only grandfathered as long as they are in continuous use. If they sit vacant for a set amount of time or the use is changed, the legal non-conforming status is lost. After that, any structure or use has to comply with the zoning code.
The real estate bust has exacerbated this issue. Owners abandon underwater properties, tenants leave and the banks may take months or even years to foreclose. These periods when the property sits vacant and unused may cause the loss of the grandfathered status.
Imagine you have found a four-plex. It is a bank foreclosure. It has sat vacant for more than a year and it needs extensive repair. You negotiate a great price due to these factors, then close and are expecting great cash flow. However, when you go to turn the utilities on, code enforcement tells you they can only turn one unit on since the four-plex has lost its grandfather status after sitting vacant for a year. It can now only be used as a single-family dwelling. There goes your cash flow!
Now What?
After you get over that sinking feeling, you can try and get the property rezoned. But rezoning process is expensive, lengthy and even worse political. All your neighbors may hate apartments and will come out to the public hearing to fight you. You may just be stuck with a very expensive problem.
Protecting Yourself
How can you prevent this? There is no set zoning code. Codes differ from place to place. If you invest in older parts of your community like I do, you need to be aware of three things before you buy a property:
- The zoning of the area you are investing in.
- The manner in which a building or use loses its grandfather status.
- The length of time the building or use has been vacant. Often this can be determined by finding out how long the utilities have been off.
All of these can be found by calling your local code/zoning office and utility company.
Here in my jurisdiction for example, the time period is one year. So if I find a non-conforming four-plex that has had the utilities turned off for over a year, I either do not buy or make a very low offer. I explain that the offer is so low because I have to convert the property into a single-family home.
Do not expect the banks to be aware of this potential problem. Many realtors are also unknowledgeable when it comes to zoning complexities. It is incumbent upon you to check these things out with your local codes and utilities offices before you buy. Code enforcement will be very unsympathetic to your plight if you get yourself in a mess.
I hope this article saves someone a load of trouble down the road! Happy investing!
{ 17 comments… read them below or add one }
Thanks for the great insight. I’m sure many folks never thought of these “gotcha’s.” Hopefully this will save someone from a costly mistake.
Jason
Thanks for the comment Jason. I hope the article saves someone some hassle too.
Kevin,
Great article. Just ran into this myself. Here’s what happened:
House built in 1944 and I purchased (without bank financing) from original owner. House sits on a corner but entire block and across the street consists of SF homes.
Rehabbed the property, found a buyer and during underwriting found out the building was zoned AA Commercial and the lender would need a re-build letter from the city indicating the property could be rebuilt in case of fire etc… The city stated the zoning changed back in 1972 (40 years ago!!) and they could not provide a rebuild letter for the property. They said a request to rezone (along with $250 fee) would be necessary. It would have to be posted twice in the city newsletter (out monthly) and up for debate before I would able to get a chance to get the property rezoned (and they could end up saying no)
Thankfully through my network I was able to locate a state statute that overrode this local zoning ordinance. I showed it to the city attorney, he agreed, and I got my rebuild letter to the underwriter the same day. I just closed two weeks ago.
Please add this to your checklist when buying property. If I had to go through the process of rezoning I would have most likely lost my buyer and the holding costs would have been significantly higher.
Again, great article!
Thanks for the comments James.
1944 wow! I wonder how they got a house built in WWII with the materials shortages and all? It is funny, the materials shortages during that time caused a housing shortage and that was when many SF homes were broken up into duplexes, tri-plexes and such to meet the shortage. Those uses still exist in many areas and today are the non-conforming uses I talk about in my post.
Jurisdictions can change the zoning at any time (even 40 years ago) and there is no way to know unless you specifically ask. Do not just assume that because a building has been there for 60 years that everything is legal! I have seen more than one investor get into trouble because they did not ask. Very good advice you have on adding a “zoning box” to your checklist because it is the investor that will take the hit.
I wish more people that deal with real estate would become better informed regarding the issue of zoning, planning and conservation issues and how if impacts the value of a property. Buyers need to be aware that municipalities are not your friend and the questions and answers need to be in writing.
Being in the business of real estate development I occasionally here about property that has burnt and how the municipality wants it to conform to the current zoning even though the state law allows it to be rebuilt as it was by right.
I also hear of projects that get building permits issued by very liberal building departments know that a sign off was required by a Conservation Commission or the proposed project increases the non conformity requiring a trip to the zoning board of appeals.
This puts a seller and buyer in a bad spot if a good attorney reviews the parcel’s chain of title as well as a municipal map that shows wetland delineations and building locations with dimensions to property lines. It could potentially lose a sale or cause great delay.
Thanks for the comment George.
As you say zoning can be very complex and investors need to be aware of its complexities or at least know someone who can help them if needed. Making friends with someone at the codes office is not a bad idea.
What makes zoning even more fun as you allude to is the “discretion” some jurisdictions have, or even different administrations within the same jurisdiction have on applying and enforcing the zoning and other codes. What is proper here may not be proper there or what is right today may not be tomorrow.
Holy cow! what an eye opener!
Great first article here on BP. I’m hoping there will be more of this caliber.
)
Thanks for the kind words Nick! I look forward to writing more.
Great article Kevin. Very informative and well done.
Another source of potential trouble for a multi-family property buyer is the illegal non-conforming property. The duplex that was split into a 3 or 4 plex without the city’s knowledge…usually in a neigborhood zoned R-2 (in my town, single or two-family residential). One of my first calls when checking out a multi-family is the utility company. I always ask the number of units the city is tracking for the property. There shouldn’t be a discrepancy. Whenever I see three or four unit that has only two gas or electric meters I get suspicious. A buyer assumes great risk (financial as well as liability) in buying an illegal multi-family.
Good advice Sam, thanks! Zoning can really be hazardous to cash flow if an investor does not know what they are doing. Even if the use has been there for dozens of years it still may be illegal. All it takes is something like a sale and the shuffling of public records for somebody in codes to take notice.
Wow! Thanks for the heads-up, Kevin.
You are welcome! Thank you for reading.
That’s a great point Kevin. I’m guessing this will save someone’s bacon
Thanks for the comment and thanks for reading Daniel.
I looked at a duplex in Beloit, WI which had been sitting empty for a while–looked like the seller was a DIY rehabber that ran out of money. I think what really happened is that it was vacant for over a year and lost it’s multi-family status and he was trying to get rid of it. Fortunately my Realtor knew about these codes and checked it out. Seller was trying to sell as a duplex when he almost certainly knew by this time that it could no longer be one.
Couldn’t one sue the City for failure to provide the proper zoning? If you could prove that the property was zoned nonconforming to it’s use to benefit other property owners wouldn’t that bring in the question of possible corruption or undue influence?
Jim,
You can sue for any reason, but the courts are not going to give you much relief here.
the courts generally do not like to second guess a local legislative body. For example, here in Tennessee zoning will be upheld by the courts if there is “any rational basis” for the zoning decision. I can tell you I can come up for a “rational basis” for almost any decision I make, and I bet the city can also.
Zoning something non-conforming is done all the time because the city wants the use to eventually go away, and it is perfectly legal.
Plus it is very expensive and time consuming to sue a city. I have seen cases drag out for years.
If you can prove collusion among property owners for the benefit of a few, you might have a case, but you are facing a very long and expensive row to hoe!
Thanks for reading and commenting,
Kevin