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.
How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
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!
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.
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!