Real estate horror story, need some advice

OP

Real Estate Investor · South Jordan, UT · Member since 2017 · 86 posts · 34 votes

@Wayne Brooks

Yeah maybe I’ll do that. I forgot to mention the house is zoned for r4, any advice with that info?

Matt Devincenzo

Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes

Quote from @David Li:

@Wayne Brooks

Yeah maybe I’ll do that. I forgot to mention the house is zoned for r4, any advice with that info?

This info is useless with the context of what R4 zoning allows and doesn't allow for your area specifically. Don't just go out and tear down the other 6 units as it is possible to permit structures after the fact. Your City may not be very open or willing to work with you on something like that, but it is worth exploring. I'd start with a local RE attorney, and try to get a good local architect or land use consultant that can help with possible after the fact permits.

Of course as you mentioned you could also pursue the demo option and start fresh from there...though you've now paid for units that don't exist any longer.

5 Reply

OP

Real Estate Investor · South Jordan, UT · Member since 2017 · 86 posts · 34 votes

@Matt Devincenzo

Ok, thanks. Pretty rough situation for me

Account Closed

Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes

Quote from @David Li:

Hello everyone. So last year I bought a 7 units apt for 1.06 million dollars. Everything looks great on paper. Bought it with 3% seller financing on a 8% cap. What could go wrong right?

Only thing is I didn’t check with zoning and took the sellers word for it. It turned out that the house is zoned for single family. And other 6 units are build illegally now the city want us to tear down the whole thing, the entire lot!

Lesson learned is always verify all the info and make sure the building is zoned correctly!

My question for all you investor is that if I tear down the whole thing and try to building 8 townhouse on it whats the all in cost I’m looking at? And how much can I use finance? Or should I just stop paying the seller and let him foreclose on me so I will be only losing about 250k with my down payment?

I, being a little more prone to taking the attack mode, would hire a real estate attorney and file a lawsuit for fraud, misrepresentation, unjust enrichment, wire fraud and I'd throw in contract violations for good measure. It's not a "little" issue and he either knew or should have known and should have declared that to you in the paperwork. He would settle the lawsuit for your $250,000 I'm betting.

That being said, I understand most people won't go that route, but it is available.

25 Reply

Scott Lamberty

Member since 2022 · 5 posts · 2 votes

Quote from @David Li:

Hello everyone. So last year I bought a 7 units apt for 1.06 million dollars. Everything looks great on paper. Bought it with 3% seller financing on a 8% cap. What could go wrong right?

Only thing is I didn’t check with zoning and took the sellers word for it. It turned out that the house is zoned for single family. And other 6 units are build illegally now the city want us to tear down the whole thing, the entire lot!

Lesson learned is always verify all the info and make sure the building is zoned correctly!

My question for all you investor is that if I tear down the whole thing and try to building 8 townhouse on it whats the all in cost I’m looking at? And how much can I use finance? Or should I just stop paying the seller and let him foreclose on me so I will be only losing about 250k with my down payment?

Sorry to hear that. I would concur with people who say retain a good real estate attorney. Sorry, I don’t know any in UT. Best Wishes!

2 Reply

OP

Real Estate Investor · South Jordan, UT · Member since 2017 · 86 posts · 34 votes

@Scott Lamberty

Thank you, I’m getting some documents to him now. Seems like we will need the seller to credit back some of our down payment since he didn’t disclose about the zoning issue

Bill B.

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

Does r4 zoning allow for a 4plex? How much less is 4plex worth than a 7plex?

It will allow for much more favorable financing as it’s no longer commercial lending.

This would allow you to make 4 much larger/nicer units instead of 7 smaller once.

This would be an option that allows the seller to keep your money (in case they need it.) while just lowering your loan balance and either the amount or length of your payments.

Luka Milicevic

Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes

@David Li

It's not common to have a real estate contract "un-done", but I have heard it happens and is possible.

I think you have a very strong case to do so.

Even if you knew the zoning before hand, it doesn't necessarily matter. There are buildings constructed on zoning that doesn't match the structure due to variances, special purpose uses, etc. Even if you knew the zoning before hand, there is no reason to believe what is built there is not allowed.

Having the city ask you tear it down is not common either....I've heard of requiring things to be brought to code, but haven't heard of a straight tear down.

You have a few options:

Meet with the city and ask them if they can grant some sort of a zoning variance, or grandfather your building in. (I can't image them not doing it)

After that, you can try sue and have the contract undone as this sounds like straight fraud on the part of the seller. That's just with the limited information that I have.

Keep us updated....

9 Reply

OP

Real Estate Investor · South Jordan, UT · Member since 2017 · 86 posts · 34 votes

@Luka Milicevic

Thank you for the response. So I spoke with the city the only thing they want us to do is to tear down the lot because it was build illegally. Right now I’m speaking to some developers and see if we can build from ground up and still make a profit on it

I also gathering some documents for the lawyer but the seller never submitted any seller disclosure and we bought it on seller financing, so I’m not sure if I can get my down payment back which I really hope I do

OP

Real Estate Investor · South Jordan, UT · Member since 2017 · 86 posts · 34 votes

@Bill Brandt

So we bought it on seller financing, we gave the seller about 220k in down payment. The term is good because is a 3% interest rate.

What I’m worried is that we can’t rent out any of the units anymore so I either default on the loan or I tore down everything and build 8 more units on the lot

City told me r4 allowed up to 8 units

Darius Ogloza

Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes

You need to hire a local litigator. Now. Someone who can deliver a proper a**-kicking. Any litigator worth his or her salt can turn what happened to you into a lawsuit that can withstand a motion to dismiss.

9 Reply

OP

Real Estate Investor · South Jordan, UT · Member since 2017 · 86 posts · 34 votes

@Darius Ogloza

Yeah I’ll do whatever I can to make it work

Matthew Olszak

Real Estate Broker · Chicago, IL · Member since 2015 · 1k+ posts · 2k+ votes

Where is this located? The property might be grandfathered in (best case).

I don't see being able to "unwind" anything. Almost any contract for purchase will have a clause stating something along the lines of no guarantees, buyer to perform their own due diligence, which you didn't do. The seller will claim they had no idea the building needed demolished and you'll waste more $$ on attorney fees. Depending on how the seller presented everything to you and what you can prove they knew before the sale, maybe you'll have a claim, but again, its going to take big $$ to recover your investment.

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

Podcast Guest on Show #222

Quote from @Matthew Olszak:

Where is this located? The property might be grandfathered in (best case).

I don't see being able to "unwind" anything. Almost any contract for purchase will have a clause stating something along the lines of no guarantees, buyer to perform their own due diligence, which you didn't do. The seller will claim they had no idea the building needed demolished and you'll waste more $$ on attorney fees. Depending on how the seller presented everything to you and what you can prove they knew before the sale, maybe you'll have a claim, but again, its going to take big $$ to recover your investment.

ya there are tonnes of properties that have non conforming grandfathered uses.. I think a harder stance with the city as well.. what can happen though with properties like these if they burn down you cant rebuild the same.. but non conforming uses that have been in use for years it is UBER rare a city would take that stance is my thought.. a good land use lawyer might advise you on this.

JLH Capital Partners51 Review

Website View Page

5 Reply

William Coet

Lititz, PA · Member since 2013 · 595 posts · 272 votes

A very large amount of New York City's buildings do not match current zoning. They are grandfathered in. Nobody is going to ask for them to be torn down. I highly doubt it would come to that in this case. Even if it was built out of compliance with the codes at the time of work, you may very well be able to apply for a retroactive zoning variance, especially on the grounds of financial viability being compromised.

Markis R Kelly

Investor · Cary, NC · Member since 2019 · 25 posts · 29 votes

Its possible to get it permitted even if its already built in some places. I would attempt to see if its possible. It may cost some money but would be cheaper than tearing the whole thing down.

2 Reply

Jon KellyPro Member

Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes

@David Li 100% speak to a highly recommended lawyer in the area. You already spent $250k so don't skimp on a cheap lawyer.

Try to go after the seller for misrepresentation first. Is there any way you can back out of the agreement? Next, I would explore the possibility of working with the city/township on rezoning the property.

Are the 7-units rented? How long has this been going on (when were they built)? I can't imagine the city wanted to tear down 6-units if they are currently rented and have been this way for many years.

Jon KellyPro Member

Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes

@David Li Also what kind of property is this for $1M??? I've only heard of cities/townships tearing down buildings if they have a LONG history of neglect and causing disturbance to the area. Is this a known drug property? Is it full of squatters? Is it about to collapse into the street?

If this is your average rental with working families I can't imagine city/township wanting to tear it down

Louis Jeffries

Lender · Chicago, IL · Member since 2010 · 149 posts · 127 votes

Hi Jon,

This is a tough situation, and I would get an attorney. It seems like you did a lot of things wrong. If you got an appraisal, (not sure if you did or did not) the appraisal will let you know the zoning. Since you purchased it without a mortgage no the mortgage company would have verified zoning. You may have bought it without a realtor or attorney. If you had another professional they should have verified zoning. Even the title company would verify zoning. If you closed with title and the seller gave you a warranty deed, you have a legal stand.

Ultimately, we must use the professionals in place to protect us, even if we are experienced we could miss something and sometimes it is not worth saving the money. The professionals are our insurance / assurance

8 Reply

Jonn Vidal

Bel Air, CA · Member since 2017 · 165 posts · 47 votes

wow so all those rental incomes are illegal and therefore technically not collectible if they default? yikes lawyer up and have your counsel address the misrep!

Rebekah Hitt

Rental Property Investor · Member since 2021 · 48 posts · 17 votes

@David Li

Would contact a good real estate attorney: fraud means the contract for purchase might be void.

Also, was the other party represented by an agent? Agents are bound by ethical standards and disclosures.

Good luck….

Rebekah Hitt

Rental Property Investor · Member since 2021 · 48 posts · 17 votes

@Mike Hern why would you let a foreclosure go against you when the contract was perpetrated in fraud?

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

Everyone who is saying it may be "grandfathered in" that may work for conversions done in the 1900's, but is sounds like this was new construction by the last owner. You can't just build whatever you want without permits, then expect it to be grandfathered in. In fact zoning often looks very unkindly on these type of things. There was a house rebuild done in a historic district in my city. The permits and plans were approved, but the owner decided to build the property taller. They failed to seek approval from the planning office. The structure was final inspected, but the neighbor sued them for violating height requirements. The structure created a safety hazard for the neighbors fireplace chimney. After three years tied up in court, there was a court order issued to tear the $850K home down. The judge ordered it done within one week and it was torn down. Lesson learned, people who think they will just skip permits and do what they want, there can be steep consequences.

In this case, the previous owner is the one who constructed illegally. You may have a case against them for the financial harm, but it may be less expensive to just default on the loan and let the seller foreclose. If you do sue the seller for damages, you would need to sue for the entire value of the structure and tear down costs.

The problem with tearing down and rebuilding is you still have the seller financing to deal with. They have a lien on the property, so they can foreclose. Even if you build an 8 unit townhouse, they can foreclose on that brand new townhouse. Nobody is going to lend you money to build with the current outstanding lien on the property. Not unless you can show the new 8 unit structure is worth more than $1.06M plus rebuild costs. I really doubt that lot is worth $1.06M and with skyrocketing construction costs, who knows what it would even cost to rebuild. Probably more than $1M.

Talk to a local real estate attorney ASAP. You will probably need to open a retainer for a few thousand, but it is worth it in this situation.

Have you talked to the seller about the situation yet? Just curious what they had to say...

4 Reply

OP

Real Estate Investor · South Jordan, UT · Member since 2017 · 86 posts · 34 votes

@Matthew Olszak

I’m gathering info right now to see if we can make a case :(