MultiFamily Property zoned as single family

12 Replies

We have been under contract for a Four-plex  but after the appraiser came out to see property he mentioned house was never zoned for multi family. It has all utilities separated, as well as entrances, etc. Now lender is saying it can't fund the deal because zoning is not correct. Our agent is saying we could try to get funding as a single family and then get it switched afterwards. 

Any ideas on how to fix this? 

@Mariana Hernandez : It sounds like your finding this out doing your due-diligence period, so that's good. Whatever you do, make sure you aren't releasing contingencies until this is resolved or you have an action plan.

Zoning is handled by the Building Department for the given city. I would give them a call to find out if it is indeed improperly zoned and exactly what it would take to get it re-zoned and demand compensation from the seller.

However, re-zoning takes time, so that's likely going to be a long-term solution. If you can close the deal cash, then you still might be able to move forward.

If you're using agency debt (Fannie Mae conventional), I have a hard time believing that they would do this deal considering the zoning issue but I don't actually know so ask the loan underwriters (don't just ask the "loan officer." make sure s/he asks the actual underwriters.) If your agent is suggesting that you mis-represent the property as a single-family when it's actually a fourplex, well, that's probably about as bad an idea as it sounds. :)

You may want to try the general "Conventional Mortgage Advice" forum to get some input from actual loan brokers, as this forums is for 5+ commercial units, and your property falls under the "residential" class because it's 4 units or lower.

Good luck!

@Mariana Hernandez

See if you can get a non conforming use permit. This means the building was use as a 4 fam prior to the zoning law changing. 

It will require tremendous research, you will need an attorney to assist you on this one-  

@Mariana Hernandez - Depending on the regulations in the area you live it is like @Steve Bracero said, you may need to get a non-conforming use permit. This is a major issue where I invest because the City has been hitting hard on trying to get these converted back to single family homes, so there is an ordinance that after a year of vacancy a property loses its nonconforming use and you have to reapply with the Zoning Board, who usually denies your request. For this reason I also ask the seller how long the property is vacant and for proof of nonconforming use permit before looking at a property not zoned as multi-family. (Here's a quick hint...most don't have this so I don't buy them) 

Also it will depend on if you are getting a loan in your personal name (ie likely to be conforming to federal lending guidelines as mentioned by @James Kojo ) then its likely they will have a lot more restrictions. if you're getting a commercial loan because you're buying under your LLC then likely they wont care about things like this as long as the asset appraises and cashflows to their lending guidelines.

I would walk away from it, then go see the local zoning guys to find out the process of rezoning the property. This could take months. Ask yourself: "What if I never get the rezoning approval?" How does that affect your exit?

@Mariana Hernandez Fire that realtor!! he is asking you to commit mortgage fraud! What will you do if they do a loan audit in 3 months find out you lied on the application and call your loan due?? You have all the time you need now. Every buyer that comes along is going to face this issue unless it's a cash buyer. In the meantime you can explore possible cures if you want. If a cash buyer comes along and he's savey he will get it on the cheap but then he will need to either convert to single family or get the zoning fixed. I would never recommend buying under false pretenses or buying with zoning issues. RR

@Mariana Hernandez : I don't think the answer is as simple as "do it" or "dont' do it." In REI, the answer is almost invariable "It depends." :)

As @Ralph R. suggests, if someone is actually suggesting you commit fraud (which isn't actually clear to me that is the case), then of course, "don't do it."

Otherwise, consider the following: as a buyer, if  you encounter a barrier-to-entry, that means that other buyers will likewise encounter that same barrier. That's a double-edge sword. It puts you at a superior negotiating position if you are able to solve it, but it's a deal-killer if you're not able to solve it. 

Likewise, if you can't get it re-zoned (at least eventually), then the person you try to sell it to next will likewise encounter the same barrier to entry, and will be faced with the exact same decision.

My advice: if you're somewhat experienced in REI and/or you're a problem solver and willing to put in the work: give it a shot but make sure you are adequately compensated for your efforts. Otherwise, kill the deal and just wait for the next one to come along.

If you move forward, your best bet for financing is going to be with local banks (sometimes referred to as "portfolio lenders".) They don't have the same underwriting restrictions as the national lenders. That is not to say that they simply ignore zoning issues, but they may still be able to work with you.

Hope that helps!


@James Kojo the fraud I was referring to was telling a lender that a four plex was a single family home. Or trying to hide the zoning issue. I bet if the appraiser is on the ball he will appraise it as a SFR possibly reducing its value. I'm not sure how a portfolio lender would view this property but all of my commercial loans requested rent roles from my properties. This is because they base a bigger emphasis on the properties ability to pay its own payment. I'm not sure they would accept rent roles from a property that the city could say was operating illegally and stop that cash flow. I doubt any lender would lend against that possibility. C while I've never tried to get financing on something like this I doubt any underwriter will lend against a non-conforming use. RR

Thank you all so much for your input! It was all great and right on! We do have a commercial lender that is not willing to move forward with the non-conformity. 

We are talking to the city and it seems that the only way would be to get a non conforming use permit as it was mentioned by some of you in the thread.

So now we are trying to assess how difficult and costly it would be in this situation to figure out if we try to negotiate the price down or just walk away. 

We were informed to do a chain of title to get to original owner/ builder, find out if it was built like that or when it was converted and get documents to prove it was like that prior to change of code. 

Does anyone have an idea of how much that could cost? 

@Mariana Hernandez you've got great suggestions and advice above here however it's all focused about how to get it closed (or not). 

The one thing that was not discussed yet is what happens AFTER you close if you decide to move forward with it.

Two things to keep in mind:

1) without re-zoning it you will have a hard time selling it. Just like you see in the comments above, many will tell your prospective buyers to walk away.

2) if a major damage happens to the property (fire, flood, hurricane, etc.) the city will not allow you to rebuild it and will force you to conform to the current zoning. 

This last one is a risk many MF buyers are not aware of and is especially common in older areas of cities (east Dallas for example)

At the end of the day, every investment carries a risk with it. All you have to do is make sure you are aware of the risks and that you are comfortable with the risk/reward ratio. 

Try a different lender. I helped someone a while back get a loan through an insurance company. I believe it was state farm,

You need a non-conforming use permit. If not you are dead in the water. Not having the non-conform permit would be a deal killer of me.

I'd have the seller do all this; they need to provide the non-conformity letter. If they can't do that why would you want the property? You couldn't give me a property if it was being used illegally, which currently is basically how it's being used today. 

So after fighting back and forth with banks and lenders we resolved the issue with a local bank that didn't care how it was zoned. They approved us for a conventional loan. 

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