What constitutes separate apartments?

Question

I am in the process of buying a home. The home is currently zoned as a two-family, but it has three stories with three separate apartments. The second and third floor share utilities, with the second floor covering utilities for the third floor, and the tenants agreeing upon the set temperatures, etc.

The appraisal came back and said the appraised amount is contingent upon "proof that the third floor has all proper permits (building, electrical, and plumbing)."

My lender interpreted this to mean that the home must be zoned as a three-family, and they will not underwrite the loan for a three-family home without 20% as a down payment (which I cannot do).

I don't know that the interpretation of "proper permits" is entirely correct. Per my city's laws, four unmarried adults may share a residence, and there are only three tenants between the two floors. Given that they currently share utilities, could I argue that the two sets of tenants are renting out individual floors of one apartment?

If the apartment must be rezoned, I will have to get a new lender, new appraisal, extension on the mortgage commitment and closing date, and wait for the seller to rezone. I would obviously rather avoid all of that.

Darrell Bratton · Answer

There comes a point where you have to walk away, which I am not saying that I would or could do in your situation. My rule is separate utitilities for each tenant. I am new but I have my criteria and I am going to stick with it.

Darrell

Pearson Caldwell · Answer

Yeah, I just found out they moved the stove from the third unit into the hallway for the appraisal...sounds like this might be falling through

Wayne Brooks · Answer

Yep, you have an illegal non permitted 3rd unit. The seller is not going to get it rezoned to 3 units.

Hadar Orkibi · Answer

@Pearson Caldwell sounds like a possible none permitted conversion.

The best way to handle it is to talk to the City. if they only have 2 units on file then that's what you have. I wouldn't pay based on the 3rd income.

You could ask the City what is the process for having the 3rd unit permitted.

It is all depending on the City rules and regulations.

Pearson Caldwell · Answer

Totally agreed, and I have some plans to make it less messy after closing. This house is very profitable though, so I do not want to let this one go by. We've been looking for over a year and this one is by far the best - probably due to the fact that it's a three family zoned as a two family.

Nicole A. · Answer

Yeah, it sounds a bit messy, and I don't think this is something you'd want to deal with yourself. If you purchase the property and it continues to not be zoned properly and utilities not separated properly, I'm guessing you'll continuously be dealing with issues and disagreements among the tenants. They might agree now on an thermostat temp, but what about when there's a vacancy and you now have to "sell" this situation to a potential new tenant? Many won't like it and will find another place to live.

Perhaps it's best you find another deal so you don't buy yourself a headache. You're in this to make money the easiest/most passive way possible, not take on other people's trouble/laziness/mess (unless of course it is easily fixable/worth the time to fix).

What constitutes separate apartments?

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