Property noted as 4 unit, but 5 different apartment units?

Question

I am looking at a 4-plex, and got some additional information that wasn't on the MLS from the selling agent today. It's a 3BR and (3)2BR 4-plex. The current owners split the 3BR unit into a 2BR and 1BR with separate tenants. Is this even legal? If so, does this have grounds to be classified as a commercial multifamily(5+ units) which could increase my taxes and other payments?

Chris K. · Answer

@Adam Juodis

I'm typing this on my phone so excuse any typos or formatting issues.

First and foremost, note that zoning laws differ between municipalities and states. So if you want a real answer, you probably need to talk to a lawyer or other specialist that has experience with these issues in the area that you are investing in.

But as a general rule, zoning classifications distinguish between SFR, 2-to-4-unit properties, and 5-units-and-above property. So depending on the zoning classification, that property might not be allowed to have 5 units.

There is also the issue with whether this 1BR qualifies as a unit. Again, the terminology and the law differs depending on the jurisdiction. But your local laws should define what constitutes a unit (try looking for terms like "dwelling unit"). In most cases, a unit requires you to have a separate kitchen and bathroom. The law may also have some specifications about whether there is a door that clearly splits the units.

So let's say the 1BR unit does not have a separate kitchen or bathroom. If so, you do in fact have a fourplex. The  question then becomes whether the law allows the current owner to rent that 3BR to two separate people. The answer again depends, but your local laws most likely have some kind of limitations on how many adults --- who are not family members --- can reside in a single dwelling unit. If there are more people living there then what the law allows, you'll have to deal with that issue.

Chris Mason · Answer

I will give you a hint. If it does not have an oven/stove, it is not a kitchen because you cannot cook in it. If it does not have a kitchen, it is not a unit.

Ryan Murdock · Answer

Zoning and financing aside, one of the last things you want included in the front page newspaper headline should your building burn in a fatal fire is "...illegal unit...".  It won't help your defense should you be sued for said fire either. Same may apply if you are splitting a unit to two separate people with two separate leases without proper rooming house permits.

Dave Toelkes · Answer

Aside from the legality of the fifth unit, you have a financing issue.  Lenders can only make residential consumer loans on 1-4 unit properties.  Properties with five or more units require commercial loans.  Residential loans can be sold to Fannie/Freddie, but commercial loans cannot.

If a lender only does residential consumer loans, the lender won't loan against your property when the appraisal comes back as a five unit property.  Commercial loans typically have higher interest rates, shorter amortization periods, and different underwriting guidelines than residential consumer loans.  Residential consumer loans are usually with recourse, commercial loans are typically without recourse.

Jeff B. · Answer

Check with the City as to how it is classified -- 3 vs 4 units?

I ran into this making an offer on an MLS shown as an 8-plex, but upon checking with the City found it to be a 7-plex - - a wash room had been (illegally) converted into a 1bd/bath.

The seller was a BROKER (gulp) and I told him I would seek to get his licensed revoked if he did not cancel the escrow and refund my EMD - - which he did.

Adam Juodis · Answer

That is one thing I am not certain on though! The pictures and details I was given did not make clear if the unit has a kitchenette with an oven/stove.

Say it does, where do we stand then?

Adam Juodis · Answer

@Chris Mason Can you explain why this is a good thing for me? Since I can do 30YF mortgage? What would happen if a certain someone would find out that there is a 'makeshift' 5th unit?

Chris Mason · Answer

Probably not conforming with all the local zoning etc.

And they are probably keeping this under the radar to keep it financeable via a residential 30YF mortgage, which is a good thing for you.

Property noted as 4 unit, but 5 different apartment units?

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