Investor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
Ok - i'll admit, the subject line of this post is a bit sensational.
I'm not going to jail. Not for this anyway. (But maybe for my killer dance moves.)
But here's the question i'll pose to the BiggerPockets crowd.
(I'm working on a new book on Multifamily for BP, and I'm in the chapter on Zoning, so I thought it would be good to get some additional perspective!)
If I want to buy a duplex... and I find out that it's located in an area where the zoning only allows for single family (or, let's say, multifamily is maybe allowed BUT this duplex clearly was converted from a single family house years ago without permits) - obviously this is a "non-conforming property."
So my question is: what are the downsides of this? Like... has anyone ever heard of a government forcing someone to turn their property back to a single family house after its been carved up? I assume most cities operate on a sort of "don't ask, don't tell" policy, but maybe that's just my experience. Could a landlord who rents out his "illegal duplex" (i.e. an old house that has been converted) get in any kind of trouble, or would they ever be forced to fix it?
I'll admit - i have several properties like this. I call em "monster houses." They can cash flow like crazy - but what are the legal / financial risks?
Thanks all! Appreciate your thoughts as I put together this book!
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
6y
@Brandon Turner
I was doing due diligence on a property in Kansas City, it had 4 units but 5 addresses. That 5th address was a basement unit with its own entrance that had clearly been used in the past. I thought I would be able to bring the unit back to life as a “reverse penthouse” in a great area. During DD I found the property was zoned SF but grandfathered in as 4 units. Talked to the city and my insurance guy. City said no way to 5th unit but I’m still thinking I can get away with it, I’ve got entrance and address. I talked to my insurance guy and he said you won’t be covered for something that happens to the person in living in illegal quarters. So let’s say there is a gas leak and my tenant dies (extreme example) I’m not covered by insurance. That was enough to get me not to consider that 5th unit.
Rental Property Investor · Cedar Ridge, CA · Member since 2017 · 4 posts · 7 votes
6y
@Brandon Turner
Nevada County, CA is brutal about unpermitted building.
One of the only counties to make people tear down new construction. Whole cabins & houses.
During the great recession there wasn't enough work for the inspectors so they sought out work, driving around looking for things, trolling MLS listings for descriptions. And now they use AirBnB to find revenue enhancing opportunities.
My FIL got popped for a decades old carport, he insisted on reconstructing it... It's now the most expensive engineered, permitted carport ever, but too low to park a truck or suv.
In '08 I was in escrow on a 4/3 with a 2/1 in the two story garage, and a 1/1 in the shop. County made the owners remove everything, including utility pipes, septic outlets, etc.
This was a good learning exercise for me. I’m currently under contract for a home that is being rented like an up/down duplex. After researching the city code and zoning map I found out that true duplexes are not allowed in that neighborhood! So, that’s probably why it’s all on one address and electric panel. I also learned a lot about all the info available to the public on a property, and found out the actual rules for ADUs and such. Good stuff! All in all I’m not too worried about renting to 2 families, but that definitely squashes my idea to permanently separate the 2 units.
Realtor · Saint Charles, IL · Member since 2020 · 126 posts · 101 votes
6y
@Amy A.
Great to see others from Maine! I grew up there the joke about everyone being partially related is definitely not far from the truth. I enjoyed your answer.
Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
6y
@Brandon Turner illegal units don't fly in the Chicago suburbs. Most of the areas I work in do a compliance inspection as part of the sale process. If there is an illegal unit then the towns require money to be put in escrow and they have a strict timeline as to when the unit has to be de converted and re-inspected. I do have clients who have used illegal units for themselves or for family to stay in, so I guess there could be some value. I don't see a lot of long term value as a rental unit though, and even if you put the unit back together post sale you will still have to tear it out if you ever go to sell in the future.
The actual city of Chicago seems to be a bit more lax about this. @Brie Schmidt has probably dealt with this a lot more than me.
Rental Property Investor · Pittsburgh, PA · Member since 2019 · 9 posts · 8 votes
6y
@Brandon Turner
A few years ago I had a triplex under contract for an unbelievable deal, but it was only zoned to be a duplex. The city required me to convert it back into a duplex to close on the deal. Believe it or not the numbers still worked as a duplex but my stubbornness got the best of me and I backed out of the deal because I really wanted that third unit.
Specialist · Newark, NJ · Member since 2017 · 80 posts · 66 votes
6y
@Brandon Turner
Speaking as an architectural designer:
Off the top of my head I know there’s this thing called grandfather rules, which exempts you, as a new owner from having to fix violations made by a previous owner/builder.
But if you decided to rehab this property, such that the means of egress of the property will be altered or touched, then you would have to bring it up to code.
It also depends on how long ago it was converted.
I would double check this and look up the International Building Codes. You can get the online version for free at the NYC Building Department Site.
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
6y
I'm sure it depends on location. Violation of a zoning law in NYC or San Diego's Gaslight district is significantly different than my town. The violation is unlikely to be discovered and, even if it were, the fine is minimal and probably wouldn't stop me. I may have to bring it into compliance before selling it, but that's not an issue for a buy-and-hold investor like myself.
Another consideration is insurance. If the insurance adjuster discovers a zoning violation, it may violate the terms of your insurance and result in a lost claim.
Most importantly, zoning ordinances are laws. Whether one agrees with the particular law or not, I would never advocate breaking the law to make a buck. I don't think BP will, either.
. We placed an offer subject to a zoning review as part of our due dilligence . Seller accepted . Zoning confirmed it as non compliant . Buyer settled (with a revised offer as a SF home.) . Buyer received a Zoning Violation notice halfway thru renovation. . Renovation put on hold while petition for zoning variance and hearings were completed. . Zoning denied 2 times . Fines were levied for non compliance after 9 months . Buyer brought property in compliance as a SF Rental
Zoning boards can make it financially expensive for being non compliant
Real Estate Investor · Los Angeles, CA · Member since 2013 · 98 posts · 48 votes
6y
@Brandon Turner I was kind of wondering the same thing as I am analyzing Hawaii investing and huge portions of the islands are only zoned for single family or max 2 units. Since i wanted small multi family my realtor will send me properties that are listed as single family with 3 bedrooms or more and you have check to see if there are more units. Sellers might give cues that the house is sub divided like listing "separate entrance."
Locals say they would never crack down on these illegal units but ther Oahu government just cracked down on short term vacation rentals, they could do the same on monster houses. If there is enough political pressure they could severely damage your investment. This has made me concerned about buying one of these nonconforming units.
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
6y
@Brandon Turner That is a fantastic question because YES, I have delt with exactly this issue in my main home market here and yes, the city is forcing out non-licensed multi-plex units.
The back history: St Cloud market began a landlords paradise, so naturally more and more landlords flooded into the market and with that more and more slum-lords. As time went, more "jankie" multi-plexs came into the system until market declined a bit into sustainable levels and the city had a glut of skummy properties bringing everything down. So, city council decided multi-units were "the enemy", and came up with a jazzy way to force them out.
The way it stands zoning doesn't matter. Even if your zoned for duplex it's nearly impossible to actually build one or get license for one because the city used the building codes for the stop measure. They passed a requirement of permeable space per unit that is absolutely insane, in short you'd have to buy the neighboring house and turn it into an empty lot.
The only multi-unit properties that are safe are those who have continuously had a license as a multi-unit (du/tri/etc).
So in my market a person could buy a place that once was a duplex but is no longer with a rental license for such, maybe an REO (I actually had exactly this case happen), in a zoning that allows duplex, and when you go for rental license they will tell you flat out no. You will say "but but but" and then they give you the requirements for multi-unit rental licensing on 2-4 unit properties which is all but impossible to achieve.
If next question is how can a person get around all that and make it happen, I did that too.
The answer I found, it's near to impossible and after I did it I was told I was the first to do so in years upon years, if ever. The short version, I had to learn how to play politics. We first went to city council with a proposal and it was an epic failure, of which I than got advised on the politics and how I'd have to play such. I than set out, it took some weeks but I got an advocate who than helped me to get a counsel member onto my cause, which lead to the next, and the next, and pretty soon we had the slimest of majority for counsel votes so we than scheduled and brought our proposal to formal counsel meeting. We didn't get it passed that first one, there was a minority coalition who opposed us, but we did get a next step on it, so we completed that next step, very strategically planned that next session that by chance a member of the opposition coalition was not available for, and our proposal passed and we received a variance to build a duplex.
Admittedly this was not an effective use of time and resources, I did it to find how it could be done as I refused the status quo of it can't be, and what that would take, is it realistic and repeatable. I would call it over the top exhausting work.
Now that's my market, many others it's basically paperwork to get the licensing. And if it is zoned only for 1 unit residential you can submit for a rezoning to one that fits that unit and it's not all that difficult usually. Or you can submit for a variance which will allow that unit as a licensed multi even though it's not technically allowed there. In most cases it's not nearly as tough as it is in my home market, this is the toughest I have experienced as of yet.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
6y
It comes down to how you deal with risk. Some people subscribe to the "will I get caught" method and others subscribe to "do it right", some are in the middle.
Whether you get caught really depends on code enforcement, which varies greatly depending on locality. In some cases there are periodic inspections, which makes it more likely someone will find out what you are doing. In other places, enforcement relies on someone reporting you. If you are not making your tenants or neighbors angry, nobody is likely to report you. Existing situations are less likely to be reported because it has been that way for a long time.
Jail is pretty extreme for a consequence, but if someone gets harmed, you could be held responsible for criminal negligence. The risk is higher if egress violations are involved. (Egress meaning windows and doors for fire escape.)
The likely consequence is being forced to convert the space back. You may get a fine. You could have tenants who exploit the situation for gain. They may threaten to report you, so they can get what they want.
Another factor to consider is the legal structure of your business. If you are a single proprietor, you are taking risks for yourself. If you are a larger company with investors, you then have a fiduciary responsibility to others. Even if you are inside an LLC or corporation, you can be held liable for your individual actions as an officer of the company. Any business like this should have a zero tolerance policy for any code violation. Any property managers should have a zero tolerance policy too. You don't want to be the fall guy when things go wrong.
The best advice is to contact local code enforcement. Present the "what if" situation and see what they say. Some may simply say, "we don't enforce that unless someone complains" or some may say "that is a serious violation". Armed with that information, make a decision that meets your risk tolerance level.
Attorney · Wayzata, MN · Member since 2016 · 70 posts · 134 votes
6y
The answer in Minneapolis, Minnesota is 100% stop the illegal unit and get it approved or don't rent it. Your "tenant" can file a rent escrow action and get 100 cents on the dollar back in rent--everything paid. It is very unlikely a use and enjoyment argument will mitigate any of it back. Plus you will be out legal, etc. Like most things in life--everything is all well and good--until you don't get along.
One downside is the ability to do conventional financing for the property which limits the buyer pool. In your example if we assume the zoning is single family but the property is grandfathered in as a duplex, lenders may not be willing to lend against the property. This happened to one of my deals a few years ago where I couldn't find a lender willing to lend against a legal non-conforming triplex (zoned duplex). That was also why the property kept getting under contract but repeatedly fell out of escrow. Not sure if this is a typical situation elsewhere, but is/was true in the Bay Area.
I second what Hai G said about the conventional financing downside. It's tricky to get financing approved. When my property was appraised, my realtor and I moved the appliances in the "illegal" third unit to a bedroom and threw blankets over them. It is legally a "Rec Room." I told the lender up front and I told the insurance agent upfront. I think the lender was key in finding the right appraiser to appraise the property "correctly" so that the loan would go through (FHA). It was on the market for awhile and had been "pending" a few times which leads me to believe the financing wasn't approved. I think there is an opportunity for a value add if you can get it rezoned or file a variance to make that extra unit a legal unit. A local landowner I met had tried to file a variance through the town to make his illegal unit a legal unit, the town denied the request and told him they wouldn't bother him about it. I am living in the extra unit, so if the town does have an issue then I would be the one forced to find alternate housing which is less consequential than for a tenant.
Flipper/Rehabber · Atlanta · Member since 2017 · 4 posts · 5 votes
6y
Early in my investing career, I bought two duplexes on one large lot in Mableton, GA. Four units, all rented. Amazing deal. Until the SECOND night I owned it, a large branch fell and broke a power line. I then learned, aside from doing better due diligence next time, that the property was grandfathered into previous zoning, which was now SFR-only. No problem, except that if I wanted to get the power line restored, we had to redo all electrical per the county inspector. To redo all electrical, we lost our grandfather status. Losing that status meant my 4 units were now 2 units. I begged and pleaded with the county, but they took no mercy on me. I somehow was able to sell it quickly, take a small loss, and move on.
Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes
6y
In Minneapolis, it is "almost" impossible to get a non permitted 3rd unit, permitted with expanded use even with our new zoning rules allowing a triplex on any lot in the city. The issue is building code, not zoning code. A triplex that was not legally permitted back in the day, won't be allowed to be permitted/grandfathered as it won't meet the IBC code. There is a very big difference in building code between a duplex and a triplex IRC versus IBC. This is the inhibitor. This is true anywhere in the country as these are the universally accepted building codes in the United States.
Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Brandon Turner - consider including some stories / case studies where people successfully converted the status of their house (or land) and include time and attorney fees. I’ve seen landlords who own 30+ student houses in my area apply to build a 7+ bedroom, 3+ bathroom house meant for 10+ students and go through local zoning for approval. The bedrooms in my area are limited by code based on lot size, like 4 bedrooms on 1/3 acre (size of most lots) for general residential. Most of the huge student homes build here have been on the main, busy road which is probably all zoned commercial.
My mom bought a 3500 sf Frankenstein rancher house in Arlington VA that had 4 separate private entrances and originally 3 living rooms with stoves, cabinets, kitchens (fridges). It was a 3/1, 1/1 and 1/1. Zoning visited after the purchase on a complaint from a wealthy neighbor and made her tear out the piping for the stoves before they approved the SFH CO. Property went from potentially renting for 5000/mo down to $2500/mo. On a 475k purchase. She sold it 6 years later as is for 625k based on lucky area appreciation.
Mister Turner! First off, please pardon the fan boy in me getting all girly and nervous actually replying to one of your posts. The honor is truly mine to possibly contribute to your book research. Thank you so much in advance for the upcoming book and EVERYTHING you are a part of in the BP community. If I ever do grow up (not likely to happen) I wanna be like you (living on the island of Aruba managing our portfolio from the eight floor balcony)! Ok, let's dig in...
There are a few different moving parts to your question that I'd like to call out before digging into the bones:
A duplex is still a residential property under IBC (International Building Code) so you may wish to change this to a 3-Family for dramatic affect in your example where under IBC, a 3FH is considered Commercial, not Residential. A 2-family smacks on the borderline of being able to pass through zoning board hearings and possibly a higher rate of passing favorably to a conforming allowance. Less of a "dah-rah-mah". SFHs and 2FHs are both the same building code classification.
Is the property vacant? One of the key factors to being grandfathered in under a non-conforming property is - is the property vacancy or occupied, and for how long? A vacant property after 6 months is subject to losing any of its grandfather clauses and MUST conform to existing IBC to obtain an occupancy permit. Again, residential is not so much the issue here for property use, but is the property occupied. Review my blog post for a nice rabbit trail on a 3FH converted to a 2FH - and the journey to get back to a 3FH. It was a disaster!!
Fees, Fines, Findings & Fun! The true-story in the BLOG above ends with the building inspector waiting for the transfer of deed to shut down the property and pull the occupancy permit from the "new owner" upon closing. I know Eric very well in that city and this is exactly what he plans to do. The original sins of the older owner will inherently be passed down to the new owner. "Caveat emptor"!
A Clause with Claws. Grandfather clauses are pretty much just that. These are events that may have happened to the building a generation or so ago that may be allowed providing no major renovations or rehab are being performed. As soon as you pop that can of worms, be prepared to go fishing for existing issues with the property that may need to be brought up to current IBC, Residential may maen proper handrails and accessibility egresses, whereas Commercial may be a bigger pill to swallow going so far as sprinkler and fire suppression systems. We took on a lake house for management from one of our clients and the exterior walls were only 2x4 construction. This is in Massachusetts were we have this thing called winter and snow. Maybe you've heard of it? Any ways, current code requires 6x2 on exterior walls to allow for the correct amount of insulation. To my delight and surprise, when we told the town inspector of this, he asked when was this work done? We did not know. We looked back for more than 10 years and he said it was fine by him. All he required was the correct amount of insulation and no further reconstruction to bring the property up to code. BONUS WIN for the Lake House!!!
So, zoning is a real-time issue to deal with. As I suggest to our clients and budding landlords all the time, your first stop before going to the property to place an offer should be a call to city hall to find out as much as you can about the property's history. This call alone can save you tens of thousands of dollars - or worse! We had a new client call us before wanting to put an offer on a SFH in a market we manage. After a few minutes of discussing the property while driving between properties, we suggested he re-think his offer price considering factors we knew about his market. That call saved our client over $40K. Glad he called us. Glad we could help!
Rental Property Investor · Seattle, WA · Member since 2018 · 25 posts · 7 votes
6y
@Brandon Turner
Hi Brandon,
Recently pulled out of a deal with my zoning contingency on a similar scenario.
The property was zoned SF, somehow had been converted to a 4plex.
After speaking to zoning, code enforcement, and land use for the county having jurisdiction, I learned the following:
-If a complaint was issued by neighbors, tenants, passed-bus, ect it could trigger a visit to the property by the county. The issue is that there was a lot of work done on the property without permits which had not been inspected. Should the county have determined the property was not operating as intended (not difficult to prove with 6 cars in the driveway) it would trigger a Certificate of Non Compliance that will show on the title report until cleared. The county can put a hold on the property to demand that it stops operating as a 4plex. Should the inspector also deem that there are safety concerns with the work that was not inspected, it is his discretion on whether you will need to expose MEPF systems. Even if the work had been approved after opening up walls, I would still be on the hook to legally convert back to SF.
-To resolve the first point, there were two options. 1) One was to go down the road of getting an exception to the current zoning. Depending on census tract and surrounding land use, it can be an uphill battle. Especially getting an exception for a 4plex in a SF zoning... 2) Convert the property back to a legal SF use and operate as a rental. Not as Juicy as the cash cow I wanted to buy. Either direction taken here costs a good chunk of change.
-The more obvious risk is with insurance. I am not a lawyer not do I claim to be an insurance expert. But as it has been explained to me, should something happen on the property, because of all the un inspected modifications, I would be on the hook.
In my eyes, the biggest risk is the safety factor. If you are able to get the work inspected in the second dwelling AND then put up partitions, install your second kitchen, ect - at least you can set yourself up knowing that your addition was signed off. Maybe you can even get a second kitchen signed off with the SF use? If this happens you can add your dividing partition between units and sleep easier.
I definitely think the above example are the extreme, but wanted to touch on the dark side potential for perspective. I have plenty of contacts who build out a separate unit in the basement. They did however build the basement out originally pulling permits and went back afterward to add casework for the kitchen, ect. Great potential way to maximize utility in a SF.
Rental Property Investor · Chicago, IL · Member since 2019 · 17 posts · 2 votes
6y
@Brandon Turner
From what I've seen in my area the local municipality can absolutely force you to convert a duplex back to an SFR if the work was done without a permit. Id imagine this varies depending on where you're located.
I could put you in contact with an experienced architect in the Chicago area if you'd like a more in-depth explanation on the topic specific to my area.
Rental Property Investor · Durango, CO · Member since 2018 · 4 posts · 3 votes
6y
I have one of these and i love it.
The only problem so far was when i went to refinance the property. The appraiser would not count the bedrooms/kitchens/ bathrooms of the 2 non-conforming units. They would only count the rooms in the one main unit (2 beds, 1 bath). So they used other 2-1 's in the area for comps to get the value which was much less than it should have been.
Rental Property Investor · Gig Harbor, WA · Member since 2020 · 26 posts · 6 votes
6y
@Brandon Turner
From how I understand it at least in my area (Greater tacoma area) , if you are grandfathered in as a non conforming multi family then operate as you normally would but if you let the property sit vacant for a period of time (I think its a year) then it would revert to the current bylaws/zoning. I believe by keeping the utilities turned on is a loop hole. But im not an attorney, only a real estate professional! Haha
Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
6y
@Brandon Turner - Chicago has a provision in it's code to potentially allow for an extra unit. About half the properties in the areas I deal with have one additional unit in addition to how many units are on the zoning cert issued by the city
13-196-740 One additional dwelling unit over original allowed – Conditions. A pre-ordinance (built before July 8, 1957) residential building or building of mixed residential occupancy, not complying with the requirements in force and applicable to the building at the time of its conversion, may be altered so as to legalize one dwelling unit, in addition to the number of dwelling units originally authorized, providing that said unit was determined by the office of the zoning administrator or the zoning board of appeals to have existed prior to July 8, 1957, and provided such building complies with the other provisions of this chapter. Such conversion need not comply with the requirements of the following specific provisions of this chapter: (a) Section 13-196-660 (height limits); however, in frame buildings, four or more levels of living space shall be prohibited and in buildings of ordinary construction, with or without attic living space, five or more levels shall be prohibited; (b) Section 13-196-050; however, all dwelling units must comply with the exit provisions of Chapter 13-160 except basement dwelling units may have a second exit through a room containing a heating plant; (c) Section 13-196-670 (stairwell enclosures); (d) Section 13-196-680 (corridor enclosures); (e) Section 13-196-690 (dwelling separations); (f) Section 13-196-710 (basement ceiling construction); however, if the basement contains a dwelling unit the entire basement ceiling construction is to be wood lath and plaster of half hour construction; (h) Section 13-196-720 (heating plants); however, basement apartments are to be separated from heating plants with partitions of one hour construction.(Prior code § 78-72; Amend Coun. J. 6-14-95, p. 2841)
Real Estate Agent · Redmond, 🌧️ Seattle Investor-Agent | 🤑 Helped 400+ Clients Invest in Real Estate | 🏘️ Owns 23 WA Rentals & Airbnbs | 🏗️ Built 5 DADU's | 📈 You Can Do It Too · Member since 2016 · 724 posts · 3k+ votes
6y
@Brandon Turner - nit-picky I know, but what you’re describing is actually an illegal addition or alteration, not a non-conforming property in the eyes of a lot of city officials. The definition of nonconforming from the city’s perspective (at least in the Seattle area) is a property that was converted either with permits or without permits before they were required to a use that is not compatible with the current zoning. If you can prove through historical records that at one point before zoning law was established or changed that this property was operating legally, and has continued to operate continuously, then the property is (legal) non-conforming. Without such proof though the property is not non-conforming, and is simply an illegal structure. There is no such thing as (illegal) non-conforming here. Curious if other markets use different definitions, but this is true of Seattle at least.
I run into a lot of other agents who mis-use the “non-conforming” label to try to lend some legitimacy to what is simply an illegal addition or alteration, which just muddies the water and results in uninformed buyers making costly mistakes
