Legally a DUPLEX, actually a TRIPLEX

17 Replies

Hi BP folks..

I've been noticing in Cleveland quite a few Triplexes for sale but are on public record as being a *Duplex*.  It seems the city has looked the other way on many of these for years.

My questions are:

- Has anyone ever had to deal with the city on this issue during annual inspections, POS inspections, etc?

- Can they cite the owner and make them use the property only as a Duplex instead of a Triplex?

- Is it possible and worthwhile to legally make the Duplex a Triplex?

- Has anyone had an issue with banks or insurance as far as the public record stating one thing and the actual use another?

- Is this something to be concerned about or not?

Thanks!

@Tony Hoffer , YES! This is something to be concerned about for a whole host of reasons. Running a foul of all kinds of local zoning laws is just the beginning. You also risk:

1) Committing mortgage fraud by misrepresenting the property and/or how you're using it.

2) Exposing yourself to liability if the 3rd renter discovers they are in an illegal unit.

3) Voiding your insurance. Do you think you're going to be covered if the 3rd tenant starts a fire and burns the place down? What if someone is hurt or worse?

What's the upside? You now have great leverage when negotiating to buy one of these properties.

I just had a deal that I was helping @Monica Pope with here in Clevleand fall apart because it was a triple that was a legal double. The appraisal came back low because the highest and best use is whatever is legally zoned. In this particular case, we couldn't consider the rent from the third unit because it wasn't legal. 

@Jaysen Medhurst  Thanks for that.  Interestingly enough, I just looked at the sellers insurance policy and it's actually for *2* units, not 3.  He's probably not covered if something were to happen with the 3rd unit tenant.  Tricky stuff..

@Matt Motil  Have you heard of anyone legally getting the city to change the 2-family status to 3-family?  I've also heard from someone that if there isn't a stove in the 3rd unit then the city is fine with it.  Have you heard that as well?

@Tony Hoffer , some cities don't care, some do, it really is a city by city basis. As for the insurance situation, @Jaysen Medhurst is correct, that your insurance company will be concerned that you're using the property in a way that it wasn't technically intended, even if it's property setup for a three unit per building codes. As for getting them rezoned, yes, it's doable and it's been done. Again, this is a city by city basis and some cities are easier to deal with than others when it comes to getting things rezoned. 

Thanks @Matt Motil . This particular property is in Cleveland Heights. Do you know how easy/hard they've been to deal with? It's all a bit odd as the seller removed the stove right before the POS inspection which then illuminated this issue. With that said, the inspector had no issue with there being a 3rd unit. Not sure whether to bail, see what the bank/insurance co say, try to make it legal or ???

Originally posted by @Tony Hoffer :

Thanks Matt Motil . This particular property is in Cleveland Heights. Do you know how easy/hard they've been to deal with? It's all a bit odd as the seller removed the stove right before the POS inspection which then illuminated this issue. With that said, the inspector had no issue with there being a 3rd unit. Not sure whether to bail, see what the bank/insurance co say, try to make it legal or ???

 If the city has conducted the POS inspection and doesn't have an issue with it and your insurance company doesn't have an issue with it, then I'm not sure how concerned I would be. If you can get insurance coverage and the local building department isn't giving you a hard time at all, then I'd say you're good to keep on moving forward with the deal. 

Thanks @Matt Motil , that's reassuring. I'm going to see what the insurance company says and go from there. If it can't be fully insured, I'm out.

Anyone else have this issue when dealing with these smaller multi-family properties?

Hey @Tony Hoffer I am helping my brother who is currently in escrow on a multi-family in Edgewater, which is 2-family on record, yet there are clearly 3 habitable, separate units in the building. He plans to occupy one unit, and rent the others out. I've been analyzing the deal as a triplex, assuming that we wouldn't have any issues renting all three units out. I'm purchasing the property from Fannie Mae, so there are no disclosures and a general lack of information about the property's history.

From what I'm reading on this thread, I need to do at least 2 of the following in order to rent the 3rd:

1.) Check with insurance to see that they will insure all 3 units, i.e. the entire building.

2.) Rezone the property to make it a 3-family on record. 

3.) Gain approval from the city inspector who issues the annual Certificate of Rental Registration.

-Does the above list sound accurate? Am I missing anything?

-How is this any different than simply leasing out individual rooms, or a guest house in a single family home? 

-Anyone have insight into how the Edgewater area treats this issue?

I don't think this will be a total deal breaker, but definitely not the money maker I was anticipating.

Great information on this thread, any other thoughts?  @Jaysen Medhurst  @Matt Motil  

I skimmed thought most of the comments and have a few thoughts.

1. Cleveland Heights is a pain to deal with. One of my least favorite municipalities in the greater Cleveland area.

2. There are tons of duplexes in the area that had the attics converted into a 3rd unit. If they have a separate gas and electric meter your generally in pretty good shape. That said many do not have a 2nd entrance/exit into the unit and would not be allowable under current building codes. If you wanted to convert one today you would need to ad the 2nd entrance/exit.

Hi @James Wise .. Noted re: dealing w/ Clev Heights!!!

As far as this property goes, there are separate utilities and entrances to each unit.  We're now just waiting to see what the appraisal looks like and confirm the entire property is fully insurable.  If both of those its items look good, we'll continue.  If not, we bail and find something else. 

In California, people don't want to disclose significant home upgrades because it could trigger a Prop 13 property tax reassessment. 

So, we get things like this. 

@Tony Hoffer

It's all a bit odd as the seller removed the stove right before the POS inspection which then illuminated this issue.

Ah, this old trick. Very common up here in the Bay Area, actually. If you can't cook food in it, it's not a "unit." So you take an oven out and POOF it's a duplex. It was inspected as a duplex, and I'd bet it'll be appraised as a duplex as well (basically removing the oven gives the appraiser plausible deniability), which could create value issues and impact your DTI if you need to use rental income to qualify.

So you have a few choices.

  • Back out.
  • Buy it as a duplex, put an oven back in to make it an illegal triplex again and leave it illegal. Then you play this exact same game when you go to sell it, wee!
  • Buy it as a duplex, do all the permits, etc, necessary for it to legally be a 3-unit. When/if you go to sell it, you won't have anything to hide, meaning it can be appraised as a 3-unit, possibly commanding a higher price. 
  • Buy it as a duplex, keep things legal, and pick one of the two units to rent it out as part of. Market the unit as having a kitchen + wet bar (eg, selling the not-a-kitchen in the not-a-unit as a feature) and being some sort of "luxury penthouse apartment" or something.

@Tony Hoffer Hi Tony, there are a lot of properties like that in Chicago. My observation is that the city for the most part looks the other way on on renting all 3 units out. The first property that I bought was 2 legal units and a non legal conforming basement unit with adequate ceiling height and 2 forms of egress. We would have had to remove the stove and kick out the basement tenants had we bought the building with an FHA loan. Since we bought it with a conventional loan our lender did not have any issues with it. We also have it insured for 3 families living there.

@Tony Hoffer I own an SFR in Cleveland Heights. If you are upfront and communicate with inspectors you won't have issues. They are not great about communicating/returning calls in my experience.

I agree with @James Wise - If you have 2 entrances and separate meters for utilities you should not have any issues. I own 3 duplexes that I am converting to triplexes and have had no issues with inspections or insurance. 

@Joe Canfield @James Wise I am  looking at a duplex with a third attic unit in Cleveland. The third unit has its own electric and gas, however, there is no second staircase. I’ve heard that an escape ladder could constitute that second staircase, have you guys heard that as well? 

Originally posted by @Jake Baron :

@Joe Canfield @James Wise I am  looking at a duplex with a third attic unit in Cleveland. The third unit has its own electric and gas, however, there is no second staircase. I’ve heard that an escape ladder could constitute that second staircase, have you guys heard that as well? 

 You need two forms of egress. I've seen exterior & interior. Contact the building department for further clarification on what is or isn't already grandfathered into your building.

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