Financing Illegal Duplex
Hi All!
I am looking into purchasing an illegally zoned property (currently used as MFH and zoned as SFH). I spoke with a loan officer who had some concerns that the discrepancy in zoning may derail the deal and leave out of pocket my escrow deposit and appraisal fee. Have others encountered this?
Some ideas I have are:
1) Hard money: Not ideal but would allow for me to purchase the property go through appropriate zoning and then refi.
2) Use online mortgage company: More removed from the details and less likely to raise a concern over the zoning.
3) Subject-To purchase: Need to connect with the owner
Would appreciate and insight on how to best navigate this situation!
Thanks!
#5 Medium-Term Rentals Contributor
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- Youngstown, OH
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#5 Medium-Term Rentals Contributor
- Lender
- Youngstown, OH
Have you looked into the rezoning process yet? I'd gather that information before weighing financing options.
Many hard money lenders will have an issue with this. In the event you default, it makes it very difficult for them to liquidate the property to the largest amount of buyers, as most buyers wouldn't be able to get a loan for it. If I were you, I'd also get with the city/county to see what re-zoning looks like, as you could be on the hook if you buy it and then the municipality says you can't operate it as it sits.
Quote from @Nicole Heasley Beitenman:
Have you looked into the rezoning process yet? I'd gather that information before weighing financing options.
Started that process. 1st lawyer believes it shouldn't be an issue - simple appeal. I find this hard to believe since nothing in Philly is simple.
I am speaking with a 2nd lawyer tomorrow to get a second opinion.
Quote from @Mark Munson:
Many hard money lenders will have an issue with this. In the event you default, it makes it very difficult for them to liquidate the property to the largest amount of buyers, as most buyers wouldn't be able to get a loan for it. If I were you, I'd also get with the city/county to see what re-zoning looks like, as you could be on the hook if you buy it and then the municipality says you can't operate it as it sits.
Maybe just offer more cash down to keep the lender more protected?
Im not sure where this is specifically in the city but there are lots of RSA-5 zoned properties that are duplexes. Have you looked in Atlas to see if it was at any time a legal duplex? My understanding was the previous zoning before RSA-5 let single family homes also serve as duplexes without a variance.
Anyways Ive been in the same boat with a ‘slam dunk’ property that had business licenses showing 2-units but didnt have up to date rental licenses for both. I paid a lawyer and it was rejected with the need to then appeal and go before the ZBA. This process will be another ~$3500 and 3+ months with no guarantee that they will give you the variance. Most neighbors do not want more cars parking on there block or more rentals, so its usually an uphill battle.
@Eric Greenberg Thanks for your response. Was financing an issue with your "slam dunk" property? Curious to hear more!
Quote from @Joseph Micheal:Happy to talk in more detail if you want to DM me. I didn't get the sense that the zoning would be an issue for financing other than the potential it would have appraised slightly lower. Based on the appraisals Ive seen for 2-4units in philly, it seems to mainly be based off sqft.
@Eric Greenberg Thanks for your response. Was financing an issue with your "slam dunk" property? Curious to hear more!
For that specific property the back unit was gutted due to a fire so conventional financing wasnt an option, so I opted to buy it cash then do a cash out refi after I rented the property.
Quote from @Eric Greenberg:
Based on the appraisals Ive seen for 2-4units in philly, it seems to mainly be based off sqft.
Agreed!
I appreciate your insight and offer to talk! Ill do some more digging first and circle back!
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#4 All Forums Contributor
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Before you waste another second of your time, I would visit the City and ask them directly what hoops you will have to jump through.
Quote from @Eric Greenberg:
Im not sure where this is specifically in the city but there are lots of RSA-5 zoned properties that are duplexes. Have you looked in Atlas to see if it was at any time a legal duplex? My understanding was the previous zoning before RSA-5 let single family homes also serve as duplexes without a variance.
Anyways Ive been in the same boat with a ‘slam dunk’ property that had business licenses showing 2-units but didnt have up to date rental licenses for both. I paid a lawyer and it was rejected with the need to then appeal and go before the ZBA. This process will be another ~$3500 and 3+ months with no guarantee that they will give you the variance. Most neighbors do not want more cars parking on there block or more rentals, so its usually an uphill battle.
@Joseph Micheal Was just about to mention atlas. See if they did any rezoning or obtained a rental license for 2 units. If it is active you will be grandfathered in. If it has been inactive for more than 3 years you can lose that variance. I bought a triplex that had a variance and an expired rental license for 10 years. The current owner simply called L&I and got an active one keeping the variance open when I acquired it.
if it is not legal, i really wouldn't play with fire like that in phila. Your resale value will always be limited because it is illegal, and god forbid you have an issue with tenants, it will be you who will be held responsible. Even if you're tenants are in clear violation of their lease, you will take the hit since you don't have a rental license. Remember, just like NY, Phila is super tenant friendly.
@Alan Asriants Thanks! Ive done some additional research. It does look like there was some prior history of property use as MFH. Will chat with the zoning lawyer to get a better feel of things before moving forward with the deal!
Thanks all!
Quote from @Joseph Micheal:
@Alan Asriants Thanks! Ive done some additional research. It does look like there was some prior history of property use as MFH. Will chat with the zoning lawyer to get a better feel of things before moving forward with the deal!
Thanks all!
Cross the t's and dot and i's before you buy, best of luck!
If you go to rezone and the city finds the work already done they could potentially fine the owner and will definitely give you hell making sure everything is done up to code, which could be an expensive nightmare. Ifthey don't want multi in that area then you won't have any luck to begin with.
Underwriting and insurance will be hard on this. If it isn't fully occupied it might be easiest to take down a wall, do the deal, and then put it back up later.
#1 Insurance Contributor
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- Norwalk, CT
Joseph,
I would get assurances from your Insurance Agent that:
1. The Illegal unit is not against the companies underwriting guidelines. It would be with many companies due the liability.
2. If the company accepts it, will it have to remain vacant until you get is rezoned
3. Until it is rezoned, how will they pay on a claim. Will they pay for two kitchens, etc. if a loss happens prior to being rezoned.
4. Is the means of egress from that unit acceptable (especially important in basement or attic units)
Quote from @Zane Cress:
If it isn't fully occupied it might be easiest to take down a wall, do the deal, and then put it back up later.
Great Idea! Worth considering in the future!
Deal went contingent so things are on hold for now (until hopefully the deal falls through)!
I spoke with the lawyer and they see a very good case to be able obtain legal zoning! (Still leaves the financing aspect unanswered)
Thanks all for your input! Will keep you posted on how things progress!