Buying a 3 Family Property - Bust?

[Dan Rivera]

Hi Everyone,

I'm a newbie investor from Hudson County, NJ with an interest in multifamily properties. I am teaming up with my parents on my first deal. We put in an offer (which was accepted) for a property advertised as a legal 3-unit.

2nd floor: 2 bed, 1 bath

1st floor: 1 bed, 1 bath

Ground floor: studio apartment

Including rent from the 3 units, and an FHA loan with 3.5% down, yields an NOI of 24,200 and monthly cashflow of ~$550. The 1st floor will need around 10k in rehab.

We are currently in attorney review. It was revealed that this property is actually a legal 2 family "w/ bonus apartment". It was registered with the tax assessor as a 3 family, but not with the building department. The seller claims to have a certificate of occupancy for the studio apartment. I believe the property lot's zoning will allow for a 3 family, but again, it's not registered. 

In our mind, we have two options. 1) The seller will have to submit a zoning request with the town to determine whether the ground floor studio is legal, or 2) we will have to renegotiate the price based on the property being a 2-family, collecting two rents. Does anyone have any advice or suggestions on what we can do? Should we have the seller verify the legality of the basement studio before going out of attorney review? Or is this deal a bust?