My Latest Triplex Purchase Resulted in the Threat of a City Fine: Here’s What I Learned

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About a month ago, we closed on a “killer” triplex deal — awesome area, neighborhood, strong rental demand. Honestly, I just really dig this building. It was built around the turn of the century, and has both the visual curb appeal, as well as the 100-year-old wood flooring and high ceilings that really make it feel grand.

We heard of this deal off market from one of the commercial guys we work with, and went and viewed it. The property was the typical rehab house that needs a lot of work — flooring, plumbing, electrical, paint, drywall, kitchens. It was a full (large) rehab.

We got the property under contract and began doing our due diligence, getting our contractor bids, speaking with the title company to get them all the information they need. I love redesigning the interior of buildings — figuring out how to make the best use of the space. I spent a lot of time on layout, colors, and all the details for that project with our property manager and one of the contractors.

Related: The Ultimate Due Diligence Guide for Buy & Hold Properties

Everything went extremely well through closing. The project started on time, and was supposed to be done in about 60 days. There were several issues to deal with regarding plumbing and electrical, but nothing too crazy. Then the drywall starting going up – you know these old buildings take a lot of love to get them looking good and ready for paint.

The kitchen layouts for each unit were completed, and the project was more or less on target time wise. Then I got the phone call …

My contractor started calling me. And he called me again. And then again. I don’t remember what meeting I was in that day, but I remember the discussion over the phone. He said something like, “Nathan, is there any reason the city would be out there? He was asking what we were doing and tried to get into the house.”

#notawesome

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Unexpected Inspections Are Never a Good Thing

I was headed out of town for a while, so after some internal discussion we scheduled a time out at the property. There wasn’t really anything we needed an inspector for, although you don’t really want those guys in there anyway unless it was planned. It gives me the sweats — just like asking out your first girlfriend in middle school. 🙂

I got the inspector on the phone after a few days of phone tag, and after a very short and slightly annoyed (on his end) conversation, we set a time to view the property. That was all the information he gave me.

The day of the inspection I thought through every possible issue that could have come up, and why or what the problem was. He approached the house a few minutes after our scheduled time. I introduced myself, we shook hands and walked into the property. He immediately started taking pictures of EVERYTHING and asking questions.

As the walk-through continued, the story started to unfold. I had had workers in the house for a few weeks now, and a lovely (please, don’t catch my sarcasm) neighbor decided to call the city on us because she saw them walking in and out of the house.

I carefully walked that entire house with him and chatted through everything we had done — how we had checked with the city throughout the entire process to make sure we didn’t need permits for anything. He really didn’t have a word to say about what was done in the entire building.

PHEW!

Success!

I could almost hear the Rocky theme song in my head at that point. I felt like we were out of the woods with no other issues — and a win over the neighbor who couldn’t mind her own business.

Well…

Or not…

At the very end of our appointment, he calmly tells me that from the day it had been built, this building had NEVER been licensed or registered with the city as a triplex.

WHAT?!?

SERIOUSLY?!?

Oh yeah. And it got better.

We had three options.

  1. Operate as a triplex and be fined and shut down by the city. #awesome
  2. We could apply for a non-conforming permit from the city, wait at least one month but probably longer, have them come back in for all kinds of inspections, and we operate as a DUPLEX. Remember, we bought the building based on the numbers as a triplex. This wasn’t a very good option, either.
  3. We could bring the building back to a single family, getting any permits needed for that, and then change walls and doorways, replace doors with cased openings, and tear out walls we had JUST finished.

Ack.

That was not a fun decision to make.

Solution

We thought through all the options. The good, the bad, and the ugly.

After careful consideration, we decided to take the property back to a single family rental. For very little additional cost, we could skip putting in three kitchens, and instead use those dollars for the extra rehab to change door openings to bring it back to a single family unit.

Because we were reverting back to a single family home, we would no longer have the burden of paying the utilities for all the units.

Lessons Learned

Even though the title company saw and agreed it was a triplex, even though many of my neighbors on streets adjacent to mine are triplexes, it doesn’t matter — the city didn’t knock on their door, they knocked on mine.

Related: How to Choose the Best Areas for Multifamily Deals With Confidence

If you are buying a multi-family, you need to make sure it’s zoned for a multi-family. I am also thankful we were able to use it as a single family unit. We could have rehabbed and flipped it for a profit, but we wanted to keep it if we could make it work.

So, what kind of ON THE JOB learning have you experienced in deals that didn’t exactly turn out how you expected? And how did you overcome it?

PS: That building is almost done. We made friends with the inspector, and we should have tenants in it before end of the year. Phew.

Investors: What did you think of this story? Have you ever run into anything similar?

Leave your comments below!

About Author

Nathan Brooks

Nathan Brooks is a dad, husband, worship leader, and real estate investor in the Kansas City market. Foodie. Coffee addict. Crossfit junkie.

34 Comments

  1. John Bierly

    Checking zoning seems like pretty basic pre closing due diligence to me, I’m surprised that someone who is a regular poster on BP would skip that step. Not only do you run the risk that you describe of owning a non conforming property, but you also pass by the opportunity of finding a property that has upzone potential – many cities are looking to create higher density and a property where you can add a unit basically gives you the land cost part of the equation for free. Here in Seattle, for instance, you can add one additional legal unit inside the shell of an existing structure without adding an additional parking – provided you are in certain zones.

    • Nathan Brooks

      As a regular poster on BP I wanted to share something that didn’t go well … to help others. We did do the due diligence that we worked through with our agent, and didn’t have any red flags up. We single units all the time … but this was only one of a couple multi’s we had done so it was much more foreign process.

  2. Douglas Snook

    Just represented a would be buyer who thought he was buying a three unit. Been used that why by the current owner since the 1960’s. Claimed he had pulled permits and everything was done to code many many years ago. Had applied for a variance from the city, it was granted etc.

    The city had it listed as a two family and claimed to have no records from that far back about any variances etc. The city went out and shut one of the units down. The deal died.

    • Nathan Brooks

      Believe it or not we actually came out ahead. The 3rd floor wouldn’t rent for a whole lot, and the changes in the rehab ended up being almost a wash. We would be able to rent as a single family and not end up having to pay for the utilities that were shared. It’s actually going to be pretty profitable in the end for us!

  3. David Ferrette

    Thanks for the great insight Nathan. I am trying to close on my first four-plex (TBD is this will actually happen) and now I need to make sure the home is registered with the city as a four-plex. I will remember this for all future purchases.

  4. Daniel Ryu

    In Jacksonville, this info is provided online via the County Appraisers website. Do they have that info online where you are and is an online check good enough? Also, does the title company have any responsibility in this case?

    Thanks for sharing.

    • Nathan Brooks

      I’m honestly not sure where it went wrong. We did all those things. Title. Agent. Look up…. it was pretty crazy. And all the neighbors still have multi’s as well … but I think the city is looking for ways to get rid of them in the neighborhood and so going after ones when they sell like ours was how they went about it perhaps.

  5. Chris Newman

    This sounds like a run-in with the dreaded Code Enforcement, which tends to be complaint-driven. These people are thugs and act like they’re getting paid on commission, depending upon how much misery they can heap on the citizenry, and without a shred of the due process that real law enforcement has to follow.

    These people do NOT back down, even when they’re clearly wrong. They don’t have to: The victim who won’t submit just goes to the next level up, nicely taking any responsibility out of the hands of the officer. Being all good union workers, they never call each other to task for misconduct, of course.

    Back in 2008, I converted an open farmland pasture near Seattle into a free public off-leash dog park, which the land use codes did not cover, one way or another.

    There was no development here: Just a bunch of winding trails cut in the tall grass. Both the dogs and people loved it and good weekends would end up with $200 in the “Voluntary donation” box @ $1/dog. Volunteers users would bring in plastic bags and fresh water jugs.

    Within two months, the local CE officer, without even a complaint, had classified this land use as literally comparable to building a baseball stadium, complete with bleachers, restrooms and two concession stands.

    After trying to be reasonable for months, it finally took a direct appeal to the county Executive (and veiled threat of bad political publicity on him, along with 50 letters of support) to get him to step in and shut down the action. That took about three days, after futile months of trying to resolve this through the “system.” I actually made the front page of the local paper: http://www.heraldnet.com/article/20081101/NEWS01/711019930 “Man’s Bark Saves Dog Park”

    The moral here is to try to get along with your new neighbors, if at all possible, so that they don’t complain. Or, at least make the effort to let them know about the changes that are happening in the neighborhood. Reassure them that there won’t be problems, and to call you first if they have issues or questions. A lot of this is just listening to their concerns. But, do whatever you have to do to avoid become today’s lunch for Code Enforcement.

    Threatening senior elected officials with public embarrassment is probably not a good first-option strategy. But it can work. 🙂

  6. Dan White

    I have seen many of these properties in Tacoma due to the large number of old inventory. The first thing you should look for is an individual meter for each unit, for these meters to be installed the property must conform to the zoning. Some very old properties may be allowed to be used as mulit-family under “non-conforming use” provisions that vary by jurisdiction, these properties should be avoided as well since if they burn down you cannot replace them. Also check for “bootlegged” units such as converted attics, basements, storage rooms into rental units, when buying such properties always check the permit history. Just a few tips to keep you out of trouble and not pay for something you cannot keep.

  7. Matt R.

    I had one of these inspectors show up unannounced. He asked to look inside. I said can I see some ID…he showed it. I inspected it and said I don’t know if this is real so no you can not come inside. He was pissed. He sat outside the house for about an hour writing something on a clipboard and that was the last I saw of him. It seems like these guys go on fishing expeditions sometimes too and especially if they see work trucks.

  8. John C. Carlson

    Nathan,

    I was surprised that I never read anything about checking permits or city registrations in your article – surprised that you never checked those “little items” when you buy property.

    I’m a commercial appraiser & I always check permits for all properties I appraise. I find permit issues in about 2 of 5 properties I appraise. Older properties like this are especially prone to have unpermitted additions, plumbing, electrical, etc.

    Most recent huge issue was when I was hired as an Expert Witness. Investor bought a property that was 5-units…….he thought. 2 retail rentals on the street and three residential rentals at the back of the property.

    Unfortunately, one of the retail rentals was bootlegged in and one of the one of the residential rentals was an illegally converted garage. Investor had to evict the tenant in the illegal garage & remove the illegal retail rental — thereby losing 2/5 ths of his income.

    He was not a happy camper & was suing everyone.

    • Nathan Brooks

      John … while I appreciate you responding, you have no idea what we do, or when we do it. In this case, we did the due diligence we thought was sufficient and we were wrong. The purpose of this blog is to HELP people with issues that come up. Which is the purpose of this post.

      • Nathan,

        I didn’t mean to offend you, I apologize. I’ve certainly missed steps in the appraisal’s I’ve completed & screwed them up.

        Thanks again for sharing some of your problem deals where something came up that you missed. Again, it helps us out in newbie investor land remember what to do so we don’t make the same mistake.

  9. John C. Carlson

    Kevin,

    I don’t think that a Title Company has the “last word” regarding whether a property is a legal use. Assessors also are many times wrong about the size of structures on site & the legal use of a site with respect to zoning.

    This is why checking permits and the Municipal Code in each City is so important.

  10. Jerry W.

    Nathan,
    Excellent article. Thanks for taking the time to share it. Every town is different when it comes to permits or zoning. I have never seen a title opinion say whether or not the use of the land was in compliance with the law, they just give insurance on chain of title. You can not tell with a property by looking at it if it’s use was legal. A nice lesson for all of us to learn without having to live through it.

  11. Jerome Kaidor

    I was going to buy a mixed use building consisting of a beauty parlor up front, and 7 apartments in the rear. As part of my due diligence, I went down to the City to look at the file. It seems that in the 1950’s a permit had been pulled to build 2 fourplexes. That is, two buildings. There was only one ( long ) building on the site! It was clear to me that somebody at some time, had joined the two buildings by building an apartment between them. ALSO, they had built an illegal second story on top of the rear garages!

    The thing had been operating like that for decades.

    The seller apparently had friends down at the City, because the same day I went down there, he emailed me a bunch of permits and paperwork. He owned a LOT of property there, and I’m guessing that they left him alone. I don’t think their indulgence would have transferred to me however.

    I passed on the deal.

  12. Rick Grubbs

    If the house is over 100 years old does anyone know when it became a triplex? If it were triplexed before there were any zoning laws in your area (zoning in many areas took off in the 1960’s) you could make a case for it being grandfathered in.

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