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.
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.”
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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.
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.
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.
Oh yeah. And it got better.
We had three options.
- Operate as a triplex and be fined and shut down by the city. #awesome
- 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.
- 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.
That was not a fun decision to make.
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.
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.
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!