To Close or Not to Close...

[Justin DeMontier]

I apologize in advanced for the lengthy post, but I'm going to try to be as detailed as possible, so here we go...I currently has a property under contract that I have been prepared to close on for my first BRRRR but have run into an issue.

The property is an off-market deal being sold as-is by the seller, who has owned it since 2005. The house is a triplex and has been used as such ever since the owner bought it; it has 3 separate electric meters, mailboxes, etc. However, the property is zoned as a single family home. I have attempted to contact multiple people from the zoning/planning commission (Knox Co., TN) and they have proven very difficult to get a hold of. Those that I have been able to reach have basically told me that it is HIGHLY unlikely for the property to be rezoned as a multi-family dwelling. I have looked into getting non-conforming use permits, conditional use permits, zoning use variance requests, etc. but this process could still be very lengthy and I'm afraid this will open a can of worms that will cause the county to further look into it and raise more issues.

My main concern/worry is that when it comes time to refinance the property after the (minor) rehab has been done, lenders may not finance the property on a long-term loan due to a non-conforming use of the property. I have a list of about 20 lenders that I called prior - 4 of which offer the long-term loan criteria that I'm looking for. Of the 4 that I had it narrowed down to, one of them said that they SHOULD still be able to do the loan, regardless of the zoning/use, it would just be appraised based on what is recorded with the county/title. So in this case, if it's recorded as a 3 unit SFR, then that's how they would proceed. However, it makes me nervous to get into this based on the fact that they SHOULD be able to get me the loan - the uncertainty makes me a little leery, as I don't want to get stuck with the property with little to no other options. That being said, another lender told me this:

“The subject is an SFR with a basement. County records supports public records. We will need permits for any additions and a document that allows for 3 units on a SFR zoning.

In some areas where zoning is changed, the local municipality will grandfather in the current zoning/use. The only way to know that is by a letter from the city/county and or a rebuild letter that states the subject (specifically) was grandfathered into current zoning, what was allowed on the property and that it can rebuild if damaged or destroyed.”

Circling back to our initial conversation, I can assure you that we will be able to refinance this property, however, the term length and loan product simply depends on the use type at the time of refinance:

· If permitted as a triplex (or grandfathered in): we will be able to offer the 30 year rental product. Bridge would be available as well.

· If permitted as SFR only: the bridge loan, 1 or 2 year term, would be the only option given the “cost to cure”

So the options are there if needed, they just don't all seem to be ideal. My insurance policy is written for a triplex and the acquisition (hard money) lender is appraising/funding it as a triplex so my only main concern is the refinance. With everything going on in the world right now, I am skeptical on the likelihood of flipping the property as an alternative exit strategy. The deal has the potential to be a home run buy and hold rental property if everything works out, but there are a lot of what-ifs that are making it hard to proceed with closing. I'm also willing to consider any strategies or approaches to make the deal work, as I know I have a great deal on the table. That being said, I'm looking for any advice/pointers from anyone who has been there before or has more experience with something like this than I do. Let me know what you guys think on how I should proceed. Thank you in advance!

[Joseph Cacciapaglia]

I would not close on a deal with this level of uncertainty regarding zoning. Does the deal make any sense if you have to convert it to single family? In my market, P&Z is extremely helpful in these situations, so it's tough to imagine the scenario you're describing. If I were in your situation, I would consult my real estate/land use attorney immediately. If this is common in your area, then there might be a very simple solution. Then, be sure to run that solution by your lender.