Getting Frost Bit on Our First BRRRR !!!

[Travis Ferree]

Hey BP!

I'll preface my post with this…Yes, we’re actively seeking legal counsel but the forum seemed like a great way to get additional input. Not knowing if this situation will require litigation, I’ve intentionally withheld the specific area this property is located in.

My wife and I (myself acting as buyer's agent) purchased what was advertised as a 3 story / 4-unit property in the state of NY with the intent to BRRR with a hard money loan. This property is listed as "411 – Apartments" which by definition means be 4 units or greater. This fact has been confirmed 3 times with both the Assessor's and Real property offices. I also have an email from the code enforcer about a month after the purchase stating "I have not found substantial evidence to contest the buildings current occupancy as a 4-unit dwelling. The renovation/alteration of the house does need to be designed by an engineer or architect in compliance with the Existing Building Code".

After receiving a stop work letter during demolition, and realizing that my GC made an oversight on the level of drawings required for the level of renovations we needed to perform, we hired a local design/PE company to complete the structural, electrical, plumbing, fire, and energy efficiency as required by code enforcement. Since the design company has been in talks with code enforcement, they have now rescinded their prior statement of not contesting the 4-unit occupancy status and state that they do no have a certificate of occupancy for a 4 unit (CoO aren't commonly used in this area). They are also not recognizing the 3rd floor as ever being approved for occupitable space which is now considered an addition, forcing us to bring the property into compliance with the International Building Code not the Existing building code as stated in the email. This new information would require the property to have a fire suppression system, as well as a paved parking lot with a combined cost of ~$45,000 which no longer makes the property BRRRR friendly.

Options we've developed:

1) Make the property into a 3 unit- Using a mezzanine clause in the code we can utilize 1/3 of the 3rd floor's square footage, mezzanine it to the 2nd floor, and it will be consider 2nd floor. This option will allow for a 3 bedroom/2 bathroom unit and avoids the ~$45k in upgrades but will most likely cause the total rent roll for the property to be ~$200 less than projected as a 4 unit. This option also impacts the refinance as the property will now have comparable sales with other 3 units. 

2) Install the fire suppression system and parking lot with the hopes that the property will appraise for the additional amount so the refinance will cover the additional costs. Based on my comps when purchasing this property this is highly unlikely but we would hire an appraisal company to verify this option prior.

Any help that anyone can provide is greatly appreciated. 

Travis