Practicality of operating a nonconforming 3-5plex on Oahu

[Pavel Bennett]

Hi folks!

I see this a lot in the listings that meet my criteria: "Number of bedrooms/bathrooms does not match tax records. Buyer to do own due diligence. Sold as is."

I'm looking for a parcel of land that has structures on it with a total of 3-5 separate living spaces (each with a separate entrance and not connected to others via doors or otherwise) so that I can live in one and rent out the others (to long-term tenants). Typically, this is on lots sized 5000-7500 sq ft and zoned R-5. I will need to finance it using a conforming loan or a jumbo.

What are the risks of doing this? My concern is that I may at some point be required to stop operating it as a multi-unit rental and have to sell at a loss at a time when potentially many other landlords are in the same situation.

Thanks!

[Colby Hanley]

One other thing to think of if you are financing it is, that the appraiser will only value the permitted part of the property, the unpermitted/non-conforming part will not count towards the value of the property.  I have seen homes come in on Maui 2/3rd of what people thought they were worth due to this.  If this happens the buyer needs to come up with the difference or the deal falls thru even though the rental income would cover the cost.