Converting two family to three family?

[Steve Schulman]

What’s up everyone - Part time investor coming out of Bayonne, NJ. First post here as I am fairly new to BP! Looking for some advice and good insight.

I recently put a 2FAM under contract with the sole purpose to convert to a legal 3FAM. The property has two units with 3BR & 2 full baths each on the second and third floor—as well as an owners duplex with 2 BR 1 full bath and a half kitchen on the first floor behind the garage. With the 2BR as its own legal unit, conservatively I can get 1100 from the first level and 2200 and 2300 from the other two 3BR. If I cannot, I would be stuck with a 3BR and a 5BR… This of course is not as enticing since I will be missing out at least 800 per month in extra rent, let alone am unsure how much demand there even is for 5br in my market or what it could truly rent for.

Moving forward, I checked with the city and reviewed the ordinances for the zoning of the property and it is in fact possible to turn into a 3fam dwelling. However, only as long as parking permits. When I checked the city code I found out that I will need a total of 5 spots to legally proceed here. Since the property only has a garage and 1 additional carport, I will have to hire an architect, basically shuffle money around and have him or her draw up a report to see if it’s feasible or not to add these extra spot. Clearly, it isn’t— if anything I may be able to squeeze a 3rd spot in the carport, but I believe that’s unlikely since there are car stacking limits. All in all, I was advised I will have to take the architects write up, hire a lawyer and apply for a code variance with the city. After doing my due diligence, I found out this can take anywhere from 6 months to a year, and cost anywhere from $10,000-15,000 (architect/lawyer expenses, survey, notices, mailing, escrow, application and legal fees, etc.) All of this to potentially get turned down and be stuck as-is with the 2FAM

That said, I based my offer off the 3FAM projected income— if the property can be legally be converted I will see a strong ROI even with the mentioned expenses, but if not I will be putting myself in a hole. I am hoping to get promising feedback so I feel confident rolling the dice and taking a chance with the conversion, but that does not seem to be the case. I was informed by a couple attorneys it is not out of the question but it is a long shot. They have been in front of hearings and as of right now, said it not likely the city will approve this for numerous reasons. One, since there are already numerous apartment complexes being put up in the area, the city is very dense with parking and residents are getting fed up. Two there are numerous applications for variances like this already being requested, and three the fact that it is a newer property doesn't help my case…

Knowing this - I advised my agent our goal right now is to keep the contract open as long as possible without putting ourselves in a position to forfeit earnest money deposit, so we can look further into the variance and confirm if it is in fact likely or not/worth taking the shot, before we back out. Plan B would be to try and negotiate the price down, ask for a seller concession, ask for all appliances, basically everything we can get before we back out, in order to make the investment as a 2FAM worthwhile. Plan C would be to look for some creative financing as this would be a perfect situation to do a Lease Option in if they would consider it...

I am hoping anyone on BP has solid input or any recommendation here. Maybe someone familiar with variances and or someone on the ground-floor in the area? Thank you for taking the time to read this, your input is appreciated.

Steve