Is it a 4 unit or a 6 unit?

Question

I looked at an interesting but complicated fsbo, multi property yesterday and I'm considering an offer.

It was built as a 6 unit with 2, 1/1's underground, with legal egress windows in the bedrooms. It has the 4 upper 2/1 unit's rented with the 2 lower 1/1 unit's vacant.

The reason for the 2 vacancy's, is a Multi Family Parking Ordinance that states, "One parking space for each unit and an additional space for each bedroom". The ordinance was adopted prior to the last sale. I only count 11 parking spaces currently, with little room for any additional spaces. Leaving 1 space short just to comply with the 4 unit's currently rented. Penalty's can be $100 per day, per violation.

The anxious owner of 9 years lives 125 miles away and is financed with commercial money, the property is also being overtaxed as a 6 unit, when it cannot legally be a 6 unit because of the parking issue. I would argue the property taxes on a grm and purchase price basis and probably win.

If I can buy this at a 4 unit price, how would I get it to finance as a 4 unit and get the more favorable terms? Then revisit the parking issue later, and what effect would turning a conventional financed property, into a 6 unit have on the mortgage?

John

Joel Owens · Answer

Deals with what we call in the business a lot of "hair" on them I pass unless I am picking it up for really, really cheap. It's a lot of work to deal with those issues and if I can't use the property for highest and best use I take a hit and have a marginal property at best.

My time is worth a lot of money. It reminds me of the TV show Shark Tank. Damon the owner of FUBU apparel is worth over a billion dollars. He Is negotiating with an entrepreneur about buying into their company. They are going back and forth over percentages. The lady is saying but at that percentage you are valuing my company and XX and it has sales of XX. Damon says normally if you look at it just on numbers you are correct BUT you are not asking me to just cut a check for XX percentage of the company. You are asking me to use up my time to help grow this business and mentor you and that is worth a lot of money as I can do only so much in a day. She agreed and they closed the deal.

So I see many things with potential to create value such as this but the question becomes "How much time will it take to create the value and what is the return versus my other investments?"

Buddy LaRue · Answer

John,

This property sounds like it should have its parking "grandfathered", and that it is actually a six unit apartment building.  You should check with the city about the parking.

If the property was built as a six unit apartment building, it's doubtful that you will get it financed as a four unit building because of the parking ordinance.  If the city gives you a hassle about the parking, contact an attorney.  It's unreasonable for the city to expect you to grow more land to accommodate a parking ordinance instituted after the building was built and was not in place at the time the occupancy permits were granted.

One thing you may consider, if there's room, is to make the parking spaces smaller, if need be.  Oftentimes, parking is not laid out well, or has spaces that are wider than needed.

Best of luck to you!

Steve R. · Answer

I would have a conversation with your local town/city zoning office.  This property sounds like a pre-existing but non-conforming use which predates the current zoning requirements regarding parking.  Many times these types of properties are grandfathered in and would represent a legal 6 unit.  Usually as long as you keep the use the same, i.e. keep it a multifamily, you are able to keep the protections of the preexisting use (please check with local laws/ordinances as I am not a lawyer).  The local zoning office or building department will be better able to assist you.  Good luck!

John Adamkewitz · Answer

Update, It gets more complicated.

I went back for a second look and got more info from the "Manager".  The rents are lower then I was told. Owner claimed $750 for the 4 rented units, actual rents are $600, $650, $650, $700. Units are beatup. I could spend 3-5k on each of the upper 4, the 2 lower units are not even close to ready, flooring cabinets ect.

Owner drops other shoe: The commercial lender has decided to "Not renew smaller property loans" (As per owner)

He has received a "Foreclosure notice" yesterday, He also mentioned the bank did an "Environmental exam" a few days ago.

He owes $258k on the property, an educated guess tells Me it will appraise between 175k-225k depending on who wants the appraisal.

I know most would run away and I may do that. But first I have question.

Do foreclosed commercial mortgages still have the listing exposure rules that conventional mortgages have?  i.e. Has to be listed for so long before they can take an offer?

Whats really going on here? How can I find out?

John

John Adamkewitz · Answer

Thank You Guy's, I agree with the Grandfathering deal.

The building is 17 yrs old and the ordinance is 10 yrs old. Last transfer 9 yrs ago. The strange part is why the unit's are empty, and why did the owner mention "a parking problem"?

He has been "less than truthful" about many other things as well. I am also starting to believe the 2 lower units may have been added.

11 parking spaces for 6 unit's, is asking for tenant arguments. Somthing is rotten here and I just have to find out what.

John

Steve R. · Answer

Forgot to add this to the previous post, but I would confirm when the property was originally built, and how many units were approved at that time.  I would then make sure that if the units were added later, were they built before the change in parking requirements went into effect?  That would help clarify if it was pre-existing or if they are illegal units.

Is it a 4 unit or a 6 unit?

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