Portland OR SFR zoned industrial

[Account Closed]

Dear Portland people, 

I've been in contact for over a year on a SFR zoned industrial in 97211. Originally there were some boundary issues that I wanted investigated, and the surveyor found encroachment issues (between properties in different zones) so the city had to get involved yadda yadda and it's dragged on.

I can back out if I don't like the new boundary they come up with. If they ever finish. 

Anyway, my partner is starting to have second thoughts because of the industrial zoning. It's a 1000sf (not including basement) house with lots of deferred maintenance on 1/4 acre. It's also on a busy 2 lane road (far back from the road, but still...) and you have to back out of the driveway onto the road. 

Also disclosure said septic but now the LA is throwing around the word "cesspool" in her emails, so it could be a cesspool instead of septic. 

Views from back yard are amazing. Lot is huge. Unfinished daylight basement could be finished. Original built-ins and fir floors from 1920's. Foundation is surprisingly solid.

Repairs/replacements needed include siding, roof, windows, electrical, sewer hookup, water lines, and all cosmetics. 

Contract price: $140k. Market rent is about $1300, maybe more with some light rehab.

I personally think it could even just have some light cosmetic work done and leave major rehab to the next buyer, maybe do a 1031 exchange, and flip for $200k.  My partner (not *business* partner) thinks that the industrial zoning makes it not a good deal. He's afraid buyers would have a hard time financing. He is also a residential RE broker.

My concern is if it's really a cesspool and not just a septic. But I guess it needs a sewer hookup anyway...

Do Portland folks think there  are too many moving parts for that price? I feel like anything that price, regardless of condition or zoning, is a good deal, especially west of 42nd. The land might be worth that alone.

Anyone have experience with industrial zoning for a SFR?

[Scott Meyers]

Dani Z. 

It appears you may have a better deal than you thought... 

1st step:  Call the Zoning/Planning commission to determine EXACTLY what is permitted under the industrial zoning.   Find out about signage, setback, etc.   And If the property can be rehabbed without a Major expense (Cesspool)  I would look into altering the ingress egress to allow greater ease of getting in and out of the property, and then rehab it and lease it out to a commercial tenant. 

In Virtually every major market throughout the country, the property would bring far more revenue with a commercial tenant, than as a single family rental with the more attractive zoning.   Besides, they pay, stay longer, and generally take care of the place.    

You were wise to put the question to BP - if you listen only to the single family novices in your circles, you will continue to only make single family profits.    

Keep us posted. 

[Dave Foster]

@Account Closed, I'll throw another possibility to you.  Since you have been in contract on that property for over one year there is a large body of law that says that a seasoned contract to purchase real estate represents a comparable bundle of rights as the real estate itself.  In other words the contract is a piece of real estate.  

If you thought that the property with it's zoning etc was valuable but you didn't want to do what was needed to bring it up to snuff you could sell the contract itself and  use the sale/assignment of the contract to do a 1031 into a different property.

[Randy Johnston]

Hi Dani,

I have to agree that an industrial zoned lot would bring in higher revenue (especially out near the airport) than an SFR, if your goal is buy and hold. But, you'll have to go through the city to develop the land and that's at least another year before you can start any construction. You need to decide if you want to go through the development process and build or if you think it'd just be best to sell the lot to a developer/builder.

If you don't mind providing me with the property address, I'll look into this a bit more for you.

Feel free to give me a call.

Thanks,
Randy 

[Theresa W.]

One point of clarification.  The industrial zoning would apply to future uses.  Make sure you have a letter from the city that the residential use is grandfathered as a legal, non-conforming use.  That letter can and should be used to secure a residential loan.

Most non-conforming uses cease to be legal if the property is discontinued being used as the original zoning.  Meaning, if there hasn't been a resident living in the property for x amount of time (usually a year), then the legal non-conforming right goes away and you're left with a property that must conform to the new zoning: industrial.  Just double check.. good luck!

[Account Closed]

I spoke with the city last year. SFR is grandfathered in, but if the whole place burns down, for example, I can't build another SFR. I can only rebuild a SFR if 75% or less burns down.

I'm not really interested in developing an industrial lot; when I develop it will most likely be small multifamily.  But there has been appreciation since the property was first placed under contract, so I was thinking I could just turn around and resell it for a profit--maybe doing some light cosmetic work on the inside (e.g. remove fake wood paneling, paint, repair broken window)--since there are a ton of first time homebuyers who might jump at any habitable house for $200k, regardless of zoning.  

Maybe highest and best use isn't residential, but if I can get more for flipping a house than I can for an industrial zoned lot, then that's one route. What I'm uncertain about is whether the industrial zoning would scare residential buyers away for financing or insurance reasons. Based on what I read in RE school, industrial zoned properties get the lowest LTV loans. Plus though the house is currently inhabited, it's in rough shape.

One option, @Randy Johnston, is to do what you've done with empty lots, which is to get it all permitted for an industrial use and then sell it to a developer so they can be ready to go at the time of sale.  I could rent out the house in the meantime (there's been a tenant in there this whole time @Theresa W.).

@Dave Foster thanks for the contract assigning tip.  I hadn't thought of that.  The contract has an expiration date so I'm guessing that would make it less attractive to a potential buyer/assignee?

One final thought is, with legal marijuana in Oregon, maybe there'd be a demand for a commercial tenant in the house if it's used as a dispensary?  As @Scott Meyers pointed out, the driveway would need an overhaul (which would cost $$ as currently there's no place to expand without grading).

[Dave Foster]

@Account Closed,  ..."One final thought is, with legal marijuana in Oregon, maybe there'd be a demand for a commercial tenant in the house if it's used as a dispensary?"

Or a 7-11 or Taco Bell LOL.

[Mike Nuss]

Hey @Account Closed do not include any residential uses in your exit strategy plans for an industrial zone, other than the current grandfathered use. Thinking marijuana is a excellent idea, but think manufacturing not retail. Portland has a limited amount of zoning suitable for grow spaces and building a grow facility is very low cost. In fact, if you want to assign the contract, I would consider purchasing that contract from you. When does it expire?

[Account Closed]

@Mike Nuss yes, if I were to sell it as a SFR, then that would be the current grandfathered use. House is only 1000SF. I'm not well-versed in that business (maybe I should call my cousin, who is . . ) but that doesn't seem like a lot of grow space to me?

Contract ends 5/31. I do think it's a pretty good deal and obviously want to get the highest IRR, but am also open to possibilities I hadn't considered before.

[Randy Johnston]

@Account Closed has the right idea as far as using the lot for a grow house and not a dispensary, if you decide to go that route . . . there are dispensaries all over the place.  

[Amanda Coleman]

@Account Closed For what it's worth when we bought our house there was a decommissioned cesspool on the property, I had never even heard of a cesspool for house sewage before but am fairly familiar with septic but our realtor assured us is was pretty much a non-issue and that lots of homes in the area had them. I guess there is potential for them to cave in but we haven't had any trouble with it and I haven't heard of it as a big issue. Long-story short, the cesspool was not an issue for us as buyers. However, I think it is costly to get a house hooked up to city sewer, which I'm sure you're already aware of. 

I can't speak to the industrial zoning but I know there was a pot grower wanting to lease some land out by the airport, I'll see if I can't get some info on what they were looking for in terms of size of space etc. 

[Account Closed]

Thanks @Amanda Coleman!  I'm clearly not that informed about the MJ industry. But you all have given me lots of munchies for thought.