What would you do?

Question

Hello all,
          
          What would you do in the situation? The property is a 3 unit and each unit is 2/1. Two of the units are rented out for $525 each with tenants paying the utilities (except heat for one). The third unit is in really good condition and ready to be rented out. The property is listed for $59,900.
          
          The issue is that the property is listed as a 3 unit in the county's website, but I called the city planner and they said that the property is zoned as R2. I asked them if they come out to inspect the property to see if the property conforms to zoning requirements, and they said no. The issue will come up if the place were to burn down and I wanted to rebuild, I could only rebuild it as 2 family house. Based on the comps, I made an offer of $25,000 cash offer because there was 4 unit house that sold not too far from this one for $30,000, but it was a foreclosed property and needed work. The owner came back at $55,000, and I went back with final offer of $30,000. The owner came back with $53,000. I told the listing agent that the property is zoned as R2 and it's not really a 3 unit house. It can be an issue anytime.
          
          Now my question is, would you guys pursue it any further or let it go?
          
          Thanks for all the help!

Edit - I should add that the property has been on the market about 3 months, and there was an accepted offer on it that fell through because of financing.

Matthew Underwood · Answer

If your offer is rejected I would attach a list of the zoning issues you mentioned above as a hard copy for the owner in your counter if you decide to do so. I would also request closing within a month of acceptance. These things usually show the listing agent and the owner you are a serious buyer with knowledge of the property and ability to close the deal quickly.

Sharad M. · Answer

So I have some update I am hoping someone can help me with. I have been negotiating on this house for a while now, and the owner has said the lowest she will accept is $45,000. The property is a 3 unit. 2 units are rented out at $525/each. There are two boilers for these three units. Two units share one. One of the tenant pays his own utilities (the one with his own boiler). The other is paid by the owner. The third unit is vacant, but in move-in ready condition. This should also rent for about $500-550.

The house was originally listed for $60,000, and the owner is saying she won't take anything less than $45,000. But the problem is an appraisal for a 3 unit property not too far from this one (although in worse part of the town) appraised for $40,000. I told the owner that I am willing to accept $45,000 contingent to appraisal. She said she doesn't care what the appraisal comes in at. I think the lowest the appraisal will come in at is $40,000. I have looked at both the houses and this one is in much better condition than the one that appraised for $40,000. The one that appraised for $40,000 only had one furnace for the whole house, and it was listed as a 2 unit in the county's website. The third unit was in the basement. This one is in much better condition and is listed as 3 unit in county's website.

I am not sure if I should take a chance with this house. I really like the house, it doesn't need any work and 2 of the units are already rented out. The third one is just waiting to be rented out.

What do you guys suggest?

Sharad M. · Answer

Eric-Actually the property is in Indiana, and R2 per the Zoning department means 2 unit. The person I spoke with in the department told me that I will have no problem using all 3 units as long as there is no fire and I don't need to rebuild. Or if the 3rd unit is vacant for more than a year.

Eric M. · Answer

Have you researched the meaning of R2 zoning? I am not aware of a suburb where R2 indicates a 2 unit dwelling (which is what you seem to be implying).  And I am pretty certain Chicago no longer has R2 designation.
If it is a non-conforming 3 flat, it can be an issue when you get a building permit or during the triennial tax assessment or any number of situations.

Sharad M. · Answer

Aaron and Mike - Thanks so much for the info. I put in another offer at $35k. I will keep you guys updated.

I gotta say thanks to Josh. This is the best resource! Better than any book or anything else out there.

Mike McKinzie · Answer

With the rent on the two of $1,050 a month and dividing that by 2%, you get a purchase price of $52,500.  But you are paying heat for one of the units.  So let's divide the rent by 3% and you get a purchase price of $35,000.  I would come back and offer $35,000 and go from there.  If you can pick it up for $40,000 or less, and no major repairs are needed, you should have a decent cash flow.

Aaron Pfeffer · Answer

I'd pursue it.  If you can reach an agreed upon price based exactly on what new construction of a 2 unit would cost you will have probably done very well for yourself.

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