My Buyers Each Wanted This Three-plex, Until it Became Apparent It Was Only a Legal Duplex!

[Burt L.]

I have a three-plex under contract that each buyer who has seen it has said they like the numbers on and want the property. It is priced at 215K and has rents of $2,050 which are easily increased to $2,500-$2600.

Its become apparent that its only a legal duplex and I didn't see any issues as it has three electric meters, three mailboxes and the address at public records vaguely reads Units A,B,C. Unfortunately, they list it as a 2 bed, 2ba instead of 5 bed, 3 ba.

Now each of the buyers has backed out as they can close with hard money, but cant get enough money back out on refi to get a decent ROI. Its zoned for two units and the seller across the street had the same problem after converting his duplex to a fourplex by separating the basements of each unit. In this case, it was an upstairs/downstairs duplex, which the owner combined, to pull a permit to convert a three-car garage to another living unit. He then re-separated the duplex into two units and I now see that one of the electric meters is just for outside lighting now.

Lenders wont leave their desks to see that the other building exists, although I have provided the building permit history for it. Of course, the owner has benefitted by having lower taxes in the meantime.

The owner will turn 80 years of age in a month, and is an old farmer who doesn't care about permitting, appraisers, lenders, etc. He knows its worked for a three-plex for many years and claims its "grandfathered in". He has offered owner financing at 4% but wants 80K down and likely no more than a 10 year balloon. If it were through a bank, one wouldn't have to put so much down, hurting ROI again. I don't much about wholesaling something with owner financing and this doesn't look so positive anymore.

Any suggestions for this "non-conforming" property that so many buyers formerly wanted?

[Patrick L.]

Burt L. The reason the buyers aren't willing to pay for the 3rd unit is that it doesn't appear to be a legal unit. If the city becomes aware of it through a complaint, future permits/inspections, etc they make force the owner to remove the extra unit (especially if the zoning is for a maximum of 2 units). I've seen that happen plenty of times here to investors that have split up units or converted a garage at a multi family property. As an investor it doesn't matter that the third unit is "there" it doesn't add much value to me if it's not legal or I can't easily make it legal. I'm not going to put money into it knowing I can be forced to later remove it.