Podcast Episode 24: “Fourplex Puzzle (Part Two).”
The second part of this podcast mini-series on fourplexes gets into some problems that can arise after the deal closes. When buying a fourplex, or any property with more than one dwelling, you must do at least two things. Number one, check to see that the zoning allows the number of suites. And, number two, confirm that the proper permits have been issued with final inspections done. A real property report (RPR) with the proper zoning stamp is not enough. Checking permits, whose job is this?
Buying Fourplexes as Investments is Trickier than it Seems
Now on to part two of “Fourplex Puzzle.” You will recall from the previous episode that our investor wanted to start purchasing multifamily properties and thought that fourplexes would be a good place to start. On the positive side, he already owned 10 wonderful single-family properties with positive cash flow and considerable equity. On the negative side he was out of money. The cash flow on his 10 properties wasn’t strong enough to handle a major refinance to do an equity take out, and he was conservative enough not to want finance things to the hilt anyway. The solution was to joint venture all of his 10 existing properties, which provided sufficient funds to purchase 2 fourplexes.
The first purchase went very well. He found a nice fourplex with three suites rented to good tenants and one suite coming vacant. As part of the offer to purchase, the seller agreed to do his best to lease the remaining suite, use our investor’s form of lease and give, our investor the right to approve the tenant. The fourplex was in an area with numerous other fourplexes. The zoning checked out as RF3, which allows fourplexes.
At closing the seller provided an older but very readable Real Property Report with compliance stamp confirming the RF3 zoning. The RPR, even though not brand-new, continued to reflect the current state of the property. Comparing the property with the drawing on the RPR showed nothing had been added or removed. The purchase was made, and on closing date a brand-new tenant had moved in after being checked out by our investor and signing our investor’s lease. All was going well.
Shortly after this purchase was finalized, another fourplex came up for sale on the same block. In fact, this fourplex was right across the street from the first fourplex. Even better, all four suites were rented to good tenants. This purchase went even more smoothly than the first. Our investor had just enough money for the down payment, found a very good mortgage, and removed his conditions. At closing, the seller’s lawyer provided a Real Property Report similar to the one the buyer got when he purchased his first fourplex. After closing our investor felt pretty good; this was going better than he expected.
What to Do About Illegal Suites in a Fourplex
That feeling lasted until one month after closing when our investor got a notice from the City Planning and Building Department that there had been a complaint that the fourplex contained illegal suites. How could this be? The zoning was RF3 and the block had numerous fourplexes, including our investor’s first fourplex right across the street. He even had an original RPR with that nice blue compliance stamp showing RF3. What went wrong?
The answer is that just because a property is zoned to allow a particular type of dwelling doesn’t mean you automatically get to build a fourplex. A building still has to be properly permitted. You need a development permit and a building permit. This is what our investor discovered when he talked to the city. His first fourplex had permits issued that allowed the building of a fourplex. The permits for the second building only allowed a duplex. “Fine,” said our investor, “I’ll just apply for the permits.”
As you might expect, it wasn’t quite as easy as that. The lot was a little bit smaller, which meant the square footage required to build the fourplex was just a little bit deficient, and building code rules had changed since the building was first constructed. To meet today’s building code regarding separate entrances, firewalls and other safety features, our investor would have to do substantial and expensive renovations.
- Suites need permits.
For any building with suites be it a single-family home with a suite in the basement, duplex, fourplex or other multifamily property, you have to check the permits to see if what is built is actually legal and allowed.
- A real property report (RPR) is not enough.
Having an RPR with compliance stamp that shows the appropriate zoning is not sufficient. If the RPR clearly showed that the building was a fourplex, (which neither of these RPR’s did), you might have an argument that the city shouldn’t have provided a compliance stamp. Best to have proper permits.
- Take responsibility for due diligence.
Permits – whose job is this? Your realtor, your lawyer or maybe your lender? Both your realtor and your lawyer should understand this question of permits, and if they are not checking out permits as part of what they do for you, then they should tell you that. In the end, it’s your job to know about permits and how the system works in your municipality. You need to be able to ask questions, know what your team is doing for you, and direct your team accordingly.
If you’re buying a fourplex in Alberta, get Barry’s legal expertise to minimize your risk. Contact him ASAP!
“Puzzle Pieces House Shape Real Estate Jigsaw Puzzle” image by AbsolutVision used under a Pixabay License.