Real Estate Dilemma

Sep 7, 2012 by

Sale pending real estate signA good friend is spending a week with us. Along with lots of catching up, he related the details of a real estate deal gone bad in which he’s currently involved. I consider Money Counselor’s readers a wonderful (not to mention free :-)) resource for advice, so I proposed, and my friend (Tom) agreed to let me describe the scenario here to see what we can learn from the comments.

Background

Tom retired from full-time paid employment in July 2011. He’s been doing some consulting and temporary work, and he began taking Social Security a few months ago. He has grown children and lives alone, and his income is far less than he earned as a full-time engineer-type. That’s okay, and all part of well thought-through plan, which also includes changing living arrangements.

Tom sold his single-family home in May. Broadly, his plan—which I think is very sound—is this: Buy a large property with several units. Live in one of the units, and rent the others. Financially, his aim is to cover all the property expenses (e.g., mortgage, property tax, insurance, maintenance), plus provide additional income of about $500 per month. Tom has no experience as a landlord or with real estate investing; he does, however, have excellent handyman-type and people skills, which will save money in both managing and improving the property.

The Investment

Tom’s aim may sound like a tall order, but after much looking and a few misfires, he found the perfect property: A large house already built-out to three functioning rental units. The clincher though was this: A spacious undeveloped attic space that Tom’s realtor discovered first and proclaimed ideal for building out a fourth unit. Tom was excited!

Tom’s realtor did a cash flow analysis. With the addition of the fourth unit, the property would meet Tom’s financial goals for the investment. After confirming expenses like property taxes and insurance, Tom made an offer under asking price that was accepted without counter. Deal done, the property closed Thursday, July 27.

The Tragedy Unfolds

The following Monday—keen to begin work on the fourth unit—Tom went to city hall to obtain building permits. That’s when lightning struck. City staff wondered aloud why Tom would be seeking a building permit to add a fourth unit to a property zoned for a maximum of three residential units. Uh-oh.

Tom asked the zoning folks about the process for getting a variance. He was told the cost of the petition would be a non-refundable $1,600, and that it would be turned down. Incredulous and desperate, next Tom visited the Planning Board, the group that makes zoning variance recommendations to city council. Sadly, a representative confirmed the virtual certainty of a variance denial.

Tom then headed for the nearest bar to drown his sorrows.

What Now?

As the only real estate professional in the room, Tom feels his realtor should have known or taken steps to learn whether zoning would permit a fourplex, as a simple matter of standard due diligence. Naturally, in retrospect, Tom wishes he had taken the initiative to make a zoning inquiry himself rather than relying on the agent. My feeling is that there are any number of questions related to buying real estate that laypersons are not qualified to answer, or even necessarily to recognize as important. If that’s not part of the reason realtor’s exist, then what is? The realtor’s cash flow analysis clearly included rent from an additional unit.

Tom’s seeking legal advice.

Your Suggestions?

What would you do if you were Tom? As a triplex, the property does not meet Tom’s goals, so he intends to put it back on the market. We’re hoping for some creative, pithy suggestions, sufficient to get Tom out of the bar. Thanks for your help.

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