Property: 607 Calle Canasta, San Clemente 92673
Status: Off market; listed in June 2016 for $1,298,000
This property COULD be a tremendous opportunity for the savvy investor, but it comes with a catch so I thought it would be good to take a look.
On its face, it seems like this 5-unit complex is priced competitively enough so that there’s a little meat on the bone for an investor to earn some income right out of the gate:
$1,298,000 with 20% down brings your mortgage payment to just around $5,000/mo. If pro forma rents hold up and you can in fact earn over $5,600/mo, you might think it’s worth looking into further. However, also included in the notes of this listing:
“Since 5th unit is non-conforming, lenders will require loan to be commercial paper. Building is zoned a four-plex, however large front unit was converted to (2) un-permitted units.”
A non-conforming use issue can quickly turn a great deal into a nightmare for the uneducated investor. Most jurisdictions in the United States have some form of zoning regulations in place. Certain zones may only permit single-family dwellings and thus forbid apartments and commercial uses.
In the aforementioned example, a 4-unit complex was converted to a 5-unit complex without properly permitting, probably because the property is located in a zone that prohibits such use. Therefore, this property is “nonconforming” to modern day building and zoning codes. In some cases, a property can be designated as “legal” nonconforming if its configuration and use was legal at one time and pre-dated the zoning laws.
There are plenty of non-conforming properties out there and the practice of changing the configuration and use of a property is not uncommon, but it’s important to know the potential hazards of investing. For example, if a neighbor files a complaint with the City about an illegally functioning 5-unit complex across the street, the City may force you to convert the property back to how it was originally permitted. You may have issues with insuring a nonconforming property. You may run into liability issues with future tenants.
It’s also worth noting that the seller’s agent believes any buyer requiring financing will have to resort to “commercial paper,” which typically means harsher terms, higher interest rates and much shorter timeframes to pay back a loan. All things to consider when considering a non-conforming property.
Questions to ask:
Is this “legal” non-conforming or “illegal” non-conforming?
How many utility meters are there?
How many units is the City building department monitoring for the property?
Have all 5 units been occupied continuously for the past year?