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Do Not Make This Mistake When Buying an Investment Property

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I bought a foreclosure (REO property) in 2007 and it almost became the biggest mistake I ever made.  The problem was that I failed to do enough research on the zoning implications of the property.  Structurally, it’s a duplex, but unfortunately after I bought the property I discovered that it was only zoned as a single family home.  Thus, I was unable to rent out one of the units until everything got cleared up. 

The primary reason this happened is because the property was a fixer upper, and as such I used a private lender to make the acquisition.  If I would have used a regular bank, the mortgage due diligence process would have likely revealed the issue before closing.  But since I did not go through a regular bank, the standard bank-mandated due diligence was not required and hence was not done.

It was only after I spent 2 months rehabbing the investment property that I became aware of the problem.  I went to the town city hall to pay the required rental unit registration fees on both units, and was informed at that time that this problem existed.  It was such an incredible piece of bad news that I literally walked out of the office that day with tears in my eyes.

So, I had to hire a real estate attorney to coordinate the process of requesting a zoning variance.  The lawyer had to pull a bunch of historical records, send letters to all the property owners in the area, and negotiate with the zoning officer.  Finally, after 2 months and $5,000, I was granted the variance.

Luckily it worked out for me, despite the added stress and expense.  But if I would have failed to gain the variance, I would have been stuck with a property that would not have even covered the mortgage, property tax and landlord insurance costs. 

So the moral of the story is, always conduct thorough due diligence on any multi-family property you buy.  And this includes the zoning laws of the local municipality.  And if you utilize a private lender instead of a traditional bank, you must be extra careful in your overall assessment.

One Response to Do Not Make This Mistake When Buying an Investment Property

  1. Will says:

    Wham bam thank you, ma’’am, my questions are answered!

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