Part of my Rental Property adventure has been exploring the wonderful world of Zoning Laws. And how they can really throw a wrench into your plans for world domination.
So as I explained earlier, my new rental property has attracted lots of former suitors. As many as 6 previous deals have already fallen through. As a young Paul Atreides once asked, “They tried and failed?” No Paul, they tried and their deals died.
I soon found out why. The property in question is zoned ‘Commercial‘ and this killed the ability for anyone to get a conventional residential mortgage. If I wanted the property, I needed to buy in cash or fix this issue.
First, let’s learn out Zoning Laws.
Zoning laws are laws that stipulate the development of land. These laws determine what structures can be built on a section of land, how the land can be distributed or sold, and whether or not businesses may be operated on a section of land.
The primary purpose of zoning is to segregate uses that are thought to be incompatible. In practice, zoning also is used to prevent new development from interfering with existing uses and/or to preserve the “character” of a community.
The problem was my building was clearly 2 units of residential property in an area designated for Commercial use.
The common divisions of zoning categories are; Residential, Commercial, Agricultural, and Industrial. Any place can also be a mix of these categories.
What I was hoping to see is that residential was a ‘permitted use’ or ‘legal use’ for my zone. But it was not going to be that easy.
Now since my building has been used this way for quite some time, the residential use was considered a ‘non conforming use‘ that had been grandfathered in.
I could keep using it in the same way.
However, if it ever burned to the ground, I would have to rebuild according to the current zoning. I.E. Commercial. I would be allowed to have a residential second floor, but only a commercial business use on the first floor. Lastly, I would have to put in a sprinkler system. 🙁
I could just take the chance that it would not burn down, but my bank would not. In order to go ahead with a residential mortgage they needed some assurance that IF it burned to the ground, the city would let me rebuild in the same fashion. (2 unit residential).
Herein lies the pickle. I need to change the zoning which is a multiple stage process involving months of work. You need the local Zoning Administrator to agree with you and then recommend to the Planning Commission that the zoning should be changed at a public hearing. Later, if the Planning Commission agreed with you, have the City Council vote to ratify the proposed Planning commission change at a second public hearing. All the while filing applications, getting inspections, spending money, and hoping the neighbors don’t show up to disagree with the proposed change. Local governments are usually very protective of their ‘Master Zoning Plan‘ that was developed long ago and thought to be correct the first time around. Keep in mind, every town’s Zoning Hell is probably slightly different.
I could never get a buyer to agree to hold open a contract to buy for this long, let alone lock a rate.
The solution lied in getting a Variance from the city. A variance is a deviation from the set of rules a municipality applies to land use and land development. This would not alter the zoning category I was in, but it would produce a letter that in the event of a total loss, I could rebuild residential as long as the footprint and square footage stayed the same. This was the ticket to a conventional mortgage (30 years and 5%).
A Variance was going to be easier to get and could be done theoretically in 1 month.
Keep in Mind, residential mortgages care about how much the place is worth, commercial mortgages care about how much money the place makes. I could get the first, i would not qualify for the latter.
I need to cut through this bureaucratic red tape like the Mountain through his horse!
Once again patience and persistence paid off. I took the following steps to secure my Variance and get the seller on board;
- Figured out how to apply for a Variance (all municipalities are probably slightly different). I did this by finding a friendly civil servant. My local zoning administrator was very helpful to the point that she sent me a copy of the paperwork as similarly situated property used to get their variance (it was all public information).
- Scheduled my Structural Engineer. $500 to come and say that they building will likely not fall down within the next 20 years. Kinda of a scam, but I needed his credentials for the presentation to the City Council.
- Put in my application and check for $250. Date set in 1 month.
UPDATE; so the underappreciated civil servant who processes these applications has found a document from 1993 that helps me out tremendously. It seems the house across the street tried to get the very same variance for the very same reason. They even hired a lawyer to do it for them.
LOW and BEHOLD my prospective property was mentioned at the time in 1993 and the Variance was granted provisionally to my spot as well as long a an accompanying Structural Engineer Letter is produced.
They wrote VOID over the $250 check I tried to pay them and granted my Variance (in the form of a letter) without having to go to full hearing.
Somebody is getting a gift basket. Has to be worth less than $20 dollars though. That is a government rule you might not all be aware of already.
The Bank is now ready to move full steam ahead. I even locked in at a slightly better rate 4.75%.
More from the Rental Property series;