I have always answered this question by saying that paying too much for a property is the biggest mistake you can make. I would say, that most other mistakes you can recover from. But I learned a new way to make this mistake: A guy I spoke with bought what he thought was a seven unit building in the same town I owned in. I thought seven units was a weird number, because back in the day, they built a lot of six unit buildings, many of them side by side on the same street. Seven set off alarm bells. I figured, it has to be the result of some remodeling, which is fine, as long as the zoning was changed to conform to the same number of units. Otherwise, you have an illegal unit. Which means you don’t have a unit.
My two recently sold buildings were in fact originally six units that got converted into 11 units. They would probably never let you do that now, but way back, you could do stuff like that. The zoning was properly changed, and when I purchased them, it was confirmed through due diligence, and spelled out in the contract that the seller was representing that the buildings were zoned for use as 11 unit buildings.
Well this guy, didn’t do his due diligence, and his attorney didn’t protect him. I thought he overpaid for the buildings anyway, but they became that much more expensive because a unit is now missing. When you have someone living in an illegal unit, you have another problem, and that is that the normal tenant landlord laws do not apply to that unit. Which means the eviction laws don’t apply to the unit. If you are in this situation, consult with a qualified Tenant-landlord attorney (who represents only landlords) for what to do. My understanding is that your only option is to buy them out, “Cash for keys,” because you can’t evict someone from a unit that doesn’t exist.
What should you do if you are in this situation? Well, I advised this guy to sue everyone, his former attorney, the seller and the broker, all of whom should have known better. This way at least he may have a chance of recovering a portion of what he paid for the property. Better to do your homework before closing.
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Knowing the potential rent isn't enough. Before you buy a property, you should also factor in closing costs of 3% to 6%, the costs to fix up the place and maintain it, and your holding costs. Then add the profit you expect to make -- and more closing costs, if you intend to turn around and sell it. Only then can you figure out what you can afford to pay.Find more about at here Tenant Agreement
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