When a zoning change could ruin your investment value

I went to appraise a triplex the other day.

As it turns out, they changed the zoning in this area. This has happened twice to two investment properties in this area. Regardless of the area that you’re in, before you buy properties like this, make sure you check the zoning regulations. Because if you don't it may turn into the worst investment that you've ever made. Let me explain.

If the home is zoning for a triplex or an investment property and the zoning changed to a single family residence, there could be a high probability that if the home is destroyed or damaged that the home can not be rebuilt as a triplex, as the new zoning laws states that the home must be rebuilt as a single family residence. This means that your investment may have declined to what single family homes are selling for in the area and worst yet, it that you'll lose the rental income. This is the entire reason you bought the tri-plex or investment property, didn't you?

So now the appraiser must determine the highest and best use of the property. Is the use of the property best used as a duplex or a single family residence? Will this significantly change the value? The appraiser will have to look at other homes in the area that offer similar square footage homes as your tri-plex. This could significantly change the value of the home. And surely it will change the use of the home.

This is the bigger problem. You see if you own a triplex and you'd like to sell, you'll have to sell the home as a triplex but disclose the zoning change. This means, investors may not be interested in buying a triplex under the assumption that the home must be rebuilt if it is damaged or destroyed and it must be rebuilt as a single family residence.

Now when you go to refinance your property and the appraiser discloses this in the appraisal, do you think the bank will want to loan you money based on the fact that if the home is destroyed, the property with a complete different function will be built in its place. There is a good probability that this will influence the value of the home and if you can even refinance.

So the moral of the story is before you buy an investment property, check the zoning and be sure that the home is legal. More importantly, dig a little deeper and find out if there are any plans to change the zoning as far out as the county or city will tell you. This way, you'll get to refinance your investment unit and sell your investment unit when you want and under the same zoning code as when you purchased the home.