The broker didn't inform me of the zoning..

I know I should have asked but this is my first purchase and I just assumed which is my mistake. The property contains 5 retail stores on the first floor and several small office spaces on the second floor. It’s located in a great area surrounded by office buildings.
After my lawyer sent out the letter of intent, the lawyer found out that the zoning for the property is for office buildings only. The retail stores were there before the zonning became effective so it’s permitted to stay but should I want to get rid of the building and rebuild, I can only build office buildings.

The building is in good condition and I had no intention of rebuilding but this gives me a pause. Should I rescind the offer? Or should I renegotiate the price?

Isnt this kind of thing that the broker should have obviously tell me?

Yea, I would expect the broker to be on top of the zoning and restrictions but maybe he assumed too much like you did :biggrin

Im no expert and none of us can be as familiar without all details but it sounds like this would effect the value of the property…Again, no expert but I would look at whether or not purchasing this piece of property zoned for retail would have a higher yeild in the area versus zoned strictly for office, and if you feel you bought high based on those presumtions against knowing what you know now I would reconsider.

It just sounds like you could have missed out on a potential negotiating point in the deal…

Hi,

Your real estate agent or agency has no legal obligation to check for zoning and zoning restrictions. You are responsible to check with the city and the city planning, zoning, permit and licensing authorities. The only time I would expect help from my agent is if I wrote a contingency or series of contingencies concerning demolishing and re-building on the property! Then the agent is obligated to assist in discovery to mitigate a decision to remove the contingency or back out of the contract.

If you think you might have wanted to demo the property and rebuild it would be nice if you would clue your agent into that? And just like any other developer you need to take the time if you think you ever want to do this to understand the properties current legal position.

In the event you did want to rebuild you can submit to the city and go through the process of applying for a zoning change! Zoning is changed in every major town and city from time to time, and properties are “Grandfathered” to there current and best use!

But don’t put this on your agent or agency, they can’t read minds and the responsibility is your’s, “CAVIOT EMPTOR” - “Let The Buyer Beware”!!!

                 GR

Thanks for the replies.

What are the things I should consider in deciding whether to go through with this deal or not?

I have no plan to rebuild but I am thinking of resale value in 10-20 years…

Hi,

Nothing changes as I said cities will from time to time rezone sections of the city to a more uniform future use plan, however it does not change existing properties and there grandfathered use. 

If your buying right today, you will make a profit and very much be able to sell for a profit in 10 to 20 years.

       GR

Your initial statement said a lot, its your first deal, we were ALL nervous the first time we bought investment property,we wonder if we are doing something wrong, overlooked something, etc etc,there is some degree of ‘chance’ in everything in life,hopefully you have a mentor you can go to , sit down, explain everything, and ask them if they would do the deal,if you don’t have someone like this get someone,go to REI club meetings, etc,there are people willing to help just to help,there is also a good chance you will run across a deal that won’t fit what your looking for that you can tell them about

I don’t have the experience that a most of these guys have, and i still worry about things, but honestly I can’t say I worry about something 20 years off,

If you have a great agent, he will do research for you, but many agents only do the minimum that is required of them. So it is the buyer’s responsibility to do due diligence. All listings will have a disclaimer that information is not guaranteed.

It’s my understanding that the building that you are buying already has the retail stores. If I liked it, I would buy it and then NOT tear the building down at any point. You can accomplish a heck of a lot with upgrading and remodeling.

If it burns down, oh well, that’s why you keep it well insured. Fires are rare and I don’t consider them to be much of a threat.

Your agent should have known that, but you probably can’t sue him because of it and make it worth your time anyway. Plus since your lawyer figured it out before you closed…the whole situation is kind of null and void.

Everything is negotiable. Feel free to re-negotiate with them as long as you are not locked into a final contract that won’t allow that.

90% of your decision should be based purely on what your annual percentage yield will be. In my case, I will not even look at a real estate investment if I cannot make a 20% APY or greater on it - and usually I only look at better deals - especially since this is a buyers market. The way I think about yield, applies to whether I am buying (or starting) a business as well. <<

Another way to look at it is CAP rates, which is what most real estate investors use (I do not, primarily since I pay cash for everything). CAP rates, ROI, APY … it all basically means how fast you get your money back on your investment … as I am sure you know.

Just read the numbers, and calculate your offer based on the return you want (per year) earned from YOUR plan for the property - either leaving it as is, or smashing & rebuilding.

If they take your final offer, good deal. If not, move on.

Good luck!

So Motivedec, as long as the numbers are right ( in this case its 6.3% CAP), this zoning issue doesn’t concern you? It has good long term tenants and I have nonplan to tear it down.

I would never, ever, ever, ever consider something with a 6.3% cap rate. It will take you many years to break even.

I don’t buy a property that does not pay for itself, in full, in 5 years or less. Usually less. I have bought some properties that will pay for themselves in 2-3 years.

This sounds like an absolutely terrible deal. A 6.3% cap sounds about right for AAA tenants–national fanchises like McDonald’s, Tim Horton’s, etc. But, when their 10 year or whatever lease expires, they’re gonna want a new building or they’ll find someplace else that’ll build one. If you can’t tear it down and build them new commercial stores, you’re more likely to loose bigtime as you end up with an empty retail unit or have to reduce rents and end up with a lower cap because the class of property has been downgraded as it becomes more expensive to maintain.

In my city, national franchises like McDonald’s, Shopper’s Drug Mart, etc. have their buildings either demolished and rebuilt every 20 years or they move to a newly constructed location and the old building remains vacant. Office space can be built vertically and is, therefore, not worth as much per square foot as ground floor retail. Unless they’re offering 100% financing in a corporate name with no personal guarantees, I wouldn’t touch it with a 100 foot pole. Get out of it if you can. There are way better deals to hold out for.