Rent roll says one thing, license says another, the city file says neither

Career changing into this and I've spent four months looking. Found a 9 room house, asking 310k, seller says all 9 rented at 540, so 4,860 a month, 58,320 gross.

I pulled what I could from the city. The rooming house license on file says maximum occupancy 7. The certificate of occupancy from a 2016 renovation shows 7 sleeping rooms. The listing photos clearly show 9 doors on a floor plan the agent sent me.

Asked the agent. She said the owner added two rooms in the basement in 2019 and they've been rented ever since with no issue. She said it like it was reassuring.

So the income on 2 of the 9 rooms is 1,080 a month, 12,960 a year, and if I underwrite at 7 rooms the gross is 45,360 and at a 9 cap the value drops by well over 100k from where he's asking.

I don't know what I'm supposed to do with the two extra rooms in the diligence. Do I price the building at 7 rooms and offer accordingly. Do I try to find out whether the basement rooms could be permitted, which I assume means egress windows and ceiling height and a licensing amendment. Do I walk because a seller who has run two unlicensed rooms for six years has probably done other things I haven't found.

What's in front of me is a decision on whether to spend money on a code consultant before I have a price agreed. That's maybe 1,500 to have someone tell me what the basement would need. Feels backwards to spend it pre-contract but the price depends entirely on the answer.

Answer

1wendy_park48CapitalPRO7

Price it at 7 rooms. That's not a negotiating posture, it's what the file supports, and the file is what a lender's appraiser and any future buyer will see.

The two basement rooms are worth zero to you today for three reasons that all point the same way. The income isn't legally reliable, so no lender underwrites it. If a licensing inspector walks the property after a transfer, and a transfer is exactly the event that often triggers an inspection, those rooms can be ordered vacated and in some jurisdictions the whole license can be pulled for exceeding the permitted occupancy. Whether that happens turns on the specific local ordinance and how it treats overcapacity, so get that read by a land use attorney in that city before you sign anything.

On the 1,500. Don't spend it now. Get under contract at a price built on 7 rooms with a diligence period long enough to run the code consultant, and make the consultant's finding a contingency. You've moved the cost inside a window where you control the outcome, and if the seller won't accept a 7 room price you've saved the money.

The thing I'd actually chase before any of it is the 2016 CO. A renovation that produced a CO for 7 sleeping rooms means somebody drew plans and somebody signed them. Get those plans. They'll tell you the basement ceiling height and whether there's egress, which is most of what your consultant would be measuring anyway, and they're free.

On walking: a seller running two over is common enough that I wouldn't treat it as disqualifying by itself. I would treat it as a reason to read the electrical and fire permits for the same period, because unpermitted rooms usually came with unpermitted wiring.

Rent roll says one thing, license says another, the city file says neither

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