Evaluating a paired sale where the smaller building is legal nonconforming

Your 72k NOI is doing a lot of work with nothing under it. You listed taxes, insurance, water. You didn't list management, turnover, or capex reserve on a 1974 building and an older one next to it.

Run it again at 35 percent expenses on a master-metered older building and see where you land. 140,400 gross, 7 percent vacancy gets you 130,572 effective, 35 percent off that is 84,900 and change so NOI is more like 45k. That's a 4.3 cap on 1.05M, not a 7. I'm not saying 35 is the right number, I'm saying you have to defend whatever number you pick line by line or the lender will pick one for you.

Dumb question from someone still learning, but why is the small building priced at 70k a unit and the big one at 78k? I'd have guessed the conforming one with more units would carry the higher per-unit number and it does. So he's already discounting the 5. Is 350k the discount or is it still too much?

Call the planner back and ask for the answer in writing, including which section of the ordinance controls, and ask specifically what percentage of destruction triggers loss of the nonconforming right. The trigger is commonly 50 percent of value, some ordinances use 75, and others allow a rebuild within a set number of months regardless of the damage. It varies by municipality, and a phone call is not a record. The second document to have before pricing the 5 at anything is the insurance binder language on ordinance or law coverage. Standard property coverage pays to rebuild what was there. If the code will not let you rebuild what was there, you need the endorsement that covers the gap between the old structure and what the code now requires, and the limits on that endorsement are usually a small percentage of the dwelling limit. Ask the agent to quote it with and without and read the exclusions. That number tells you more about the risk than the planner will.

Fourteen units across two adjacent buildings manages almost exactly like fourteen units in one building, which is the good news. One trip and one vendor call cover both, and the turns get scheduled together. The part that is less good is master metering on the 5. Four one bedrooms and a two bedroom, all on one water bill, with tenants at 700. You have no lever on consumption and no way to know which unit has the running toilet until the bill jumps. 6,400 a year across fourteen units is not awful on its face, but the likelier reading is that most of it is coming from the five.

1974 walkup with six 2-beds at 950. What are those units actually renting for turned? If the answer is 1,100 you have a real story. If the answer is 975 you're buying it at the top of what it does.

And budget the turns honestly. Every one of these I've touched, the first three turns cost double what I planned because the last owner's idea of ready and mine were different buildings. Cabinets that look fine in photos are 40 years of grease.

On the rebuild question, the number worth pricing is what it would cost to put five units back up on 9,000 square feet today. You have no plan to build, and it still matters, because if the answer is 900k for a building carrying 315k of your basis then the nonconforming status is a smaller exposure than being underinsured relative to replacement, whatever the zoning says. Get an actual replacement cost estimate rather than the assessor's number. Also, with an older building and four 1-beds, ask what the electrical service is. If it is 60 amp panels you will find out at the first insurance inspection.

I'll ask the one I'd feel stupid asking out loud. If you buy both parcels at once, does anything force them to merge into one tax parcel? Because if they merge, does the 5-unit stop being a separate nonconforming building and become part of a fourteen-unit assemblage on 9,000 plus whatever the big lot is, which might actually be conforming in total?

I genuinely don't know if that's how any of it works.

Can someone define legal nonconforming for me plainly? I read it as the building was fine when built, the rules changed later, and it's allowed to stay. Is that it, or is there more to it?

@jessreyes12 I read about merger doctrine last week and it's real in some places, common ownership of adjoining lots can force them to be treated as one, but it usually cuts the other way from what you're hoping. It can strip a lot of its own separate buildable status. @nicole_adeyemi that's a question for a land use attorney in that specific municipality, not for us.

@megan_doyle15 that's basically it. The use is allowed to continue because it predates the rule. The catch is the rights are usually limited, you often can't expand it, and if it's destroyed or abandoned for long enough the protection can end. That last part is the whole reason parcel is worried.

Four one-bedrooms at 700 in a market where the 9-unit next door gets 775 for a one-bedroom. That gap is either condition or a landlord who never raised anybody. Worth knowing which, because one of those is 375 a month of upside sitting there and the other is a renovation budget you have not written down yet.

Ask for the leases on all fourteen before you get much further. On a two-building deal like this I'd expect the small one to be mostly handshake month-to-month, and the security deposit accounting is where these get messy. Deposit handling rules differ state to state, including how they transfer at closing, so ask your closing attorney what your state requires rather than assuming the seller credits you at the table.

9,000 square feet is small. Even if you could tear the 5 down someday, you're not getting a meaningfully better building on that footprint under a 2,500 per unit rule, you'd get three units and a parking problem. So I wouldn't buy it for the dirt. Buy it for the 3,675 a month or don't buy it.

The framing I'd push back on is the ten day deadline. He wants both sold together because it's easier for him. That's his problem, and he's already told you what the 5 is worth to him by pricing the 9 at 735 alone. He'd rather have 735 today than market a small older building himself.

If the zoning answer isn't in writing in ten days, buy the 9 or walk. Nothing about this pair is so rare that another one doesn't come along.

Buy the clean one. That is 735k for a conforming nine with room on the lot, which means one financing conversation and one set of unknowns. The 5 unit adds an insurance question, a water metering question, a zoning question, and a variance you may never get, all for 3,675 a month. As @samantha_ruiz says, the cap is fiction until you have twelve months of actual bills. Ask for twelve months of tax bills, water bills and insurance loss runs on both buildings.

Take the pair, but only at a price that assumes the 5 is worth land value plus the income stream for as long as it stands. Fourteen units versus nine is the difference between a hobby and something that supports a real management arrangement. The per unit cost of everything falls the minute there are enough doors to interest a decent vendor, and eight is already enough to see it start. Nine gets you partway there and fourteen gets you the phone call returned. But price the 5 like it might one day be a parking lot. If 315k does not work under that assumption, counter at what does. He has already shown you he will unbundle.

Two things nobody has said. Your 14,800 tax figure is the seller's current assessment. Plenty of jurisdictions reassess on transfer, and in some of them a sale resets the value to the purchase price. That is a state and county specific rule, so pull the last three years of bills on both parcels and ask the assessor's office directly what happens after a sale. And if you finance both, ask the lender whether they would cross the parcels on one loan or write two. One loan is simpler, and it also means the 5 can never be sold without dealing with the release language, and a lender who knows the 5 is nonconforming may not want it as collateral at all. Get their treatment of it in writing before committing to the pair, because that answer might make the decision for you.