Illegal/Commercial Use Of Residential Property
We once financed the purchase of a home that was being used as an office for a large paving and concrete contractor.
He had a large commercial sign in front and heavy equipment parked all over the lot. The county turned a blind eye to it because the area was run down, and the usage made sense for the contractor because he bought the property for $60,000.
BUT – the home had appreciated over the years, and the contractor decided it was time to sell when the value hit $500,000 and the area was turning back into a moderately nice neighborhood.
The usage of the property was not an issue because our buyer intended to move into the property, the contractor was going to move out, and, most importantly, the basic structure of the property had not been altered (it was still a 3/2 – although a very beat up 3/2).
We have had other transactions involving extensive marijuana growing operations, illegal (unlicensed and unpermitted) board and care businesses, landscaping businesses, restaurants, swim clubs, and more.
None of these uses were issues because the property’s overall structures had not been altered, and we were able to prove that the illegal or commercial operations were stopped or going to stop.
PadSplit Properties OK Too – Unless…
More recently, we received a transaction that involved a property that is being used for PadSplit – where homeowners rent out single rooms within a property to different individuals – usually on a short-term basis.
We told the agent this would not be a problem because “Pad-Splitting” is not illegal per se and if it is for any reason, it is something that can easily be stopped.
What we did not know though was that the property had been converted into a structure that no longer resembled a home and that it was more akin to a small motel.
It was a 3/1 originally, but additional bedrooms and baths had been added without permits, replacing the living and dining rooms.
The structure had been altered so much in fact that the appraiser refused to even say that a single-family residence was its “highest and best use” – something that every appraiser must say before an underwriter will accept the appraisal.
The only way we can finance this property is if the sellers turn it back into something that is much more akin to an actual home.
Anyway – the illegal/commercial use of a property is not an issue as long as (1) the usage of the property can be stopped; and (2) no significant structural changes have been made to the property.
