After 15 years as a Realtor who specializes in student rentals, I can say for certain that not all properties are what they seem, especially when secondary suites are involved. Investors are always encouraging each other to do their due diligence, but when the market’s hot and decision-making time is limited, it can be all too easy to fall back on assumptions.
That’s what happened when one of our clients purchased what they thought was a legal duplex, based on its location in an R2 zone where zoning allows for duplexes; the MLS listing, which said it was a duplex with two separate units; and the purchase agreement, which stated its current use could be legally continued as a duplex.
But when it came time to license the property in London, Ontario, the application was rejected on the basis that the secondary unit was not added legally. Our clients found out the hard way that just because a multi-family property is in a zone that supports this particular use, that doesn’t mean its use has been legally established. Even a fire inspection report stating it has been inspected as a duplex does not make it legally established.
The solution
These are the steps we take in our local area, some of which will change depending on the city or province involved.
First, if your city has rental licensing, make sure your property is licensed for its current use prior to closing. This will avoid many potential pitfalls. In this example, it’s vitally important to understand that a duplex in a duplex zone doesn’t mean it’s legally established if you can’t confirm either:
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Its use as legal and conforming or its use prior to 1973, establishing it as legal non-conforming
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That there was a permit taken out to add the additional unit(s)
If you can’t prove either of these facts, then the unit may be deemed to have been added unlawfully, and you could have to apply all over again as a duplex or under the new Secondary Dwelling Unit bylaw. You might also be told to remove the additional unit if you can’t ensure it complies, which will put a serious crimp in the valuation of the property you just purchased.
We find that new buyers are primarily focused on the home inspection, obtaining financing and confirming the leases; once those hurdles have been cleared, they wait for the lawyer to call and to sign the closing documents. But it’s vital that you have competent representation not only from a lawyer, but from an experienced Realtor and property manager as well.
Investors often underestimate the wealth of knowledge a local PM can lend to due diligence is underestimated during this phase of the property purchase. A competent PM will have been on dozens, if not hundreds, of inspections with the fire department and city bylaw and zoning inspectors, so they should be able to quickly point out areas of concern they’ve come across during these inspections.
So many times, as a PM, we’re called in to clean up the mess post-purchase, as in the case above. The pitfalls we continually see crop up just after the deal has closed, and they’re ones that could have easily been avoided.
