There are properties in the market that were built in violation of the Building Standards Act or local ordinances. For investors and owners, accurately understanding the risk of inadvertently acquiring a property with excess floor area ratio, along with the right sale strategy, is an important part of legal risk management. In this article, we explain from an investor's perspective the types of properties with excess floor area ratio, why they are difficult to sell, and the key points for selling them.
What Is a Property with Excess Floor Area Ratio? Understanding the Two Main Types
Properties with excess floor area ratio generally fall into two categories: "illegal buildings" and "existing nonconforming properties." This distinction is extremely important when making an investment decision.
What Is an Illegal Building?
An illegal building is a structure that was built in violation of the conditions set out in the Building Standards Act or local ordinances. In addition to exceeding the floor area ratio, this can include construction that differs from the approved application or use for an unauthorized purpose. There are also many cases where unapproved extensions or renovations unintentionally place a property in violation, and if discovered, the owner may be subject to penalties.
What Is an Existing Nonconforming Property?
An existing nonconforming property is a property that complied with the Building Standards Act when it was originally built, but later ceased to comply with current standards because of subsequent legal revisions. Unlike an illegal building, it will not be subject to a correction order from the authorities. However, when carrying out renovations that increase total floor area or rebuilding the property, it must be brought into line with current standards.
Why Is It Difficult to Sell or Finance a Property with Excess Floor Area Ratio?
The low liquidity of properties with excess floor area ratio stems from the structure of real estate transactions and the screening standards used by financial institutions.
Residential Mortgages and Financing Are Difficult to Obtain
In the case of an illegal building, using a residential mortgage is effectively impossible, and transactions are generally limited to cash purchases. Even for existing nonconforming properties, the collateral valuation is kept low, making financing difficult to obtain. Because financial institutions place significant weight on collateral value when setting a mortgage, they tend to avoid lending on properties with low liquidity and limited convertibility to cash.
You Cannot Rebuild to the Same Scale
Existing nonconforming properties can continue to be used in their current condition, but when rebuilding, they must comply with current laws and regulations. As a result, it is difficult to reconstruct a building of the same scale as before, which leads to a practical decline in property value.
What Are the Four Key Points for Selling a Property with Excess Floor Area Ratio?
Even if a property exceeds the floor area ratio, that does not mean it is impossible to sell. Consider the following four approaches based on your situation.
1. Reconfirm the Floor Area Ratio Through a New Survey
First, consider having the floor area ratio measured again. In some cases, the property may actually comply because the earlier survey lacked sufficient accuracy. It is important not to assume a violation from the outset, but to conduct a new survey through qualified professionals.
2. Position the Extra Space as an Advantage
Existing nonconforming properties are not subject to correction orders, so they can continue to be occupied as long as they do not violate the Fire Service Act. One strategy is to present the larger floor area than current construction standards would normally allow as a practical benefit and target buyers who value space.
3. Legalize the Property Through a Reduction Renovation
Because floor area ratio is the ratio of total floor area to site area, it may be possible to eliminate existing nonconforming status through a "reduction renovation" that decreases total floor area. Once brought into compliance, the property may become eligible for residential mortgage financing, significantly expanding the pool of potential buyers.
4. Sell It as Land with an Old House
This approach treats the building's value as zero and sells the asset as land with an old house on it. For buyers who plan to use the land after demolition (such as investors or acquisition companies), this can be an attractive condition. However, the property must be vacant.
FAQ: Common Questions About Properties with Excess Floor Area Ratio
Q. Is it a problem to continue living in a property with excess floor area ratio as it is?
If the property is an existing nonconforming property, it will not be subject to a correction order from the authorities, and it can continue to be used as it is. However, any extension, renovation, or rebuilding will require compliance with current laws and regulations.
Q. What is the difference between an illegal building and an existing nonconforming property?
An illegal building has been in violation of the law since the time it was built and may be subject to penalties. An existing nonconforming property was lawful when constructed, but due to legal revisions no longer meets current standards, and it is not subject to administrative sanctions.
Q. Is a residential mortgage completely unavailable for a property with excess floor area ratio?
For illegal buildings, residential mortgages are generally unavailable. For existing nonconforming properties, treatment varies by financial institution, but financing conditions are stricter than for ordinary properties because the collateral valuation is lower.
Q. How much does a reduction renovation cost?
The cost of reduction work varies significantly depending on the scale, structure, and construction method. In some cases, it may cost more than an extension, so we recommend estimating the balance between sale proceeds and renovation costs with a qualified professional.
Q. What should I keep in mind when selling as land with an old house?
The property must be vacant. In addition, because you will need to negotiate how demolition costs are reflected in the sale price, you should plan on the assumption that the price may be set below the general market level.
