How Illegal Additions Can Affect Buyer's Ability to Purchase

[Nghi Le]

Calling out contractors, realtors, and lenders for help on this one...

I just purchased a property at auction on Monday.  It looked like a deal with its current setup and square footage.  However, I didn't even notice that there was illegal additional square footage (in the form of an extra family/living room) on the property until a few days ago; well, I knew it was there, I just didn't know that it wasn't a part of the legal square footage.

This addition needs a bit of work.  It has some flood damage (from bad plumbing), so floors, trims, and some walls will have to be done (we're going to take out the plumbing altogether).  The floor is sloped, so we'll have to raise it up a little.  The roof also needs to be redone on this addition.

The alternative would just be to tear out the addition.  Either way doesn't affect the actual legal square footage of the house.  But it seems like such a waste.  I'm estimating that it's only going to cost $5k - $10k more to fix it up as opposed to tearing it out, but it adds about 30% more square footage to the house and possibly $20k more in value.

I've talked to a realtor and a few contractors about making it "legal".  They all say it's going to cost too much and make my profit margin way too thin, both from the extra work that needs to be done and the amount of time it'll add to the project timeline.

Ideally, I'd like to just fix up the illegal addition that was basically handed onto me when I got the property, and then list the property with the additional square footage.  But I heard that the banks will not appraise that extra square footage, which would prevent buyers from purchasing.  Or should I list it with the legal square footage and then mention there is additional square footage?  Ultimately I think this addition will add value to the buyers, but I'm not sure if the bank, inspector, appraiser, etc. will prevent the buyer's purchase of the property.

Someone also told me to put "Buyer to Verify" on the listing to protect myself, but not sure if this would actually scare buyers away.