Buying a property with 2 unpermitted units

[David P.]

I found a property in a very good area of Southern California where the seller added 2 additional units (attached) to the back of her house. The main house is approximately 2,500 sqft and she added another 1,000 sqft where it has a 1bd/1bath unit and a 2 bd/1 bath unit. Everything is all private with seperate entrances but the meters are split (70/20/10%) between the 3 units.  Currently all 3 units are rented out and they are close to market rents with leases that all expire March 2025. All the units look great and done in workmanlike manner but the 2bd/1bath unit has a funky set up and layout where it looks like it was pieced together. 

The price of the property is also very low and is only asking for the value of the front house alone and I believe the front house is worth more than what they are asking. I am fairly confident that just the front unit alone will appraise to the sale price.

Main problem I have right now is the legal issues with unpermitted units. It has been there for over 10 years now and I doubt anything is going happen with the city at this point but while I toured the property i picked up very good vibes with 2/3 tenants. They were all great except for the 2bd/1 bath unit. While talking to them and trying to gauge what I can i asked them if there are any water issues with the unit. The boyfriend there said he couldnt say anything but told me i should do my own due diligence. In a way this sounded like they knew it was unpermitted. With unpermitted base what i found it is even more difficult to evict if they are non paying and worse off all you might need to cough up some massive relocation of $18k in state of CA. On top of that the landlord may need to return all the rent payments made by the tenant for the illegal units. Has anyone had experience with this? 

In our area these unpermitted units are all over the place and to get them permitted is not worth it and basically would require taking everything apart and putting it together so that is not an option for me. Almost feel like a roll of the dice and you just gotta pray you don't run into a tenant that can game the system and this case even have more fuel to their fire since they are unpermitted. 

[Jason Wray]

David,

One piece of advice I can give you is 99.99% of banks and lenders will not finance that property due to the ADU and units where there was "no permit" pulled. you can also run into an appraisal issue as the appraiser will request loan program and may keep the inspection "Subject to" until a permit or approval is given from County.

There is an option where you can use a "specific portfolio program" that can clear the appraiser and allow them to complete the report without giving the unit(s) value only the subject property and lot. I have done a few of these last year and all (3) of them came over to me from a realtor who was trying to find a bank to fund.

If you do not go through the right bank or program you will pay earnest money, commit to contract, pay for appraisal and end up getting the loan denied in underwriting. Be very careful if you have never done one of there or financed one yet with a unpermitted ADU. Feel free to reach out if you have any questions i enjoy helping BP members steer around obstacles.