Very Motivated Seller w/ Unpermitted Rooms & Bathroom

[Michael R.]

I received a call last week, off a mailer, from a very motivated seller two towns over.  The couple is 3 months late on their mortgage payment, and their daughter is living in a home a couple of blocks away not paying rent.  Their plan is to sell the home they're living in, kick the daughter out of their other house (she hasn't been paying the rent), and move back into that house.   I visited the home this past weekend and here are the details on the situation:

Public records:  3 beds, 2 baths, 2 car garage 1350 finished sqft, 650 unfinished

Currently:  5 beds, 3 full baths, 2 car garage 2000 sqft finished

ARV as a 3/2/2: $210,000 conservatively. A house 2 blocks away, with the same layout, not on a small lake (this one is) sold for $200,000 two years ago.

ARV as a 5/3/2: $230,000 (very tough to find reasonable comps)

Repairs not including what's needed bring addition to conform with building and zoning:  $15,000 conservatively (interior paint, carpets, landscaping, deck/floors resurfacing)

Outstanding Mortgage:  $158,000

Past due amount:  $4650

As we walked around in the basement the man explained to me that he finished the basement himself: framed walls, added electrical outlets, and closets to create two additional rooms in the basement along with another full bath.  He also added a kitchenette down there and he was basically running a business out of the basement.  There are full-sized windows in each room as the house is on a hill and this basement has a walk-out to the back porch and yard.  He told me he never pulled permits for any of the work he did downstairs.

The plan is to assume the mortgage, get it current, and either tear out the additional rooms or get them approved by the county.  Then perform the rest of the repairs and flip.   This could either be minimal headache to get the other rooms approved, or a complete demo of the work which could lead to considerable headache.

Possible case:  $220,000 - $15000 repairs - $5000 for permits after the fact + fines - $162,000 owed - $10,000 cost to sell = $28,000

Are there too many unknowns here and too much risk for the return on this deal?