Legal 4 unit with 2 additional non/comforting units

Buying & Selling Real Estate
8yFollow

Legal 4 unit with 2 additional non/comforting units

Paul Bommarito
Rental Property Investor · Detroit, MI · Member since 2018 · 47 posts · 36 votes
Hi BP, I have a question about buying a multifamily property with non-conforming units. We are under contract for a very nice legal brick 4 flat in Chicago that we plan to house hack. However, the building also has two additional non-conforming/possibly non-legal units in the basement. We were trying to negotiate with the seller to remove the tenants and remove the stove and cap the gas line, but he is not willing to do this unless it becomes absolutely necessary to pass appraisal. My questions are: 1. What legal risks/other risks do we take on if we allow the tenants to continue to stay there? 2. If we try to evict, what rights do they have since the units are technically non-conforming (although one of the units does have two forms of egress and windows in most of the bedrooms. 3. How bad can the fines and expenses become if it is discovered by the city or reported to the city by the tenants? 4. Can the tenants sue us for living in a non-conforming unit? Or can we try to restructure the lease to highlight that they agree they are living in a non-conforming unit and relinquish the right to sue us for anything related to the units status as a non-conforming unit? We ideally want them to be out so that we could potentially Duplex down or convert the space to something else. The cash flow from the nonconforming units does help the cash flow significantly, but I would rather save a giant headache down the road if possible then save a few hundred bucks a month now. Thanks in advance! Paul
0Reply
43 views

Most Popular Reply

Jeff Burdick
Investor · Chicago, IL · Member since 2016 · 515 posts · 247 votes
8y
Originally posted by @Paul Bommarito:
Hi BP,

I have a question about buying a multifamily property with non-conforming units.

We are under contract for a very nice legal brick 4 flat in Chicago that we plan to house hack. However, the building also has two additional non-conforming/possibly non-legal units in the basement. We were trying to negotiate with the seller to remove the tenants and remove the stove and cap the gas line, but he is not willing to do this unless it becomes absolutely necessary to pass appraisal.

My questions are:

1. What legal risks/other risks do we take on if we allow the tenants to continue to stay there? 2. If we try to evict, what rights do they have since the units are technically non-conforming (although one of the units does have two forms of egress and windows in most of the bedrooms. 3. How bad can the fines and expenses become if it is discovered by the city or reported to the city by the tenants? 4. Can the tenants sue us for living in a non-conforming unit? Or can we try to restructure the lease to highlight that they agree they are living in a non-conforming unit and relinquish the right to sue us for anything related to the units status as a non-conforming unit?

We ideally want them to be out so that we could potentially Duplex down or convert the space to something else.

The cash flow from the nonconforming units does help the cash flow significantly, but I would rather save a giant headache down the road if possible then save a few hundred bucks a month now.

Thanks in advance!

Paul

 Hey Paul.  I have a lot of experience with non-conforming units in Chicago.  PM me if you'd like, I'd be happy to discuss further.  

1Reply
See this reply in the discussion

5 Replies

Jump to latestLatest
  • Tom O.
    Chicago · Member since 2018 · 216 posts · 165 votes
    8y

    So, hi from Chicago. Non-conforming, illegal units are pretty common in Chicago and especially in the area I'm looking. (BTW, I'm planning a lunch hour meetup downtown if you're interested. See other post: 

    https://www.biggerpockets.com/forums/521/topics/58...

    I would ask your real estate attorney these questions. I would ask an inspector who has experience dealing with Chicago Building Department/housing court cases. You can also ask the Alderman or their assistant. They love answering "constituent questions." If you have a relationship with your Alderman (do you live in the City?) you can ask them or try the Alderman in the area where the building is located. 

    I was looking at a 3-unit the other day and was alarmed to see the illegal attic unit with a toilet and hotplate. Where's his shower? My pure guess would be you could rent out the illegal units for years without being caught. But if you are doing improvements to the place and getting plans, building permits, etc., then they may find those units and cite you. 

    Safest course: get the seller to evict the illegal units. If there's written leases with them can they be terminated due to the sale? I think an eviction will rise and fall on whatever the facts are of the eviction and not change too much just because the unit is not a proper unit. But this is a guess; I'm not your attorney and you need to talk to one who knows this stuff. Hopefully that lawyer will do your closing. 

    If you need the name of such an attorney, message me. I know a good one. 

    0Reply
  • Frank S.
    Specialist · Chicago, IL · Member since 2015 · 870 posts · 345 votes
    8y

    That's for your attorney to answer.  I think they can claim  relocation assistance, check with your attorney.

    Have your attorney push for vacant possesion as part of the negotiation. Have them provide the 30 days notice to the tenants.  You may need to delay closing accordingly. 

    Non-confomring units are extra cash, with the associated risk of course.   A lot of people like them.

    0Reply
  • Jeff Burdick
    Investor · Chicago, IL · Member since 2016 · 515 posts · 247 votes
    8y
    Originally posted by @Paul Bommarito:
    Hi BP,

    I have a question about buying a multifamily property with non-conforming units.

    We are under contract for a very nice legal brick 4 flat in Chicago that we plan to house hack. However, the building also has two additional non-conforming/possibly non-legal units in the basement. We were trying to negotiate with the seller to remove the tenants and remove the stove and cap the gas line, but he is not willing to do this unless it becomes absolutely necessary to pass appraisal.

    My questions are:

    1. What legal risks/other risks do we take on if we allow the tenants to continue to stay there? 2. If we try to evict, what rights do they have since the units are technically non-conforming (although one of the units does have two forms of egress and windows in most of the bedrooms. 3. How bad can the fines and expenses become if it is discovered by the city or reported to the city by the tenants? 4. Can the tenants sue us for living in a non-conforming unit? Or can we try to restructure the lease to highlight that they agree they are living in a non-conforming unit and relinquish the right to sue us for anything related to the units status as a non-conforming unit?

    We ideally want them to be out so that we could potentially Duplex down or convert the space to something else.

    The cash flow from the nonconforming units does help the cash flow significantly, but I would rather save a giant headache down the road if possible then save a few hundred bucks a month now.

    Thanks in advance!

    Paul

     Hey Paul.  I have a lot of experience with non-conforming units in Chicago.  PM me if you'd like, I'd be happy to discuss further.  

    1Reply
  • Paul Bommarito
    OP
    Rental Property Investor · Detroit, MI · Member since 2018 · 47 posts · 36 votes
    8y
    Thanks everyone. The seller is not willing to vacate the units unless it becomes absolutely necessary. It seems like this is a much more common thing in Chicago than I first realized and probably not that big of a deal. Going to definitely talk through everything with our attorney when we review the leases and figure out the best course of action. One other quick question, for anyone who has a nonconforming unit or knows someone who does, can you include an addendum in the lease application where the tenant acknowledges and signs a waiver stating they know the unit is nonconforming and waive all rights to sue or seek recompense for matters related to its status? I’m not sure if that would hold up in court, but thought it would potentially help if anything were to happen.
    0Reply
  • Frank S.
    Specialist · Chicago, IL · Member since 2015 · 870 posts · 345 votes
    8y
    Originally posted by @Paul Bommarito:

    One other quick question, for anyone who has a nonconforming unit or knows someone who does, can you include an addendum in the lease application where the tenant acknowledges and signs a waiver stating they know the unit is nonconforming and waive all rights to sue or seek recompense for matters related to its status?

    I’m not sure if that would hold up in court, but thought it would potentially help if anything were to happen.

    I don't think this will hold in court.  Once again, make your attorney earn her money.  You could give the tenants a 30 day immediately after closing and keep your fingers crossed all works well.  In fact, the current owner could tell them this is coming so they can prepare. Tenats frick out when a building is sold, they should know what's coming.  If they have a lease, that is a problem. 

    I had been contemplating this exact issue of  renting non-conforming units.   If the "space" in question is rented as part of a conforming unit, you may be ok - say, second floor with "attic access",  or first floor with "basement access."  The tenant can use it for "storage", right?  The tenant has access to the space, whaterver they use it for, it's up to them, and you can't necessarily monitor that.  I don't know if that will hold in court, I doubt it.   

    Also, your insurance may drop your coverage if an accident happens and this is seen as  a "code vilation", "health hazard", etc.  I will talk to my underwriter.  Still, there is good money to be made on non-conforming units.   The more risk you take, the more proffit you should get, right?

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free