Include illegal ADU income in offer price?

Question

I'm in negotiations on a duplex property with a nonconforming, illegal basement ADU (3 units total). All units have tenants. However, without more information about the downstairs unit and going through the permitting process, it's unclear whether I can get it legalized, and most likely won't have sufficient time during the due diligence process to know for sure. Therefore, I need to make a judgement call on whether (or how much) to consider the income the sellers are getting on the unit. Would you include it in your calculations around your offer? If so, would you consider the full or partial amount?

For more context:

- The property is located in Seattle and on a SF5000 lot

- All 3 units are registered as rentals and the basement unit has had the same tenants for over a decade

- A cursory email to the city asking whether the unit could the legalized received a "no" (though I think for incorrect reasons)

- There's a high probability that as is, the unit doesn't meet fire codes (window egress), and I would need to spend some cash getting it to code

Sherief Elbassuoni · Answer

@Eugenia Koo, in the 4 pages PDF "Seattle Department of Construction and Inspection, Tip 116A", in the second page you can see that the electrical circuit breakers and temperature controls must be located in the dwelling unit. If things are shared at the moment, that is fine. There are some creative ways for split them. I also saw some house-hackers use two separate systems of heating (baseboard heaters in the dwelling unit, and forced air in the main unit).

You should be able to split the shared heater and panel. Just talk to a contractor and get a ballpark quote. Use this number in your calculations and negotiations.

Good luck with that.

Sherief Elbassuoni · Answer

@Eugenia Koo, I have an ADU at the City of Seattl. You can just go to the SDCI website and download the PDF that has the ADU requirements (Separate access, separate heating, kitchen/Kitchinette,....). If you know that only the window egress may be the reason for why the ADU is not permitted (not to code), you can take that into consideration in your offer (assuming you have separate kitchen/heating/entrance/...). If you downstairs misses a few of the requirements, just know that adding an ADU may cost you a decent amount of money. Please also take into consideration that because of  Covid, the Department of Construction & Inspection is closed, and things are taking longer than usual.

Feel free to give me a call if you have more questions and I can share some of my ADU experience with the City of Seattle.

Thanks!

Marc Winter · Answer

Don't do it.

A few reasons:  if you do not have proper egress, you as owner will be liable in event of tragedy.

You will need to make sure your insurance on the property is for 3 units--you'll pay for the extra premium, however when something happens, very doubtful that the insurance company will cover your loss.

Depending on the politics in the City, they MAY end up condemning part or ALL of the property until it is brought up to current code--IF they will allow the legalization of the basement.

If the 10-year tenant decides to act up and stops paying, how would you evict from an illegal apt?  You might be liable for ALL the rent they ever paid.  (Sounds nuts, I know, but remember, you'll be dealing with Seattle courts!)

I would walk away from this deal.

Thomas Mattausch · Answer

@Eugenia Koo, I can't comment on this ADU code specifically, I just know that generally, nonconforming uses often tighten what can be permitted. I would be (pleasantly) shocked if you could add get an ADU permitted on a nonconforming duplex. Unless you're willing to take the risk that no one will ever report the use (which they probably wouldn't), I doubt you can use all three units. This deal is probably cheap for a reason.

If you subscribe to the times you click "My Account -> Newspaper Archive" and you can search back over 100 years. It's fun! Make sure to use exact phrase syntax in quotes, i.e. "123 Main St" not 123 main st. I found the original advertisement for my house from the 20s advertising that it had a separate unit in the basement which helped me get my own nonconforming duplex status recognized and permitted.

Eugenia K. · Answer

@Thomas Mattausch yes it is a grandfathered duplex on SF zoning. I assumed per this code that it didn't matter if the property was a SFH or MFH on SF zoning- up to 2 ADUs could be added.

I'm skeptical the ADU was built out as far back as the 1950s (the property itself was built in the 1960s) but I would love to understand how you use the Seattle Times archives to research this for other properties. Can you share more about how you use the Seattle Times to help validate this type of question?

Eugenia K. · Answer

So helpful, thanks @Thomas Mattausch!

Eugenia K. · Answer

@Marc Winter good points- the risk of the tenant acting up definitely came to my mind as they've been paying significantly under-market rents and I was thinking to owner occupy their space.

I tried to counter with an offer that I thought was a fair price (a slight discount on the current income on the unit) with a contingency to re-register all units so I could borrow some time on legalizing. Alternatively, I could go for another visit and bring out a GC to determine viability. The sellers refused on all fronts, so the deal is now dead. Better off I suppose :)

Matthew Mazur · Answer

@Eugenia Koo you can retrade based on scope of work or if you can’t count the income because it’s not permitted. If the agent doesn’t think it’s legal they should not be advertising it. You’re an investor, you can’t pay for income that the city could shut down on a whim, just be clear that your going to verify all of this in your dd.

Eugenia K. · Answer

Thanks @Sherief Elbassuoni! I've seen the ADU requirements though they are quite detailed. Since it is my first purchase of such property, I don't think I can be completely sure about legalizing without someone more familiar with the intricacies of the requirements. There is a separate entry and kitchen, but the water heater and electrical panel are shared, for example.

Thomas Mattausch · Answer

Is it a grandfathered duplex in a single family zone? If so, non-conforming uses often disqualify it properties from many zoning uses and options. Not sure if this applies to ADUs.

If you can sufficiently prove it was used as is back to when the zoning use would have been legal (perhaps as far as the 50s), you could legalize it's use. The Seattle TImes archives can be useful for this.

Include illegal ADU income in offer price?

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