Looking at a SFH with unpermitted basement bed & bath

[Tom Melun]

Hi all,

First time poster and novice investor. My fiancé and I purchased our first duplex as a house hack about 6 months ago. Feeling great about that purchase and now looking for our next deal. Here’s the scenario:

We put an offer on a SFH that's in the middle of a flip. The seller stripped it down to the studs and made permitted improvements to the main floor and significant unpermitted (as we just found out when receiving a counter offer) improvements to the basement (bedroom with egress window, plumbing and electrical for a kitchenette, flooring, paint, trim, etc.). The basement has a separate entrance but the permitting office deemed the stairs were to steep for approval. The seller suggests appraisals for similar properties with unpermitted spaces have been coming back as if the spaces were livable.

With the intent of finishing the kitchenette and renting the basement space, what risks are we incurring? Is this common practice? Will homeowners/rental property insurance cover us? Any and all insight would be greatly appreciated as we consider our response to the counter offer!

Cheers and thanks!

Tom