Illegal multifamily... am I going to Jail!?

[Brandon Turner]

Ok - i'll admit, the subject line of this post is a bit sensational.  

I'm not going to jail. Not for this anyway. (But maybe for my killer dance moves.)

But here's the question i'll pose to the BiggerPockets crowd. 

(I'm working on a new book on Multifamily for BP, and I'm in the chapter on Zoning, so I thought it would be good to get some additional perspective!)

If I want to buy a duplex... and I find out that it's located in an area where the zoning only allows for single family (or, let's say, multifamily is maybe allowed BUT this duplex clearly was converted from a single family house years ago without permits) - obviously this is a "non-conforming property." 

So my question is: what are the downsides of this? Like... has anyone ever heard of a government forcing someone to turn their property back to a single family house after its been carved up? I assume most cities operate on a sort of "don't ask, don't tell" policy, but maybe that's just my experience.  Could a landlord who rents out his "illegal duplex" (i.e. an old house that has been converted) get in any kind of trouble, or would they ever be forced to fix it? 

I'll admit - i have several properties like this. I call em "monster houses." They can cash flow like crazy - but what are the legal / financial risks? 

Thanks all! Appreciate your thoughts as I put together this book! 

[Lee Ripma]

@Brandon Turner

I was doing due diligence on a property in Kansas City, it had 4 units but 5 addresses. That 5th address was a basement unit with its own entrance that had clearly been used in the past. I thought I would be able to bring the unit back to life as a “reverse penthouse” in a great area. During DD I found the property was zoned SF but grandfathered in as 4 units. Talked to the city and my insurance guy. City said no way to 5th unit but I’m still thinking I can get away with it, I’ve got entrance and address. I talked to my insurance guy and he said you won’t be covered for something that happens to the person in living in illegal quarters. So let’s say there is a gas leak and my tenant dies (extreme example) I’m not covered by insurance. That was enough to get me not to consider that 5th unit.