Tips for turning a illegally ran rental into a legal one?

[Jake Brockway]

Hello Everyone, 

I'm a new investor and I'm currently looking for some strategy tips on a multi-family deal I found. A mutual friend of the owner and myself got us in contact. Let me tell you about it. 

First I'll tell you what the agent told me: There are two separate properties that the owner is trying to sell together. Two Buildings. One Triple - One Quad . Each unit has 3 Bedrooms 1 Bath and Living Area. Currently each bedroom (3x4 + 4x4 = 28 rooms) is being rented out to different parties, usually one individual per room. Every 3 bedrooms share a single bathroom. At one time kitchens we're included, but they were having trouble renting the rooms out. They decided to remove the kitchens, and add a common area with two couches and a tv. Since then almost all the rooms are rented out on a regular basis. Now, this place is so popular that there's a waitlist (I verified this, it's true). Occupancy is almost always full year-round, and some tenants have been living there for 3+ years.  Currently, property is netting around 75k in profit per year. Sounds like a good deal right? I then asked the agent multiple questions, and she seemed to be dodging certain questions like - explain to me the type of tenants currently living here; why is the owner trying to sell if it's so profitable etc. So I decided to start asking questions the property manager, a 67 yr old woman that manages and lives onsite. 

Upon talking with the property manager,(we'll call her Sally), she told me quite a bit more than the agent chose to. Apparently the property does not do leases, only (sounds to me like unofficial) paperwork in the beginning stating you won't destroy the place. The main tenant base is, and I quote Sally's exact words, "black men with warrants". Sally also informed me that there isn't a set amount of rent or a time that rent is due. Some of her tenants pay weekly, some monthly, some when the can, some every two months etc. She also told me that she does not ever allow people under the age of 30 to rent a room, "as they often are the cause of drugs, violence, and other issues". She also dissuades women living there, because " women cause problems". Sally told me that 75-85% of rent payments are with cash money. However, she keeps a very detailed record of everything, and can prove that property is making around 75k in profit per year. Sally is somehow holding this crazy, disorganized structure intact. 

Here are my current thoughts: If you haven't already guessed, this property is in an area that many would call "the ghetto". The way the business is being ran is very illegal and full of liability ( two forms of discrimination; harboring criminals, no official leases etc). I'm disappointed that the Agent failed to uphold her fiduciary duty by withholding information that could cause me harm as a new owner ( and I know that she can lose her license for this btw). Sally is actually a really good property manager, she just isn't doing things legally, and her old age leaves to me believe that she'll have to be replaced sooner than later anyways. I'm not sure if anybody in the area, other than criminals and drug addicts, would want to live in such a unusual setup. 

My question for you guys: How can I turn this property into a legal, cash-flowing business? Who do you think would be my ideal target market considering the area of town? or should I run far far away? Thanks for the feedback!