Is a non-permitted addition a deal breaker?

[Kristen Bottger]

I'm looking at a short sale that has a room addition that was done without a permit. The record has the property as a 2bd/1ba, but the illegal addition makes it a 3/1 plus more sq. ft. The last buyer cancelled escrow when they found out about the addition and the cost of some termite damage (2k). Is the non-permitted addition a reason to walk away from this potential deal or a bargaining chip to lower the price? Anyone have experience with rehabbing and flipping a property that was lacking permits on previous additions?