Converting bathroom to bedroom and illegal/no permit addition

[Wendy S.]

Good day everyone.

So recently bought first rental property, sellers wouldn't budge on their price much even though I added supporting Inspection report.

Property was listed as a 4/4 ranch, however, the Appraiser adjusted the appraisal saying it was a non permitted garage conversion hence a 3/3. Property still appraised in excess of PP, so I figured ok I'll end up buying at full price with 2 of the repairs issue I had wanted them to remedy.

In addition to the illegal/unpermitted conversion there is an enclosed 'sunroom' with enough space for 1 bedroom self contained unit (more on that later). If I rented to a single family for about $1,350 with PITI of $634 it would still cash flow. This however is not my model as I'm a per room model but in this case having done the math with only 3 bedrooms it would make sense to just rent to 1 family, get that out the way then deal with the non-permitted as well as other side of house. Btw, house is zoned SFh and has 2 separate driveways on two different roads with a huge yard space all around.

Decided to do some remodel and make the 3/3 nice. Work just got underway and master bedroom and bath shows that there is leak which was previously patched going to foundation. So the whole floor is rotted out.

My thoughts are 'when life gives u lemon u make lemonade.' So I'm thinking with all the extra costs I'm looking at, why not fix correctly and convert master bathroom to another bedroom thus having a 4/2 situation vs 3/3. Bathroom already had 2 entrances one from master bedroom and one going to living room. So just a window and closet would be needed to make a bedroom. Then depending on the outcome with the unpermitted I could have that as well as another Bedroom with bath on the other side of house later. A 4/2 now makes for better cashflow renting by room as well.

Curious to know your thoughts on the above as well as SPD had no repairs done prior or any issues but contractor is saying based on the patchwork done all around the perimeter of that side of the house they should have been aware. Any recourse here? I'm also trying to see if insurance will cover for structural damage?