All Forum Posts by: David P.

When i saw this article and that it was in my city of Long Beach I thought of landlords on top of prayers for this family. Back house but luckily deemed permited ADU exploded.

https://www.yahoo.com/news/beloved-father-fighting-life-icu-...

I agree with this post and can relate to it. Currently I am in escrow in southern california for an A class asset that is 200k under value. The rents are low and rates are high. It is not cash flowing and in fact I will be losing ~3k/month in year 1. Around year 3 I will start breaking even after rent increases and refi. I am buying this property for a few reasons but luckily my other cash flowing assets will offset the lost and I am still cash flowing positive as a whole. 

It sounds like a poor business decision but its very difficult to get cash flow in A class assets. I plan for the long term game and rarely ever sell so even appreciation is only on paper. The way i see it is my cash in the bank is only giving me 5% interest which will start going down once rates fall. The cash in my bank is also just paper until i use it to buy an asset. As long as i have enough money to cover my expenses and live comfortably I don't mind taking a hit on the cash flow part. It could limit me from getting my next investment property since I am not accumulating as fast now but around my area cash flowing properties are very difficult to find. I think most important is the quality of the asset first and the other variables you change over time. 

Quote from @Dan H.:

Quote from @Rick Albert:

A couple of thoughts:

-You don't know if the units are built to code. You won't know until you open up walls. The cost to get it permitted could be costly. I've had a few clients permit unpermitted units and it cost about double what they expected. 

-You can't go by what the Seller says regarding building codes, etc. Building codes change every year. It might have been to code when they did the work, but not anymore. That's how I was able to renegotiate the price for one of my house hacking clients.

-If the tenants wanted to, they could contact the City and get you into hot water. This includes you possibly being forced to pay them back for all the rent they had paid.

-I have seen appraisers fine with it as long as it looks decent. The real question is whether or not they call it out in the report and send to the lender.

-If it isn't zoned for three units, then it isn't happening. You can possibly do an ADU and JADU, but you would have to live somewhere on the property.

I'm not saying don't buy it. It could be a great deal, you just really need to do your due diligence. 

 >If the tenants wanted to, they could contact the City and get you into hot water. This includes you possibly being forced to pay them back for all the rent they had paid

Have you heard of this ever happening?  SB13 and its grace period on unpermitted units should preventing this from occurring.   A local jurisdiction should not be able to pre-empt state law and state law currently allows safe, unpermitted  units by law (see sb13 and search for 5 or five).  Senator weinkowski explicitly states that the state wants to guarantee that safe units are not removed from the market so there is no doubt the intent of that section of sb13.  

@David P. JADU, besides having to be built from existing permitted space, requires the property to be owner occupied. There are a lot of issues with having JADU including finance issues if there is also an ADU, requirement for owner occupancy, that it removes space from the primary structure and usually lowering the value of the property such that it is common practice to remove the JADU when selling the property.

Good luck

 Do you have any articles on SB 13? I tried google/youtube searching and not finding a lot of info. Mostly SB 9. So SB 13 bascially states its very difficult for the city to red tag or remove a safe unpermitted unit off the market?

I forgot to mention the 2 bd/1bath unit...the bedrooms do not have windows at all. Only a slider door that goes back into the living area.  I think that alone might not get financing. Anyone know?

Quote from @Rick Albert:

A couple of thoughts:

-You don't know if the units are built to code. You won't know until you open up walls. The cost to get it permitted could be costly. I've had a few clients permit unpermitted units and it cost about double what they expected. 

-You can't go by what the Seller says regarding building codes, etc. Building codes change every year. It might have been to code when they did the work, but not anymore. That's how I was able to renegotiate the price for one of my house hacking clients.

-If the tenants wanted to, they could contact the City and get you into hot water. This includes you possibly being forced to pay them back for all the rent they had paid.

-I have seen appraisers fine with it as long as it looks decent. The real question is whether or not they call it out in the report and send to the lender.

-If it isn't zoned for three units, then it isn't happening. You can possibly do an ADU and JADU, but you would have to live somewhere on the property.

I'm not saying don't buy it. It could be a great deal, you just really need to do your due diligence. 

 It is single family residence zoning. So base on conventional financing I would need to be owner occupied for it to work if the 2 units were classified adu and junior adu?

Quote from @Dan H.:

Quote from @David P.:

Quote from @Dan H.:

Quote from @David P.:

Yes I think everything will depend on the apprasil but that's a good point on 2 adus on single family residence zoning. I'm guessing one could be called the junior adu and the other being the main ADU could work. It is located on the MLS and the agent has been pushing for a cash buyer. I definitely need financing and will make sure to have my contingency in play.

I'll read up on those legislation you posted but my biggest concern is if the current tenant can't be evicted and can legally live there for free since it's unpermitted.

Ca allows ADU and JADU but
- having both an ADU and JADU disqualifies from f/f conventional financing.  It is one reason JADUs are often pulled for the RE sale
- JADU must come from existing permitted space.  Only a small amount of footage (I believe 150’) can be added for ingress/egress purposes only.  if it is new build, it cannot be a JADU.

 >It is located on the MLS and the agent has been pushing for a cash buyer.

This should have been an off market listing. The risk associated with financing almost necessitates a cash offer.  

>I'll read up on those legislation you posted but my biggest concern is if the current tenant can't be evicted and can legally live there for free since it's unpermitted.

Assuming you do not get whacko judge, the unpermitted unit has no impact on collecting rent or the eviction process.   Legislation is pretty clear in on priority to keep safe unpermitted units.   There are some whacko judges but the odds you get he is real small.  More cumbersome and a definite impact is the rent control law.  Which city is this in?   At a minimum you have to abide by AB1482.  You may have local more stringent local rent control.   In San Diego county, this is limited to the city of San Diego.   

good luck

 It is in the city of Orange county. I will need to research a bit on the fannie freddie part because if that is indeed true then I defintely will be ruled out already. The 2 lenders I used before both didnt mention that part so a little surprising.

In regards to AB1482, yup fully aware. Basically rent caps and no fault evictions are more strigent on the landlords. That part I am actually okay with since the property it close to market rents. Main fear is evicting an at fault tenant in unpermitted units and whether the same rules applies or do they get even more priviledges. Everyone read up on that beverly hills woman who lived on a unpermited ADU and she stop paying rent and squatted there over a year and was demanding the owner pay over 100k for her relocation expenses. I think those are rare cases though and i think she did finally leave.

 https://www.google.com/search?q=fannie+freddie+2+adus&sc...

Simple search will show F/f by rule does not allow 2 ADUs.  However, if you are not in a single family zoned area, they may not check (I know of such cases).  

This RE has finance risk of both the unpermitted additions and that the unpermitted additions do not comply with F/f conventional residential Loan requirements. 

If you place an offer, do not remove contingencies on financing or appraisal.  Recognize you fixed loan costs and inspection cost is at risk, but earnest money should not be.  It may be worth the risk.  Not sure is seller will accept an offer with these contingencies as it will cost time on the market if the contingencies are exercised.  

A good deal in southern Ca market in this market is seldom without work (dumps needing a lot of work) and risk (such as unpermitted work, foundation issues, etc).   I placed an offer on a hoarder house with no water available (a well had to be dug); risk and work.

Good luck. 

Yup, understood. My apprasail and inspecton report cost will be at risk but I'll be covered if the deals blow up. Not a huge deal in my opinion and it may open the doors for more negotiations if i need to find other financing methods. This probably seems attractive but at the same time if it stays unpermitted it can be head aches along the way and if i were to ever sell in future run into the same sort of problems.

Quote from @Dan H.:

Quote from @David P.:

Yes I think everything will depend on the apprasil but that's a good point on 2 adus on single family residence zoning. I'm guessing one could be called the junior adu and the other being the main ADU could work. It is located on the MLS and the agent has been pushing for a cash buyer. I definitely need financing and will make sure to have my contingency in play.

I'll read up on those legislation you posted but my biggest concern is if the current tenant can't be evicted and can legally live there for free since it's unpermitted.

Ca allows ADU and JADU but
- having both an ADU and JADU disqualifies from f/f conventional financing.  It is one reason JADUs are often pulled for the RE sale
- JADU must come from existing permitted space.  Only a small amount of footage (I believe 150’) can be added for ingress/egress purposes only.  if it is new build, it cannot be a JADU.

 >It is located on the MLS and the agent has been pushing for a cash buyer.

This should have been an off market listing. The risk associated with financing almost necessitates a cash offer.  

>I'll read up on those legislation you posted but my biggest concern is if the current tenant can't be evicted and can legally live there for free since it's unpermitted.

Assuming you do not get whacko judge, the unpermitted unit has no impact on collecting rent or the eviction process.   Legislation is pretty clear in on priority to keep safe unpermitted units.   There are some whacko judges but the odds you get he is real small.  More cumbersome and a definite impact is the rent control law.  Which city is this in?   At a minimum you have to abide by AB1482.  You may have local more stringent local rent control.   In San Diego county, this is limited to the city of San Diego.   

good luck

 It is in the city of Orange county. I will need to research a bit on the fannie freddie part because if that is indeed true then I defintely will be ruled out already. The 2 lenders I used before both didnt mention that part so a little surprising.

In regards to AB1482, yup fully aware. Basically rent caps and no fault evictions are more strigent on the landlords. That part I am actually okay with since the property it close to market rents. Main fear is evicting an at fault tenant in unpermitted units and whether the same rules applies or do they get even more priviledges. Everyone read up on that beverly hills woman who lived on a unpermited ADU and she stop paying rent and squatted there over a year and was demanding the owner pay over 100k for her relocation expenses. I think those are rare cases though and i think she did finally leave.

Yes I think everything will depend on the apprasil but that's a good point on 2 adus on single family residence zoning. I'm guessing one could be called the junior adu and the other being the main ADU could work. It is located on the MLS and the agent has been pushing for a cash buyer. I definitely need financing and will make sure to have my contingency in play.

I'll read up on those legislation you posted but my biggest concern is if the current tenant can't be evicted and can legally live there for free since it's unpermitted.

Thanks for the reply Jason.

I thought in regards to unpermitted ADUs the main problem would only be not getting value for them and as long as the permitted structure the main house appraise to value I should be fine getting a loan. Is that incorrect?

I found a property in a very good area of Southern California where the seller added 2 additional units (attached) to the back of her house. The main house is approximately 2,500 sqft and she added another 1,000 sqft where it has a 1bd/1bath unit and a 2 bd/1 bath unit. Everything is all private with seperate entrances but the meters are split (70/20/10%) between the 3 units.  Currently all 3 units are rented out and they are close to market rents with leases that all expire March 2025. All the units look great and done in workmanlike manner but the 2bd/1bath unit has a funky set up and layout where it looks like it was pieced together. 

The price of the property is also very low and is only asking for the value of the front house alone and I believe the front house is worth more than what they are asking. I am fairly confident that just the front unit alone will appraise to the sale price.

Main problem I have right now is the legal issues with unpermitted units. It has been there for over 10 years now and I doubt anything is going happen with the city at this point but while I toured the property i picked up very good vibes with 2/3 tenants. They were all great except for the 2bd/1 bath unit. While talking to them and trying to gauge what I can i asked them if there are any water issues with the unit. The boyfriend there said he couldnt say anything but told me i should do my own due diligence. In a way this sounded like they knew it was unpermitted. With unpermitted base what i found it is even more difficult to evict if they are non paying and worse off all you might need to cough up some massive relocation of $18k in state of CA. On top of that the landlord may need to return all the rent payments made by the tenant for the illegal units. Has anyone had experience with this? 

In our area these unpermitted units are all over the place and to get them permitted is not worth it and basically would require taking everything apart and putting it together so that is not an option for me. Almost feel like a roll of the dice and you just gotta pray you don't run into a tenant that can game the system and this case even have more fuel to their fire since they are unpermitted.