Hi Robin,
That is a lot of work to do in a hot market where you may get out bid in the end.
Do you have a good real estate agent? While you don't have to have one if this is your first property I would recommend it. You could increase your chances of getting your offer accepted if you let the seller's agent also represent you (double commission) some won't to avoid conflict of interest. If it's already listed someone is going to get that 3% might as well get a good agent to help you negotiate and teach you a lot about the process.
1. Good idea you can look a lot up online however it's hard to tell sometimes if the inlaw was added before the records started or more likely it was just done illegally. Most listings will state unwarranted unit in garage or something like that it usually isn't something they try and hide.
2. Good idea in theory but don't give the address to the official. Generally ( do your own due diligence) as long as there is a safe egress path out of the unit i.e. a swing door not the roll up garage door, and there is an egress window out of every bedroom you should be able to make it legal. They may make you tear open walls to show the plumbing and electrical is up to code but at least it is possible.
3. Typically you only get an inspection after your offer is accepted so I probably wouldn't pay the $500 or more prior to getting my offer accepted.
4. Similar to the inspector most contractors unless you've given them a lot of work in the past will want to get paid to walk a house with you.
I'm not sure exactly how the in law appraises. A lot of it has to do with legal finished space but all else being equal the in law may increase the value a bit compared to dead garage space but not nearly as much as legal square footage.
You can put an appraisal contingency, inspection contingency and a financing contingency which covers you pretty wall but a clean cash offer even if it's less will probably win out.
This guide is pretty helpful http://www.sf-planning.org/ftp/files/plans-and-pro...