When an LLC elects S status, its operating agreement and other documents must conform to the S corporation eligibility requirements.

Positives:Extra income.Today FNMA doesn't really care about non-conforming areas as long as LIKE properties transact in your market.Added income for a potential buyer.Negatives:Insurance - If destroyed you couldn't get it re-built.Possible fines or you could be asked to re-convert the home back to its permitted use.What happens if a tenant gets injured by living in a non-permitted area?  

What do the local regs say about legal non-conforming use (because in my opinion that's the scenario that you've purchased yourself into.)  

I was getting frustrated with "blanket loans" & restriction from conforming loans ie loans that Fannie could purchase.  

HI John,The reason He just wants some money on this property is probably because its a 2 unit property on a parcel that is only legally conforming for a SFR.No conventional or even quasi-conventional lender or even private lender I know (unless really low LTV) would lend upon this type of property.The seller probably wants a liquidity event to take him out of the property due to his in ability to get financing on it.With out legal conforming use or precedent to keep that other structure in place the lender has no restitution to use that 2nd SFR as collateral for lending purposes.I hope that helps.

Thus, they don't have to conform so strictly to Fannie and Freddie's underwriting guidelines.

You should be able to get $38,250 in a cash out refi if the property appraises for $51k.  75% is the conforming cash out LTV limit for investment properties and if memory serves, you should be able to use appraised value after 6 months of seasoning.Of course this also assumes your DTI and credit reports supports it.

I have an accepted offer on a funky 5 unit.  1 SFR and a 4 studio apartment building, non-conforming lot, grandfathered in.  

I have an accepted offer on a funky 5 unit. 1 SFR and a 4 studio apartment building in Washington state, non-conforming lot, grandfathered in.

The MLS or State contract as you put it, has probably been vetted by board of realtor attorneys and offers protections for both the buyer and seller and conforms to state and federal law. 2.