You also risk:1) Committing mortgage fraud by misrepresenting the property and/or how you're using it.2) Exposing yourself to liability if the 3rd renter discovers they are in an illegal unit.3) Voiding your insurance.

So given the oppurtunity to inspect and discover this, you chose not to.

ALWAYS, ALWAYS, ALWAYS get the VERIFICATION OF DEPOSITS from the institution/bank where the money is AVAILABLE before letting anyone know about your deal!

I think both institutions offer unique opportunities to better than average cash flow with the right purchase and strategy. 

In regards to point 4), you mention the possibility of a tenant living for free indefinitely inside an unwarranted unit, due to the inability of the landlord to enforce rents, and the inability to perform an eviction.It's my understanding that if the Department of Building Inspection (DBI) discovers the unwarranted unit, it's possible for them to force the landlord by law to legalize the unit.

We discovered during inspection that the hall bathroom has an alcove for a shower, but no shower installed and the space is too small for a bathtub.

I've been digging all day and discovered that their office address is a virtual location where they just receive mail there.

Talk with a few lenders and they can help discover some options. 

.- Negotiated Solutions: Worked with the seller's agent to determine whether the seller would address the violations or if you would need to assume responsibility, potentially negotiating a price reduction or credit at closing to cover repair costsWhy You Found Out LateThe fact that you discovered the POS violations only five days before closing suggests a lapse in communication or oversight.

I did have one issue that was disappointing that consumed a lot of time: After sending an invite to an applicant for background screening, the applicant somehow was able to register as a landlord; that was discovered by the RentPrep team after a considerable amount of time and delay.