And that they will pull permits accordingly?  

Dawn, Darren and Jay are ALL correct AND if they're city of Milwaukee tax foreclosures, that means a city inspector has already gone through them THOROUGHLY and done a full report on ANY and EVERY issue wrong inside and out and that means they want it fixed up to code (i.e. fixed just right, not some rigged up quick fix) and ALL plumbing and electrical work MUST be permitted, thus you're hiring a master plumber/electrician for that work at around $70/hr +/-.I very, very much caution anyone from skirting the permit rules not just for possible trouble with the city, lots of people do all sorts of unpermitted work and get away with it from city's point of view, but for liability reasons.

The appraiser stated that the unit in back was never permitted for a second unit (so, it was a SFR). 

Or maybe the contractor has some discounts somewhere.Your biggest 2 hurdles will be permits and the mortgage company. 

I don't think the owner ever got a permit to do this addition.  

You'd want to have everything separated, with permits.

The section 121 exclusion also permits the first $250k ($500k for married couples filing jointly) of gain on the sale of your primary residence to be excluded from your gross income.

You could set this up and then sell it for a small premium as an in-place "system" but it may be 50/50 as to whether the buyer will value the process you have OR prefer having in place long-term tenants with locked-in leases.One note, if you are going the business route and selling it as such, make sure to go legit on taxes, fees and permits.  

This would include permits, utility disconnection, debris removal, and site prep basically graded for the foundation crew to start pouring a new basement 

One good idea is to find the escrow/title agent that specializes in new construction as they will know who is who in your market.After finding the finish value (what a home will sell for), you want to ideally be at 20% to 25% of that by the time you finish the preliminary plat application and finish the permitting process.