And if you go to add on to the un-permitted addition, you may be required by inspectors to open up all the walls... or worse. 

Since we are doing this we hit a wall wondering how can we get conventional lending for a buy and hold property.

Some more questions and details: There are a few improvements we'd want to make just for us if we could afford it, i.e. installing a door/deck to the yard for our dogs, finishing a garage and heating it for an art studio, insulating an odd closet off of the main bedroom/knocking down the wall to make the master bedroom much larger.

Then you also have to seal openings from the wall cavity into the living spaces.

Moving a wall isn't that difficult nor expensive.  

If you're not completely opening up walls then it could be less.Regarding financing, I don't think the option of closing on it and immediately getting an equity line will work, because they're going to use the lower of purchase price or appraisal.  

Nail the guy to the wall!

On top of that the units themselves get very little wear and tear because guests are using things like the kitchen to cook or putting holes in the walls to hang personal pictures. 

All that said I love older homes and have owned a few  however accidently digging up your septic or opening a wall to find it used to be a shed teaches you to be cautious.

Sometimes its best if you just buy an empty lot but other times it may prove advantageous to do a remodel leaving the foundation and one wall up.