Should I purchase a home with an un-permitted unit?

January 5, 2023

Long before accessory dwelling units (ADUs) became a hot buzzword in California Real Estate Investing circles, homeowners across California, especially in urban areas such as San Francisco, Oakland - Berkeley, and San Jose, were adding additional units to their properties, either for themselves, their families, for extra income, or all three over time. Sometimes these were permitted by the local building authorities, but more often, due to government bureaucracy and restrictive zoning covenants, these were done without the benefits of permits oversight from local governments. As such, these un-permitted units can vary widely in condition with respect to building codes.

There are many multi- and single- family properties in the Bay Area that have un-permitted units. These may also be known as illegal units, illegal accessory dwelling units (ADUs), or un-permitted units. Some Realtors may also not explicitly use these terms, instead placing a disclaimer such as “buyer to verify legality of extra unit” or “buyer to do due diligence on unit count” in their listing descriptions.

Firstly, it's important to note that un-permitted units can come with significant risks and potential liabilities. For example, if the unit is not up to code, it may pose safety hazards for tenants or violate zoning regulations, which could result in fines or legal action. Additionally, if the un-permitted unit is discovered by local authorities, you may be required to remove it or pay penalties.

Secondly, if you're planning to finance the purchase of the building, lenders may be hesitant to lend on a property with un-permitted units, as it can make the property more difficult to sell in the future.

That being said, purchasing a multifamily building with an un-permitted unit may also come with some benefits. For example, the additional unit could provide an additional stream of rental income, which could increase your return on investment. Additionally, if you're able to obtain the necessary permits and bring the unit up to code, it could increase the overall value of the property.

Ultimately, whether or not you should purchase a multifamily building with an un-permitted unit will depend on your specific circumstances, risk tolerance, and goals. Before making a decision, it's important to thoroughly research the property, consult with professionals such as a real estate agent, attorney, or inspector, and carefully consider the potential risks and benefits involved.

In our next post, we’ll be discussing the process for obtaining permits for an un-permitted unit and bringing it up to code. Stay tuned!