If you've been flipping houses for any length of time, you'll have most certainly come across properties with illegal additions. Depending on your point of view and the specific circumstances this can present itself as a headache or an opportunity. Most people consider this situation as a something negative and will quickly run the other way as they do with probate properties. Let's have a look and see if there's some opportunity here and what the best practices are when you come across a situation like this.
Doing your due diligence while you're looking to purchase an investment property is critical. Homes with minor illegal additions are more common than you think. A homeowner or contractor might have made changes with all the best intentions in mind. However, they may have overlooked a few steps in the process. Not every situation is the result of somebody attempting to cut corners although that does happen occasionally. A lot of times contractors or people are in a rush and make simple mistakes.
There are situations where contractors make significant additions without permits resulting in inaccurate square footage data. It can be a potential issue in many respects. If anyone ever needed to make an insurance claim the erroneous information could cause significant problems. Not to mention, the local taxation office may ask you for retroactive back taxes. They may even include interest and penalties over and above. Another possibility is eventually having to remove the addition entirely especially if it impacts zoning bylaws.
It's a good idea to surround yourself with experienced people to help make a qualified decision. Knowing exactly what you're facing is essential because if you do decide to go ahead and purchase, you’re assuming all the potential liabilities involved with the addition. Having the right people around you, such as skilled, qualified inspectors is a considerable asset. Accessing someone knowledgeable is key similar to other investments like preforeclosures for instance. It will allow you to assess the potential additional costs if you're willing to assume the issue. Another option is, having the current owner fix all the problems before moving forward with the purchase depending on the circumstances.
Once you understand your situation fully, you can plan a course of action. Many high-risk aggressive investors will look at this as an opportunity. First off, putting an offer in on a home with illegal additions may allow you to come in with a significantly lower proposal. Many times the seller isn't even aware something is wrong and discover they’ll need to either take it off the asking price or do the repairs themselves. Usually, the seller is happy to take the reduced number instead. Secondly, if you're in an overpriced market, you can come out ahead. Thirdly, you will likely have less competition trying to obtain the purchase. Most investors do not want to touch this type of project thinking it's too much work like short sales investments.
Best practice is always to go down and pull the permits for the house you're interested in pursuing. Having this information can help position you well if you're considering the purchase. Every area regulates their permits a little different due to local zoning bylaws. It's important to follow the rules when doing your rehab so that you know everything checks out when you sell the project. The last thing you want is for somebody to get hurt. It could also result in legal action towards you which is never worth the risk.
You'll always want to do your due diligence while researching a potential property. Working with experienced investors who understand local zoning laws is still a great asset. Some illegal additions if handled correctly can potentially be very profitable. Never cut corners in always get the right permits, so you pass every inspection when you sell.