Another issue is value of the property. Appraisers will not include unpermitted improvements in the value of the property. They may even note in the appraisal report that conditions exist that should be looked at by a licensed inspector or engineer - a serious red flag that often leads to denial of a mortgage application.
There is also the risk that the city (or county) could direct that the unpermitted improvements be removed. This doesn't happen a lot, but it does happen if somehow the local building inspector finds out about the improvement and has safety concerns. Not common, but it does happen.
Finally - check your landlord/hazard insurance. Some policies cover repair or replacement of damaged structures that are permitted only.
Thanks for your post. As the others have already mentioned, you should never rent a home to tenants with the knowledge that the living areas are not permitted nor in conformance with building codes. Should this information be given to a tenant, they can stop paying rent and assert that the property is unsafe--this is not the ideal situation for any landlord or tenant.
Now to your question...
The important word in your question is "ATTACHED" three bedroom home, and not a detached single family property. In this case, my advise is as follows:
1. If this is the condominium and NOT a planned development (check the CC&Rs and see if the property is a condominium or is described as a "unit") then not only are the improvements not allowed, they will NEVER be approved by the City, and if the homeowners association gets wind of this, the homeowner (which could be you) would be required to remove it, and to return the attic to its previous condition and pay hefty fines. Also, please know that attics are areas where fire breaks and fire protection exist a condominium building, so every home in the building can be compromised by an "attic" living area.
2. If this property is an attached planned development home (check the CC&Rs, and the property will be described as "lot"), the fire and safety issue may not be the same as with a condominium but it's highly unlikely that the extra rooms in the attic will be approved. There is something called "maximum coverage" coverage allowed for each building lot and the size of the lot dictates the amount of living space allowed in each home. Usually a developer will use every square foot of allowable living space in building a home, so if there are added living areas to the home, these would usually exceed the allowed space on the property. So again, the rooms would need to be removed. Also, the HOA does have some say in the amendments, and they can force the current owner (which, again, might be you) to remove the rooms and bathroom.
3. Since this is an attached home, there is probably no way that the roof line of the property was amended (particularly increased in height to meet current building codes) to accommodate the living spaces, nor the floor of the attic or the walls holding the attic floor amended to provide proper strength for loads and weights associated with living spaces. So again, the property will not receive the building permit you need to rent the home to tenants.
Finally, I might point out that while the home was for sale, and the property was viewable during open houses, it is more than likely that--if this is a homeowners association--the Board of Directors have seen and are now aware of the illegal or unpermitted changes made to the home. Even if the new owner decides not to apply for a building permit for this home's amendments, it is likely that someone from the homeowners association WILL contact the City about the changes, and the amendments will eventually have to be removed. So no matter how you slice this, it doesn't sound like a good investment.
My opinion on this one, since you are seeking opinions, is to find another home unless you are prepared to remove the bathroom and bedroom and return the property to its original condition, there is virtually no way you'll be allowed to keep the unpermitted amendments in an attached housing complex.
Sorry about this one!
Area Pro Realty-People's Choice
Now if the conversion was done by a non-license handyman, then it might not be a good investment to buy.
Also if you are investing, I recommend for you not to buy a condo or townhouse that has rules and regulation in occupancy. Meaning, in a condo or townhouse development they have restriction on the number of owner occupied and non-owner occupied. So, my advice, get a single family house or duplex, tri-plex, etc
In terms of rental, make sure that the converted space meets the standards for human habitation.
John Sourby has given you an excellent answer to your question.
My primary concern about properties with unpermitted work are issues with respect to safety. This is particularly true with respect to electrical and gas connections which can be a very serious fire hazard if not done properly.
Also any gas fueled devices such as furnaces, hot water heaters, and stoves and ovens can be a source of carbon monoxide in the living area if not vented properly.
In addition where attic space space is converted to living area, are there adequate provisions made for the occupants to escape quickly in the case of a fire.
These are just some of the concerns that I have about unpermitted work where an area, such as an attic that was not originally designed as a living area is converted to a living area.
I recommend that you have the property thoroughly inspected by a licensed general contractor before you remove your contingencies to buy the property. I recommend that you be present when the contractor inspects the property and ask specifically about any safety related issues.
Charles Butterfield MBA
Real Estate Broker/REALTOR
Cell Phone: (408)509-6218
Email Address: firstname.lastname@example.org