Hi Janel,

I would say the biggest danger is from using substandard materials. Since the wiring, design or materials may not be up to code, they may fail. There is the danger of fire, or the building settling wrong. These are rare, but you never know how they were actually completed.
Secondly, if the addition was not permitted, the actual square footage of the home will not match the records in MLS and the public records. The owner can't legal say it is 1500 SF, when 300 SF were added without a permit. They must state something to the effect of"actual square footage does not match tax records."
As to the insurance company, you will have to ask them. That's a good question, since I presume that they would see a difference in their records compared to what you are asking to be insured.
Lastly, on the permitting process... I wouldn't say it's expensive, per se. The problem is time. It takes time to get the permit, the wait time can be months. During that time, there isn't a lot you can do except wait. Once the inspector checks the place, they can say it's fine, or that you need to do X, Y and Z to get it up to code.

A good home inspector can help avoid almost all of these problems. The professionals have a good eye for what may be legal and what won't get a permit. They do not offer a guarantee, however, it is their opinion. If you really like the place, you may want to consider having a contractor or architect do an inspection.

Call me at 808 723 0900 if you have further questions.

Aloha,
Frank