You have some good input from Frank. A few of the concerns that I've worked through with both buyers and sellers regarding non-permitted additions:
1) Appraisals - nonpermitted work will not be counted as living space on the appraisal. When you go to sell the property in the future, this won't be included in your valuation. Also as a buyer, sometimes appraisers 'flag' certain property conditions and the loan may not be underwritten until those conditions are remedied.
2) Insurance - as Frank noted, this can be an issue. I've had buyers look into this, and if the usage is not according to permit, including "non conforming" 2nd kitchens, insurance adjustors have a valid basis to deny a claim in case of a fire. Also if you're renting out the non-conforming space, the renters may not be able to get insurance as well.
3) If it's a CPR property, then your neighbor won't be able to get any permits approved due to the existence of non-permitted work on the original larger parcel (long story on this one...please call me for more info).
4) And last but not least, as Frank mentioned, you could have risks such as poor wiring creating fire hazards, non-treated wood that invites termites, unsafe structural elements, etc.
On the positive note - if the work is done according to regulation, but without a permit - "After Build" permits are possible, and several local contractors have been successful in getting those through. If you buy the property, it's wise to start the work on getting that done as it will increase your value whenever you go to sell.
All that said, I noticed you clicked on the Kaneka #21 listing which is a foreclosed condo at Regency Huleia in Puhi. This is one of my favorite REO listings on Kauai and I believe presents a very good value! I've had buyers in this project when it first came on the market and their inspectors were very pleased with the quality of work done by the developer. You shouldn't have any permit concerns on this unit. If you'd like more info, or help with negotiating on an REO listing, I'd be happy to help you. I also live in Puhi and am very familiar with the area.
Susanna Kunkel, RA
Hawaii Life Real Estate Services, LLC