Unwarranted Space and it's Consequences?

Asked by James, San Francisco, CA Sun Feb 1, 2009

I'm thinking about buying property with and unwarranted bed/bath downstairs. What are the consequences if the city discovers this? Is there any reason that the city would even come out to inspect? For example, let's say I higher a contractor to come out and do some work. Would the city come out and inspect the property before issuing a permit, or would the contractor simply get the permit himself without andy inspector coming out? Same applies if I were to get termite work completed?

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Jeff Woo, Other Pro, San Francisco, CA
Mon Feb 2, 2009
Hi James,

There is more to consider.

The issue of illegal units brings up a number of potential legal consequences assuming you are renting the illegal unit.

Firstly, if the unit is reported to the Dept of Building inspection, they will issue a Notice of Violation requiring you to either legalize it or remove it. They will fine you 9x the permit cost. Most units cannot be legalized.

Second, you will have to evict your tenant(s) before you can either legalize or remove the unit. Under Prop H, you would owe relocation costs of approx $4800 per person plus the legal costs of the eviction.

Third, a tenant in an illegal unit technically has a claim against the landlord for renting a legally "uninhabitable": unit because it lacks a proper occupancy permit. The tenant may seek 3 years worth of back rent plus other types of damages. They don't always, or even usually, prevail on this type of claim, but the attorney's fees in defending it will be substantial.

If the building in question is a single family residence (SFR)and the upstairs is rented too, you have the problem of losing the various protections that landlords of SFR have under Rent Control, including the right to raise rent to market rent and not being subject to the Protected Tenant limitations.

If the building is a multi-unit building, an eviction of a tenant from an illegal unit uses up your one "free" eviction for purposes of condo conversion.

That being said, thousands of people have and rent out in law units. They just don't necessarily understand the risk. I tell clients if you are thinking about buying an property with an in law, you simply need to understand the risk and price accordingly. How you evaluate and handle tenants in illegal units will depend upon what you want to do with the property. For instance, if you are looking at a SFR with an in law and you want to live the property, I think their are a lot of good opportunities out there because few buyers are willing to deal with tenants have have to be evicted.

Jeffery Woo, Esq.
Sedgwick, Detert, Moran & Arnold LLP
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Eileen Bermi…, Agent, San Francisco, CA
Sun Feb 1, 2009
James--I recently covered this topic on my blog, Inside San Francisco Real Estate. Here is the excerpt, which I think will provide some necessary background on the concept of unwarranted space:

"In real estate circles, San Francisco is famous for the prevalence of “unwarranted,” or “illegal” rooms. Many buyers ask me about the ramifications of these rooms, so I thought I’d share today.

Unwarranted rooms are those which have been built without involving city permits and inspections. In a major renovation situation–for example, adding a unit or bedroom and bath–you or your contractor will apply for a permit from the city. Once the permit is granted and the work is done, one or several city inspectors comes out to the property to sign off on the work. This signoff ultimately goes on your property’s 3R, or building permit history, report. This is one report that is provided to future buyers if you decide to sell your home.

The fundamental issue for prospective buyers is that the work may or may not have been be done in accordance with city safety codes. This is particularly important when it comes to the electrical and plumbing work behind the walls, which a city inspector approves. Another downside is that if you purchase a home with any sort of prominent, unpermitted work and decide to do a subsquent renovation with permits, an inspector can notice the unpermitted job while examining the work related to your current, unrelated project during a scheduled visit. In the case of an unwarranted unit or simply a bedroom and bath downstairs, inspectors can then ask to see plans and permits, or require that you furnish such documentation.

Finally, if you decide to buy a house with an unwarranted unit and rent that unit, you will run into problems if a neighbor decides to notify the city."

And to continue, there are some contractors who will add rooms without permit--same goes for termite work. The risk you run is a fee for permit violation if the work were reported by a neighbor and the city came out to investigate, as well as additional costs incurred if the city requires that everything be done to code.
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Dp2, , Virginia
Sun Feb 1, 2009
David is correct, and an inspector might also be sent out if any environmental issues crop up, if the city/county/state needs to survey the area (perhaps for future work--especially when dealing with easements), etc. Also, in certain locales, one can't sell a property without city/county approval (which usually implies the requirement of an inspection). Perhaps, this isn't a requirement in your area, but it would most likely affect you upon resale if such an ordinance were passed after you purchased this property.

Instead of purchasing this property with restrictions in your title policy (which could also affect whether your lender would be willing to fund the deal), why not get the inspection and find out what needs to be done to get that work approved. Factor those costs along with any other potential rehab costs, and readjust your purchase price accordingly. This way it's a win-win for all parties involved, and you'll be able to purchase the property with a full-warranty title policy.
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David Tapper, Agent, Burlingame, CA
Sun Feb 1, 2009
James, looking at your situation from a worst case scenario, the City can always make you remove the bed and bath. Or they will make you pay for a permit and leave it at that or have you make some changes to make sure it's up to code. But the chances of them just coming for the heck of it is not likely, unless one of your neighbors tells on you. There are many homes in the city with illegal inlaws.

Now, if your contractor or pest guy needs to do some work, yes they need to get a permit. Depending on the work order, yes the city will come out prior to and after the construction.

Dave Tap Tapper
Cashin Company
Web Reference:  http://www.Teamtapper.com
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