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
"In real estate circles, San Francisco is famous for the prevalence of â€œunwarranted,â€ or â€œillegalâ€ rooms. Many buyers ask me about the ramifications of these rooms, so I thought Iâ€™d share today.
Unwarranted rooms are those which have been built without involving city permits and inspections. In a major renovation situationâ€“for example, adding a unit or bedroom and bathâ€“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 propertyâ€™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.
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.
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