Illegal units in 2-4 unit buildings - Chicago

[Donald Hruska]

Hi all, I'm doing research for my first purchase which I'm hoping to make sometime in the next 12-18 months. I plan to purchase a 2-4 unit property in Chicago and live in one of the units. Very frequently I see in listings "illegal" garden units. What are people's opinions of these? Do you factor in theoretical income from one of these units?

[Dan Wood]

Donald?

[Dan Wood]

I didn't know you were on here as well, we should talk sometime! I have basically the same plan you outlined above.

[Donald Hruska]

Hey Dan, small world, yes we should!

[Richard C.]

I don't condone illegality.  HOWEVER...

I wouldn't factor the illegal unit in to your financial calculations.  I would live in the illegal unit.  You'd still clearly be an occupant for loan purposes, but wouldn't be putting yourself or your tenant in such a jam if code enforcement came calling.

[Omar C.]

I agree with Richard, don't count the revenue and live in the illegal unit.  Chicago is pro tenant and you don't want to raise any red flags with city hall.  

[Donald Hruska]

So let's say you're valuing a 3 unit property using the GRM of the area, and you don't factor in the illegal unit - that results in a pretty large difference in value from the asking price. Is that basically no longer a useful way to value the property?

[Omar C.]

If the numbers don't work as a 3 unit I would walk away or renegotiate.  You can always bring in an experienced contractor and find out what would it take to make it a legal unit. 

[Jonathan Pliszka]

"If the numbers don't work as a 3 unit I would walk away or renegotiate. You can always bring in an experienced contractor and find out what would it take to make it a legal unit."

This is incorrect. The legality is based on zoning. The process to make something "legal" is quite a bear. For example, you'll need all neighbors within 200 feet of the property to sign off on this. There's really no benefit for them to do so. The process is quite pricey just to establish an application, which will likely be denied anyways.

With that being said, there are thousands of illegal basements/attics in Chicago. I believe it would be rare for you to be called out on this, but to be safe, I'd make the numbers work with just two units. Feel free to PM if you'd like, I have some experience here. Cheers!

[Brie Schmidt]

There is a big difference in Chicago between a non-zoned basement unit and a basement unit that would not pass building codes.  I would say a good 30%-40% of our buildings have a non-zoned basement unit.  I have yet to hear of a single person getting in trouble as long as the unit could be zoned for it meaning 2 forms of egress and proper ceiling height

[Cliff Mccue]

I think the least of your concerns should be whether or not you can get away with it.  I think there is a good chance that you can.  As @Brie Schmidt said, there are plenty non-zoned units out there.  Heck, I'm certain I've lived in one at one point.  

The bigger issue from my point of view is the liability around playing a tenant in that unit.  If some thing should happen to that tenant living there, it will put a big damper on your investing career.

[Account Closed]

@Omar C. and Richard C. - I'm not in Chicago, but I'm in a similar situation - renting out two units and living in the third (illegal) one. Question is - doesn't this void the property insurance policy? Could OP be denied coverage in case of a claim because the basement unit is illegally occupied?

To clarify, I'm not talking about damage to the basement. Let's say a fire damages the second floor and OP files a claim w the insurance company. Can't they deny the claim because of the illegal unit?