Legal 2 with an illegal basement apartment - Chicago

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Legal 2 with an illegal basement apartment - Chicago

Kavan Kucko
Member since 2019 · 9 posts · 3 votes

I am looking at a property that is a legal 2-unit apartment with an illegal basement in Chicago. I ran the numbers and it looks like a good deal, even without including the income from the basement (~$500/mo positive cash flow when trying to overestimate costs). So I don't need the income from the basement, and I'm not really interested in renting an illegal basement, but I'd much prefer not to evict the basement tenants. The two guys living down there have been living there a long time; they might have even previously owned the house. 

I am not concerned about the city finding out and having to pay a fine, and then having to evict under those circumstances since there's cash flow without the basement rent. My concern is that of larger liability - think fire or something like that. I'm not sure exactly what makes the apartment illegal, it has a legal exit (and is small enough that I think it only needs one), the windows might be too small and the ceiling might be too low.  

I think I may purchase the building, rent to the two guys in the basement as long as they'd like to stay, and if/when they leave, either look into making the unit legal, or quit renting it. But I worry even that may be exposing me to too much risk.

Just wondering what people's thoughts are on the liability vs kicking out long term tenants.

Thanks

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Prashanth MahakaliPro Member
Architect · Chicago, IL · Member since 2015 · 93 posts · 130 votes
6y

@Kavan Kucko

If there is a life threatening situation in the building, the fact that you have people living in the basement unit will affect you as the owner.

Best case scenario: you buy the building, evict or pay the basement tenants out, apply for a zoning change to add a legal basement unit, apply for building permit to do the work, pass inspections and rent out the basement unit as a legal dwelling unit. While doing the repairs to the legalize the basement unit, you may have to do other work in the building like upgrading electrical and water service etc. So, this is the most expensive and legally sound scenario.

Worst case scenario: you buy the building as-is and continue to collect rent. A tenant calls the city on you. The city will cite you for building violations and force you to deconvert the basement unit and restore it to an open basement. If there is a fire, not only will you get a building violation notice, you could face civil suit for an illegal unit. Unless you own the building under a LLC and in some cases, they will find a way to come after your personal assets. So make sure you have more than adequate insurance.

Realistic scenario; buy the building, evict the basement tenants and keep it as a vacant basement unit. If you have the money, remove all the partitions and keep it as an open basement. Do nothing else.

The question really is about your risk tolerance. The fact that you posted about this tells me your risk tolerance may be in line with the realistic scenario. That’s what I would do.

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  • Prashanth MahakaliPro Member
    Architect · Chicago, IL · Member since 2015 · 93 posts · 130 votes
    6y

    @Kavan Kucko

    If there is a life threatening situation in the building, the fact that you have people living in the basement unit will affect you as the owner.

    Best case scenario: you buy the building, evict or pay the basement tenants out, apply for a zoning change to add a legal basement unit, apply for building permit to do the work, pass inspections and rent out the basement unit as a legal dwelling unit. While doing the repairs to the legalize the basement unit, you may have to do other work in the building like upgrading electrical and water service etc. So, this is the most expensive and legally sound scenario.

    Worst case scenario: you buy the building as-is and continue to collect rent. A tenant calls the city on you. The city will cite you for building violations and force you to deconvert the basement unit and restore it to an open basement. If there is a fire, not only will you get a building violation notice, you could face civil suit for an illegal unit. Unless you own the building under a LLC and in some cases, they will find a way to come after your personal assets. So make sure you have more than adequate insurance.

    Realistic scenario; buy the building, evict the basement tenants and keep it as a vacant basement unit. If you have the money, remove all the partitions and keep it as an open basement. Do nothing else.

    The question really is about your risk tolerance. The fact that you posted about this tells me your risk tolerance may be in line with the realistic scenario. That’s what I would do.

    4Reply
  • Mark AinleyBusiness Member
    Property Manager · Roselle, IL (Chicago Suburb) · Member since 2013 · 2k+ posts · 1k+ votes
    6y

    @Kavan Kucko If only it was as easy as a simple fine if you get caught.....@Prashanth Mahakali is pretty spot on here and there is no one that knows better then him as he has investors all the time referred to him around the city to get them thru their court case that include plans and permits even if it is just to remove the illegal basement.  

    When you go to evict the tenants in the basement and they call 311 on you that is exactly how people get caught.  It is tough to enforce leases with basement tenants because they call 31 and city has to come out.

    If you keep the tenants there and they are no issue then let this tenant run its course but there is a lot of risk with it.  The one scenario where I feel an investor has the least risk is when the illegal unit is used for the owner.  We have owners that either live in the illegal unit or when they come into town they stay there.  

    If the space is nice then maybe you consider duplexing down and combining to make a larger 1st floor unit.  A little less risk and you can add value to the building.  

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  • Eric M.
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    6y

    Couple things. I am under the impression there needs to be 2 egress points regardless of size but I could be wrong.

    And I have to disagree with worst case scenario in the first response. 

    Worst Case scenario. Fire in the basement and they can't get out and the landlord is arrested for manslaughter. 

    Wouldn't be the first time.



    https://www.nbcconnecticut.com/news/local/waterbury-landlord-pleads-guilty-to-manslaughter/1906469/



    https://www.nytimes.com/2012/06/15/nyregion/manslaughter-charges-for-landlords-in-brooklyn-fire-that-killed-5.html


    https://www.enjuris.com/blog/questions/landlord-premises-liability/

    1Reply
  • Kavan Kucko
    OP
    Member since 2019 · 9 posts · 3 votes
    6y

    Thanks all. I think what I might do is put in an offer contingent on a vacant basement at the time of sale. I might add a clause that transfers some money to the basement tenants to help them on their way. Then I could take a look at options for the basement:

    1. Leave it vacant/storage

    2. Duplex down?

    3. Air bnb? (I don't think I can in Chicago if it is not my primary residence and there are fewer than 4 units.)

    0Reply
  • Nik Corbaxhi
    Rental Property Investor · Stratford, CT · Member since 2019 · 154 posts · 115 votes
    6y

    @Kavan Kucko, how about this. You buy the building and you tell your basement tenants they have to get out. While the previous owner kept it rented, you don't have to and I am sure you can kick them out, with or without their wish, legally speaking. Even if they have a lease in place, the moment the city finds out that it is not a legal living space, they will enforce it.

    PLEASE, do yourself a favor and DON'T rent the basement. No matter what you do to it, unless it has legal size windows (which seems like it doesn't and it never will), and a proper separate exit, then you cannot rent it or make it legal. Go the route of adding it as additional storage to the first floor tenants and hopefully you can charge a bit more. 

    0Reply
  • Eric M.
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    6y
    Originally posted by @Nik Corbaxhi:

    ..... the moment the city finds out that it is not a legal living space, they will enforce it.

    You sure you are talking about our city....or maybe your city? LOL

    0Reply
  • Nik Corbaxhi
    Rental Property Investor · Stratford, CT · Member since 2019 · 154 posts · 115 votes
    6y
    Originally posted by @Eric M.:
    Originally posted by @Nik Corbaxhi:

    ..... the moment the city finds out that it is not a legal living space, they will enforce it.

    You sure you are talking about our city....or maybe your city? LOL

    Definitely talking about my city. :) but what I can tell you about ANY city is that when $4it hits the fan, the city has to hold someone accountable for!

    0Reply
  • Kavan Kucko
    OP
    Member since 2019 · 9 posts · 3 votes
    6y

    In the end I'm going to make an offer contingent on the basement being vacant at the time of closing. If we settle on a price, I'll get someone in there to see if its possible to make it a legal third, if not, it'll be storage.

    1Reply
  • Eric M.
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    6y
    Originally posted by @Nik Corbaxhi:
    Originally posted by @Eric M.:
    Originally posted by @Nik Corbaxhi:

    ..... the moment the city finds out that it is not a legal living space, they will enforce it.

    You sure you are talking about our city....or maybe your city? LOL 

    Definitely talking about my city. :) but what I can tell you about ANY city is that when $4it hits the fan, the city has to hold someone accountable for!

    I am not sure an illegal apartment constitutes the sh t hitting the fan but we have 500+ murders a year and the police typically only arrest someone in about 1/3 of them. So we are not great at holding people accountable here for murder.....let alone having an illegal apartment. I know buildings that have had illegal apartments for decades. It isn't high on the priority list until something bigger happens. Then they will nail the landlord.

    0Reply
  • Nik Corbaxhi
    Rental Property Investor · Stratford, CT · Member since 2019 · 154 posts · 115 votes
    6y

    @Eric M., you were the one that provided the links to what the consequences can be if something big happens. The city will never care if you are running an illegal apartment, UNTIL Sh t hits the fan, meaning until someone gets hurt. It all comes down to whether you can sleep at night knowing you are exposed to something that can get you big time for a few extra hundred dollars a month. And yes, you can argue that everyone is doing it, so why not me? Absolutely not against it, I am just trying to point out the risks that come with doing so.  

    0Reply
  • Jon A.
    Asheville, NC · Member since 2017 · 385 posts · 274 votes
    6y

    You may want to check and make sure that you can convert the illegal basement apartment into a legal one. For the zoning of my duplex I am not allowed to make the basement a separate and legal unit. All that I am allowed is the duplex itself. Therefore, it is really not worth it for me to finish it in as a live able space at all because it will not add the value to offset the cost. Just a thought for you moving forward with your options. 

    0Reply
  • Kavan Kucko
    OP
    Member since 2019 · 9 posts · 3 votes
    6y

    Thanks Jon. Yeah the numbers work alright without any basement income, but they'd be better with some basement income. My lender knows some people that can take a look at the basement and the zoning and let me know if they think they can (a) get the building zoned as a legal 3 and (b) do the construction to make the basement legal. I think I'll look into that down the road. 

    1Reply
  • Jon A.
    Asheville, NC · Member since 2017 · 385 posts · 274 votes
    6y

    Just call the zoning dept yourself and you would know very quickly.

    0Reply
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