Illegal multifamily... am I going to Jail!?

Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes

6y

Brandon, a big risk to me is if something happens to the residents, like a fire, where they get hurt or worse, die. How are you treated with insurance and in court?

Financing could be a risk and of course the government could shut you down at any time. Big risk in my opinion with too little reward.

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Syed H.

Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes

6y

A LOT of people do this in NY/NJ. My educated guess from experience would say that there are more illegal units on LI than there are legal.

Now most of the time, owners just get away with it. But you do not want to be the person who gets F**ked because of it.

You can get sued by your township, my local townships do this, and you can have a major liability in various scenarios. The liability depends on the specific scenario, but you can get sued for a fire in an illegal apartment that didn't have correct means of egress. Your property insurance can deny your claims if they find out it was used as a multi. Etc Etc. Tons of scenarios there. I personally know a few people who have had these unlikely scenarios happen to them.

Like someone else said it is a higher risk = Higher reward scenario. I would consider illegal MF's as basically not having property insurance. If you are willing to do that, good luck.

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Jason Perry

Rental Property Investor · Tiffin, OH · Member since 2018 · 16 posts · 17 votes

6y

@Brandon Turner We have more experience with these types of zoning issues than I can even explain. We had neighbors complain one time because they didn’t realize they had moved next to a triplex. We had a really long battle and saga with them (I’ll spare you the details) and the city and we were able to prove it had been a triplex since prior to the zoning going into effect. Most of the other problems we’ve had have been with appraisals and financing but if we never have another zoning or nonconforming property issue it will be too soon.

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Roger Goltz

Emerald Isle, NC · Member since 2019 · 9 posts · 3 votes

6y

My experience is that it is varies greatly by location. In the area that I started investing, we had an inspector who asked us to make minor changes to areas so they could not be used as living space after it was obvious a previous owner had been doing so. In another city we invest in, during my due diligence time we had reason to believe there was another unit added to an existing duplex. In that case, not only were they fine with it, the city planner had rented the unit when he first moved to town.

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Bob Norris

Investor · Kennett Square, PA · Member since 2012 · 45 posts · 25 votes

6y

@Brandon Turner, they may make you bring the house up to code with a change of ownership, which could make what looks like a solid deal into a less attractive one.

I look forward to reading your new book. Thanks for what you do for all of the investors who learn a ton from your sharing and Bigger Pockets being there!

Bob Norris

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Brandon Sok

Investor · Bellbrook, OH · Member since 2016 · 63 posts · 39 votes

6y

Proud owner of an illegal duplex!

We started it as an SFH house hack that is now a duplex since we moved out. We were able to do the loan and insurance under that primary residence then covert to a rental dwelling. Only risk would be they tell you to file the proper paperwork right?

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Christine Hsu

Investor · Northern NJ & Westchester NY · Member since 2020 · 5 posts · 3 votes

6y

Originally posted by @Lee Ripma:

@Brandon Turner

I was doing due diligence on a property in Kansas City, it had 4 units but 5 addresses. That 5th address was a basement unit with its own entrance that had clearly been used in the past. I thought I would be able to bring the unit back to life as a “reverse penthouse” in a great area. During DD I found the property was zoned SF but grandfathered in as 4 units. Talked to the city and my insurance guy. City said no way to 5th unit but I’m still thinking I can get away with it, I’ve got entrance and address. I talked to my insurance guy and he said you won’t be covered for something that happens to the person in living in illegal quarters. So let’s say there is a gas leak and my tenant dies (extreme example) I’m not covered by insurance. That was enough to get me not to consider that 5th unit.

Is it possible to turn the 5th unit into an Airbnb or short term stay? I was considering a duplex that had a finished attic and separate entrance. That deal didn't work out, but wondering for future opportunities.

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Jason Turgeon

Realtor · Boston, MA · Member since 2019 · 244 posts · 275 votes

6y

In Mass, you wouldn't be able to get financing with an illegal unit. There are lots of illegal units here, but when those owners go to sell they almost always find they have to rip out the extra unit, usually by removing the stove but often by also removing any unpermitted work and bringing everything up to code. I've seen some sellers learn some extremely painful lessons by trying to cheat the system.

And yes, you could end up in jail if someone dies in your illegal unit. The laws are there for a reason:

https://www.bostonglobe.com/metro/2012/02/03/quincy-landlords-sentenced-three-years-prison-for-renting-illegal-apartment-where-father-and-sons-died-fire/q2yvAzz6ogXToqReE77CxJ/story.html

https://www.metrowestdailynews.com/article/20070119/NEWS/301199976

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Henry Lazerow

Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes

6y

These are very popular in Chicago. I personally don't like them but lots of clients like them as cashflow higher if you buy a 3 unit for price of a 2 unit. The risks are a tenant calls you into city which is rare but could happen. You don't have issues with financing in IL. The appraiser just asks you to remove the stove from the illegal unit. I have done them for clients both FHA and Conventional with no issues.

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Nik Moushon

Architect · Wenatchee, WA · Member since 2018 · 843 posts · 907 votes

6y

Originally posted by @Brandon Turner:

Ok - i'll admit, the subject line of this post is a bit sensational.

I'm not going to jail. Not for this anyway. (But maybe for my killer dance moves.)

But here's the question i'll pose to the BiggerPockets crowd.

(I'm working on a new book on Multifamily for BP, and I'm in the chapter on Zoning, so I thought it would be good to get some additional perspective!)

If I want to buy a duplex... and I find out that it's located in an area where the zoning only allows for single family (or, let's say, multifamily is maybe allowed BUT this duplex clearly was converted from a single family house years ago without permits) - obviously this is a "non-conforming property."

So my question is: what are the downsides of this? Like... has anyone ever heard of a government forcing someone to turn their property back to a single family house after its been carved up? I assume most cities operate on a sort of "don't ask, don't tell" policy, but maybe that's just my experience. Could a landlord who rents out his "illegal duplex" (i.e. an old house that has been converted) get in any kind of trouble, or would they ever be forced to fix it?

I'll admit - i have several properties like this. I call em "monster houses." They can cash flow like crazy - but what are the legal / financial risks?

Thanks all! Appreciate your thoughts as I put together this book!

Here is what I have seen and heard of happening in this kind of situation in my nearly 10 years of practicing architecture.

Will you go to jail? - For a first time offense, absolutely not. You would need to be a habitual repeat offender and/or not follow the cities orders to end up going to jail. This is one of those things where you REALLY have to piss off the judge to go to jail.

So if you don't go to jail..what happens? - Well first, most cities will try to work with you to find some way to meet the current code. You have several options to look into: a variance, becoming legal non-conforming (vs just non-conforming), zoning change, and other unique/drastic measures such as huge changes to the house to make to a true two property duplex/townhouse (this would require a lot of research and very site specific). If at the end of all of this you still cant find a way to come to an agreement with the city they can, and do have the right, to force you to convert the duplex back to a SFR. If you don't they can issue huge fines (usually by the day) and if those rack up and dont get paid they can put liens on the property, which after a time of non-payment they can foreclose on your property and take it from you. I've seen this done on un-permitted SFR additions or renovations.

Oh and be careful of legal non-confirming properties. There is a very small list of improvements you can do to the property and still stay legal non-confirming. Once you do either X amount of work (usually based on a percentage of the building being worked on) or the type of work the city can then force you to meet all current codes and remove your legal non-conforming status. If you are trying to fly under the radar on your work (which I dont advise) you have to be mindful of what work requires permits and what do not. This is where the city will catch a lot of illegal duplexs.

As for the "dont ask, dont tell" policy....I've seen it done a lot. Usually the city will kind of look away as long as there is no health, life safety or building code violations that put people in danger. Now if they get a complaint or tip about an illegal duplex they do have an obligation to investigate and at that point they usually do bring down the hammer...again every city is different.

I've seen banks back out of financing once they found out the duplex was an illegal duplex. So theres that to consider if anyone is thinking of buying one.

If you have any other questions let me know. I literally deal with zoning and building codes on a daily basis.

2 Reply

Boris Suchkov

Rental Property Investor · Santa Monica, CA · Member since 2018 · 45 posts · 22 votes

6y

@Brandon Turner

A number of people alluded to this, with the best explanation IMHO by @Brian Lucier, but let me add my two cents: there is zoning, and then there is the building code.

A "legal nonconforming" building is a building that was built legally (as per required permits and zoning) at the time of construction. If zoning for the area was later changed, for example from allowing triplexes to allowing SFH only, the building was grandfathered in. A new building on this lot can only be an SFH. But an existing triplex can stay, given a set of conditions (which likely vary by municipality, but mostly have to do with avoiding major upgrades, renovation of more than X% of the property, or the building being vacant/condemned for more than a certain period of time).

Adding a unit by putting up partitions/doors to subdivide an existing property in an unsafe way and without permits may be illegal under any zoning. The issue here is the safety/fire code more so than the zoning. It's best to stay away from this, except where a path to both meeting code and legalization may exist (for example, California's ADU legislation under which unpermitted garage conversions, units permitted as rec rooms, unpermitted additions, etc can become legal residential units once building code and some limited zoning requirements are met).

The tricky part is to understand when zoning and building codes interact, i.e. when required renovations to bring a property up to code trigger the loss of legal nonconforming status.

1 Reply

Brian LucierPro Member

Property Manager · Fitchburg, MA · Member since 2012 · 148 posts · 201 votes

6y

@Brie Schmidt
@Boris Suchkov
@Brandon Turner

The "B's" Have it!

B1: Thank you Boris for the shout out on our post! We do try to do the right thing in our properties and rehabs. The smart money is always spent up front on the rehab to get things done right the first time. I love operations and building infrastructure. Pretty rooms are nice and fun to look at, and extremely important for marketing to moving the deal. The infrastructure is where I can spend hours in basements and attics looking at the bones and utility systems to get the full picture of the property.
B2: Brie - SUPER impressed with the codes to back up the post! I LOVED this! There is IBC for Residential and Commercial and THEN some states have their own addendum to the code which is a pain in the patookie to cross-reference and mark up the code books. I carry my MA CSL and am supposed to have my code books and license on me at all times. I wear a lanyard all the time with my HIC and CSL cards inside and keep my code books in the office while working on several sites. Those vital relationships with the municipalities are so critical to maintain. If I didn't mention it before - town officials LOVE having GOOD Landlords and investors coming into their market to buy and fix up buildings and will usually bend over backwards to help you have a great property.
B3: Hey Brandon, let's see some video posts of those Brandon illegal dance moves (aka BID moves) in true Marvel Comics fashion "Guardians of the Galaxy" dance-off style when they blow up the bag guy at the end of the flick. I am sure you have enough support here to post your bail!
B4: Me, doing my 50th post on BiggerPockets. WOOHOO! Now, let's kick it up a notch and get to the next level. 1,000 posts - here I come!!! Thank you BP Community!!!

2 Reply

Sean H.Pro Member

Investor · Smithfield, VA · Member since 2016 · 25 posts · 9 votes

6y

I feel as those maybe i am being tracked by google, as i was just looking into this exact topic!

At least in my area and after doing some research with the city; appears that if any house is currently being used as a Multifamily (3+ units)....or can have documented use (such as a utility bill) of being used as a multifamily in the last 2 years, then it can continue to be used as a multifamily.

However, without these attributes, then the town ordinance does not allow for multifamily and everything in town is zoned as single family (SFR).

Lastly, a special use permit can be submitted to allow the house to be used as a duplex.

So, based on Brandon's questions and the responses so far, looks like it is city by city dependent.

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Robert Freeborn

Real Estate Agent · Bellingham, WA · Member since 2017 · 427 posts · 182 votes

6y

@Brandon Turner

Wow, some amazing and well thought out replies here.

I know in my local town of Bellingham they are requiring rentals to be permitted. So if you had a monster unit they might now allow you a rental license.

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Teri Feeney Styers

Real Estate Agent · Grand Junction, CO · Member since 2015 · 1k+ posts · 736 votes

6y

@Brandon Turner As a Realtor I have run into similar scenarios more than once. Jail? No... Wish you were in jail and didn't have to deal with it? Maybe... Here are the various problems: others have mentioned the ability to control the temperature and access the electrical panel 24/7 (those items just make sense). There is also what is called "fire separation". IRC requires a 1 hour minimum "burn time" before the other unit is affected. This can be expensive and difficult to achieve when re-configuring a single family floorplan - especially in the cases of a two story dwellings. In my area these types of illegal duplexes (and also garage conversions) happen all the time. Don't ask don't tell can work on a limited basis. But what if there is a fire or crime or other incident that draws the attention of local enforcement agencies? What if you want to pull a permit for a new roof and the inspector sees the new garage apartment? What about your liability insurance coverage if someone is injured and the insurance company realizes that your second unit is illegal? What about resale (I always look at this for my clients)? Locally, my county building department won't make you tear it down; but they will make you apply for a permit retroactively and open up the walls so they can see plumbing, electrical, etc. Garages don't have residential depth slabs - and they will make you dig down to reinforce that slab to bring it to the appropriate strength (I know - how does a household need a heavier load capacity than a car?). Anyway, as a flipper and as a Realtor I always recommend: A. Due diligence prior to purchase - including looking up all prior work permits issued on the property. B. Go to the officials and tell them what you have and ask how to remedy C. Just don't do unpermitted work.

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Bob Floss II

Attorney · Northbrook, IL · Member since 2017 · 719 posts · 549 votes

6y

@Brandon Turner I've had some house hack clients work around this by renting out the first and second floor units and living in basement "unit" themselves. They are typically clients that only plan on occupying the property for a year.

Chicago gets a bad rap, but they will give you the opportunity to pull permits and make the corrections to legalize it. When you get into some suburbs, they are savage. I've had an inspector come in for a notoriously bad village and force the owner to rip out the beautiful wet bar in his man cave because he viewed it as a possible kitchen for an illegal basement rental. Anytime a grandfathered zoning comes up, I also have to remind clients that should the property have a massive fire or take heavy damage, the village may not allow it to return to a nonconforming use. My client found that out after a fire in his 2-flat and the village wanted permits to turn it into a single family home. He won, but the village put up a hell of a fight.

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Jonathan R McLaughlin

Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes

6y

@Brandon Turner so I’m thinking that everyone who gives the thumbs up to a version of “hey it’s kind of illegal and you know it but probably won’t be a problem and you can come out ahead” will applaud their tenants who apply the same logic to not paying their rent?

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Illegal multifamily... am I going to Jail!?

Illegal multifamily... am I going to Jail!?

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