Purchasing properties with illegal In Law Units in Oakland
Rental Property Investor · San Francisco, CA · Member since 2015 · 236 posts · 156 votes
Hello BP universe! I seek your advice and wisdom once again!
I've been looking at properties in the Oakland Bay Area and have noticed a lot of single family homes with in law units that aren't permitted. I was wondering if such properties are even worth considering seeing the potential cash flow opportunities of renting out the in law unit.
Has anyone purchased an SFH with an "illegal" unit and rented it out? Or has anyone bought a property and got the in law unit permitted and if so, is that a long and expensive process?
Forgive my vagueness but if you need additional information, please let me know!
Much mahalo all in advance!
@Sherwin Gonzales and @Calvin Kwan,
The short story is that if you rent out an illegal unit in SF or Oakland, all the liability is on you, and none on the tenant. #1, the "illegal" unit is subject rent control, as is the other "unit" of the SFR, because it is being operated as 2 units (rent control law follows usage, not just actual structure..) In addition, they are likely subject to tenants' rights and just cause eviction protections, with caveats.. And if there is a fire... whoops! May not be covered by insurance!
But there's more...
If they dispute the legality of the unit and demand all prior payments of rent, they have the right to do so, based on the law. In other words, even if they lived in your illegal unit for 5 years, they could demand the 5 years of rent to be returned, legally.
Having said that, many landlords still do it, and many tenants do not enforce their rights, due to lack of knowledge, inability to spend time, money, or effort doing so, etc.. I do NOT have any illegal units. Others will only let friends, handymen, etc live in illegal units, since they feel that is a lower-risk situation.
As one last note, tenants have DIED inside illegal units because of inadequate ventilation, egress, etc. Certainly no matter if your unit is "non-conforming", illegal, or whatever, you bet your *** you better have it be safe!!!!! Anything less would be HORRIBLE and an injustice to any potential tenant and yourself...
Here's some more fun reading on professional tenants taking advantage of the illegal unit scam (scam back towards landlords..)
https://www.thelpa.com/lpa/forum-thread/222413/Renting-an-illegal-unit..html
Watch your asses! ;)
SF is promoting the conversion of formerly (officially) uninhabitable space into habitable space. Oakland is not as promoting about that right now, but the cities are generally all for adding more legal units. So just walk into the planning counter (hopefully with lots of pictures and anything else you have regarding the space, like ceiling height, utilities, structure etc.), tell them you want to convert an existing space into a new residential unit to help address the city's inadequate quantity of housing supply and housing crisis.
Be sure to pay your RAP fees and revenue tax before you go in though!!
Good luck guys! :)
Interested in the response to this as well. San Francisco has tons of in-law units that aren't permitted. I'm wondering what the liability issues are with these properties. What could happen if there was a tenant dispute?
@sherwin gonzales
hi Sherwin
I bought a property with 4 units years ago that was a legal 3. Everything was fine at the time. Now that I went to refinance the property, it came up that it was illegal. I went to the town to make it a legal 4 family, and I got lucky that I was granted the variance.
I don't know how people are selling these properties with illegal units. Banks will not lend if the unit is illegal. Also, most people overlook the fact that if something happens in the illegal unit, such as a fire, insurance will most likely not cover it. You are taking a huge risk with an illegal unit. Municipalities are cracking down on these setups because they are unsafe and also a way to generate additional revenue.
You can purchase and rent out and can be fine. But realize that the city can come and make you take it out. There goes your cash flow.
Gino
@Sherwin Gonzales and @Calvin Kwan,
The short story is that if you rent out an illegal unit in SF or Oakland, all the liability is on you, and none on the tenant. #1, the "illegal" unit is subject rent control, as is the other "unit" of the SFR, because it is being operated as 2 units (rent control law follows usage, not just actual structure..) In addition, they are likely subject to tenants' rights and just cause eviction protections, with caveats.. And if there is a fire... whoops! May not be covered by insurance!
But there's more...
If they dispute the legality of the unit and demand all prior payments of rent, they have the right to do so, based on the law. In other words, even if they lived in your illegal unit for 5 years, they could demand the 5 years of rent to be returned, legally.
Having said that, many landlords still do it, and many tenants do not enforce their rights, due to lack of knowledge, inability to spend time, money, or effort doing so, etc.. I do NOT have any illegal units. Others will only let friends, handymen, etc live in illegal units, since they feel that is a lower-risk situation.
As one last note, tenants have DIED inside illegal units because of inadequate ventilation, egress, etc. Certainly no matter if your unit is "non-conforming", illegal, or whatever, you bet your *** you better have it be safe!!!!! Anything less would be HORRIBLE and an injustice to any potential tenant and yourself...
Here's some more fun reading on professional tenants taking advantage of the illegal unit scam (scam back towards landlords..)
https://www.thelpa.com/lpa/forum-thread/222413/Renting-an-illegal-unit..html
Watch your asses! ;)
SF is promoting the conversion of formerly (officially) uninhabitable space into habitable space. Oakland is not as promoting about that right now, but the cities are generally all for adding more legal units. So just walk into the planning counter (hopefully with lots of pictures and anything else you have regarding the space, like ceiling height, utilities, structure etc.), tell them you want to convert an existing space into a new residential unit to help address the city's inadequate quantity of housing supply and housing crisis.
Be sure to pay your RAP fees and revenue tax before you go in though!!
Good luck guys! :)
Thanks for scaring us straight, @J. Martin!
I've done a few of those loans.
The appraiser is either going to give the extra space no value, or count it as a work/storage/etc shed and valuate it accordingly. It's NOT an unpermitted in-law unit, or we've got an issue, and there needs to not be a tenant [or cousin Joe...] in there.
It takes about 15 minutes to turn an unpermitted unlawful zoning-violating end-of-the-freaking-world in-law unit into a perfectly fine storage shed and/or detached work area in our market. You do this before the appraiser shows up.
You should talk to a lawyer about renting it out and possible consequences, not my area of knowledge.
I've done a few of those loans.
The appraiser is either going to give the extra space no value, or count it as a work/storage/etc shed and valuate it accordingly. It's NOT an unpermitted in-law unit, or we've got an issue, and there needs to not be a tenant [or cousin Joe...] in there.
It takes about 15 minutes to turn an unpermitted unlawful zoning-violating end-of-the-freaking-world in-law unit into a perfectly fine storage shed and/or detached work area in our market. You do this before the appraiser shows up.
You should talk to a lawyer about renting it out and possible consequences, not my area of knowledge.
This is "tail risk" behavior, IMHO. If you do it, you will probably be fine 95-99% of the time or more. And it will seem 100% fine, until it's 100% totally not fine - if that ugly call ever comes.. And let's just hope that call (if it comes) is only suing you for all past rents (arguable if enforceable - read above), and not an injury, fire, or death that destroys a chunk of your net worth. Call it a black swan. Call it tail risk. Call it "ain't gonna happen." In my industry, we call them "low probability, high-impact events." If that is the sort of risk you prefer to take in your investing, of course, feel free to do so..
Sherwin & Calvin, I originally addressed your rental risk and potential legal liability in my post above. But on this particular issue regarding financing, I agree with Chris M. It's not really a big deal on financing. It all depends on the appraiser and lender, but neither are strict, and can be easily "converted" back (this is discussed in my link above also). But in reality, some just stack boxes in areas where there are things that shouldn't be there. Others just cap the water on the shower, remove the sink faucet and cap, and/or remove toilet and cover hole, and all of a sudden, what do you have left? Some storage/basement space with rectangular objects to put things in (cabinets, vinyl rectangular enclosure with no water..) I am not endorsing this method. Just stating what some folks are doing..
I wouldn't let financing worries detract you. I would be thinking about the other liability issues above. I do some interesting things, but I don't do that.. (I would live in the "nonconforming/illegal" unit myself before renting it to someone else, though not necessarily recommending that either..)
@J. Martinor @Chris Masonhave either of you come across an active BP insurance agent that we could tag to get their input on this? It would be interesting to see how they go about dealing with situations like those we are discussing@Sherwin Gonzaleswhen they arise.
@Sherwin Gonzalesmy biggest concerns for anyone ever trying to pursue unpermitted structures/units are the health/safety and insurance risks (not to mention everything else mentioned above). Make sure you really do your diligence, and if you need to spend the hours (or dollars with an attorney) getting a true grasp of everything before you commit your money - consider it time/money well spent.
@Calvin Kwan@Gino Barbaro@J. Martin@Chris Masonthank you so much for all the feedback and advice! I really appreciate it.
My first initial thought was that I could rent the in law unit to a friend or co-worker. It would be like a house hack where I'm renting a room in my house. But I'm just thinking ahead in the future when I move out, it would be nice to have two units to rent out instead of one. But that could get complicated because all the utilities would have to be under the SFH unless I get the proper permits to separate the two units.
Nevertheless, great advice all!
Much Mahalo!
I have a duplex in Oakland with a non-conforming cottage in the back. The structure itself is all to code, but it doesn't meet the zoning/setback requirements. I use it as a short-term rental -- I would be much more hesitant to rent it as a primary residence.
BTW, Oakland city council recently eased restrictions on secondary units.
@Edward Sittlerthank you for sharing! This article is very interesting. It would be nice to know the exact new zoning/ setback requirements and other new restrictions.
@Edward Sittlerthank you for sharing! This article is very interesting. It would be nice to know the exact new zoning/ setback requirements and other new restrictions.
Here is a link to a PDF of the proposed changes that were accepted.
Awesome! Thanks @Edward Sittler!
@Sherwin Gonzalesthe illegal unit is actually a good negotiation point for you in purchasing the property. To buy it as is and rent it out as an illegal unit is inviting danger. However, if the unit was done well, then converting it to a legal unit should not be overly difficult. The caveat being that you can tell if the unit was done correctly or not. Sellers know that they are selling something that is non-conforming. Most hope to find a buyer that either does not care or does not notice, thereby passing the liability on to the next unsuspecting buyer.
In this litigious society, especially the Bay Area, it is not a question of "if" you will be sued but "when". Don't take the risk of renting an illegal unit, especially since you publicly posted the question here on BP. From a legal perspective, you basically posted a giant target on your back...
However, if the workmanship looks good, you could press hard for price concessions and then go through the legalization process. Look very closely at the mechanical aspects of the building and obvious code compliance issues. You will also need to quietly move the existing tenant in the illegal unit out to end potential liability, before you start the legalization process. Ideally, I would move the tenant out immediately. Also as @Edward Sittlermentioned Oakland is starting to take a more positive attitude toward ASU's, but you have to keep the parking issue in mind when you are considering going the legalized route.
I personally have not done the conversion process, BUT into contract on a triplex in the upper Fruitvale area last year and I researched the process in depth. We made an offer and later found out that 1 unit was illegal and pushed for a price concession. In the end I was not able to push the selling price low enough to justify the risk/conversion. There are many moving parts in getting legal, but it does not look overly difficult if you have the time and some construction knowledge.
Good luck!
-Arlen
or @Chris Masonhave either of you come across an active BP insurance agent that we could tag to get their input on this? It would be interesting to see how they go about dealing with situations like those we are discussingwhen they arise.
I don't think insurance agents really social network. I think they just barge into my office and throw business cards at me like ninja stars... kind of like new lenders and you, which is why if you're smart you avoid being in your office to avoid the ninja star barrages. I don't have that choice!
I do however have an excellent insurance agent ninja star shield that I keep handy.
If you just want to talk it over with a smart insurance gal that isn't in the bay area and isn't on BP, google/call Shantel Pilcher of Pilcher Insurance.
@Sherwin Gonzalesthe illegal unit is actually a good negotiation point for you in purchasing the property. To buy it as is and rent it out as an illegal unit is inviting danger. However, if the unit was done well, then converting it to a legal unit should not be overly difficult. The caveat being that you can tell if the unit was done correctly or not. Sellers know that they are selling something that is non-conforming. Most hope to find a buyer that either does not care or does not notice, thereby passing the liability on to the next unsuspecting buyer.
In this litigious society, especially the Bay Area, it is not a question of "if" you will be sued but "when". Don't take the risk of renting an illegal unit, especially since you publicly posted the question here on BP. From a legal perspective, you basically posted a giant target on your back...
However, if the workmanship looks good, you could press hard for price concessions and then go through the legalization process. Look very closely at the mechanical aspects of the building and obvious code compliance issues. You will also need to quietly move the existing tenant in the illegal unit out to end potential liability, before you start the legalization process. Ideally, I would move the tenant out immediately. Also as @Edward Sittlermentioned Oakland is starting to take a more positive attitude toward ASU's, but you have to keep the parking issue in mind when you are considering going the legalized route.
I personally have not done the conversion process, BUT into contract on a triplex in the upper Fruitvale area last year and I researched the process in depth. We made an offer and later found out that 1 unit was illegal and pushed for a price concession. In the end I was not able to push the selling price low enough to justify the risk/conversion. There are many moving parts in getting legal, but it does not look overly difficult if you have the time and some construction knowledge.
Good luck!
-Arlen
Great point Arlen. I was answering the OP's question, without digging into the potential opportunities into negotiating price on the illegal unit, depending on the feasibility of conversion (I don't have experience with conversion of illegal units in Oakland either).
In the Bay, because they are not uncommon, it's tough to negotiate significant discounts for the spaces.
I refused and still refuse to pay any much more than storage space for totally illegal living space. And won't operate them that way. As you can imagine, these deals were a dime a dozen during the crisis, especially in Oakland and Richmond. Because they had a lot of "hair" on them. Check with the city, and try to present whatever documentation you can find to the seller to leverage your negotiations..
Good luck!
@Amit M.I think you have might have some experience in this strategy in SF. Any words of wisdom for our young friends?
@Arlen ChouThank you for the great feedback!
I by, no means, want a big target on my back! In the future, I will be more conscious about things I post on BP or anywhere on the internet in general.
I guess there's no way to delete a post on BP. You can only update a post.
Typically, banks will not even grant a loan once an unpermitted structure is associated with the property.
Insurance will operate similarly. As noted above, even if you skate thru escrow, the first claim or problem and it's your A** on the line. Your sole defense (if it applies), is the seller did not disclose the condition to me AND it was not discovered in the title/permit search during escrow.
Deals are everywhere and if these are the only ones your finding, IMO SHOP ELSEWHERE
1- illegal inlaws are not for the faint of heart.
2- really depends on the specific circumstances wrt your risk factor.
3- are there existing low rent tenants? Hard to get them out/could complicate things significantly.
4- best to have a path towards legalization.
Not to beat a dead horse but the laws for inlaw unit in oakland are actually pretty relaxed now. See below
Has anything changed in the last year for anyone in this forum (as far as experience goes with converting an unoccupied illegal unit into a legal one in Oakland)?
I'm interested in an almost empty four-plex (legally, a three - plex). The current tenant is in a LEGAL unit.
SB 1069 and AB 2299 eased regulations and costs associated with adding units to a single or multi family zoned area in Jan of 2017. I do not have practical experience with these changes yet but in general it should make the process easier and cheaper than historically!
It's also worth noting that Oakland does not actually allow short-term rentals al la AirBnB. This PDF has been making the rounds. So trying to deal with an illegal unit that way in Oakland is also inviting trouble.
Thank you, both @Andrew Muff and @Robert Marston. Did not know that about short term rentals (apparently the owner is currently renting out the illegal unit via Air BnB).
Just received more information on this property and the City of Oakland's list of violations with the deadline to abate (April 25th). Seems like more work than initially, and that the seller is selling to avoid the headache of fixing 7 violations.
@Andrew Muff I was under the impression, if the AirBnB rental is for greater than 7 consecutive days Oakland does allow it to be rented for "Permanent Residential Activities", correct? Perhaps these changes were part of the new State legislation effective 1/2017.