Buying an Income Property with illegal units
Sometimes a buyer knowingly purchases a building with illegal apartments in it because they want the additional cash flow.
What are the down sides to do this. Read the brief article to learn more.
Illegal Units
Hi risk income! Maybe jail time awaits the greedy.
I’ve seen this happen, more than once. A buyer knowingly and willingly purchases an illegal small apartment building, say a two to four unit property. It’s illegal in that one of the units is one unit too many for existing zoning, or it does not meet building and/or fire code.
Cash flow of the building is one of the determining factors in obtaining a desired mortgage. Somehow the financing goes through; the lending institution granted the mortgage. The happy new buyer loves his little building with the positive cash flow….then it happens. There is an argument and falling out with one of the tenants. The tenant takes on a new mission in life….to bring the evil landlord to his/her knees.
This smart tenant knows that he is living in an illegal apartment, that the cost to make this basement apartment meet code would be prohibitive. He also knows that if he reports his landlord to the housing gestapo, that he will be out of a place to live. But that’s okay, because he’s on a mission against evil.
So report it he does.
In the end he simply moves to a new rental apartment, the illegal apartment is closed down and our new landlord is now receiving $1,100 less per month on his building, or $13,200 annually.
He sees the blood dripping off his P&L statement; he cannot afford to keep the building any longer. Now instead of being a triplex with three apartments generating revenue, he’s left with a money draining duplex and sells the building for less than what he paid for it.
He also has to pay those no good greedy lawyers and Realtors for the pleasure of selling his building. Our landlord has just had a bad day!
Oh yeah, the jail time thing.
If a tenant in an illegal apartment was injured or killed in the building lacking a fire retrofit certificate, that landlord could be facing criminal and civil litigation.
And all of that because he thought he could squeeze extra money out of an apartment that should not have existed.
