In-law units, ("in-laws", for short, but properly called "secondary units") are common all over the Bay area. The fact is, the vast majority of these in-laws are not legal. 

A legal, secondary unit is one that has gone through the permit and variance process and has passed all requirements. An illegal unit is one which has not been processed and/or approved by the proper authority, be it city or county. 

My recent survey of all Oakland residential listings in the Multiple Listing Service (MLS) shows more than 5 percent are presently being marketed as having in-laws. It is disturbing to see how many of these in-laws are touted as a positive feature without any caveats.

This article explains what buyers and sellers need to know when looking at a second "apartment" in a single family home located in a residential neighborhood. I have found many buyers, sellers and agents downplay the importance of clarifying this issue. In most  cases, the possible consequences of owning or transferring title to a home with an illegal unit are not fully understood.

Problems with neighbors

People spend their hard-earned money to buy a home. Invariably, buyers prefer lower density locales to more populated ones. They are seeking peace and quiet. In general, the lower the density the greater the desirability and the higher the value of the properties.

When people buy, they rely on single family zoning as a component of value. If this reliance is shattered by repeated exceptions to the rule, there can be uneasiness about the stability of the area.

According to a City of Oakland building inspector, Oakland  frequently receives complaint calls from irritated neighbors about illegal rentals. Complaints are made because more people in a neighborhood means more noise, traffic, pollution, and increased parking problems.

Another reason why homeowners fear the intrusion of renters in a residential area is the belief that tenants do not have a vested interest in maintaining the property.  Although this is often not the case, the concern still exists. This is less of a factor, of course, if the home with the in-law is owner occupied.

Once city authorities receive a complaint, they are compelled to inspect the building. The owner is usually told to apply to convert the unit to legal status. For various reasons, the application may never be made or, if made, the approval is not granted. 

In either instance, the city inspector will then require the kitchen to be removed; usually this means eliminating  the stove. The city then views the apartment as "storage space." If city requirements are not followed, substantial fines can be levied. 

Rental income

A buyer may buy a specific home because he plans to pay part of the mortgage with rental income from the in-law apartment. He may have this expectation despite the fact that his lender appraised it as a single family residence. 

The buyer could be giving  more credence to the way the property is being marketed (as having an in-law) than to the lender's definition. This is why the buyer may later feel the property is worth less to him because it cannot produce the expected income.

Nondisclosure about having an illegal rental (usually with renovations done without permits) can be one of the causes of action by buyers against sellers and brokers.

Insurance coverage

What if there is a fire in the rental unit? Will the owner's fire insurance cover property damage? According to a local insurance agent I consulted, possibly not. Failure to pay on a claim would be even more probable if the fire was caused by a tenant's carelessness either with cigarettes or children playing with matches.

This scenario could also nullify the owner's insurance coverage if his insurer had not been notified of the rental. Even more likely, the insurer would not have been willing to write a policy at all for a home with an illegal rental unit. Check this out with your insurance agent if you own, or are contemplating owning, a residence with an in-law. 

An even worse set of circumstances would be a fire or accident in the apartment where someone was seriously injured or died.  Would the owner's regular or extended liability coverage protect him? If his insurer did not know about the rental, the answer could be no. It is easy to see how this unfortunate event could lead to an expensive lawsuit with no insurance protection for the owner.

Tenant's rights issues

This can be a sticky wicket, depending on where the home is located and your relationship with the tenant. All tenant issues should be fully explored and codified in writing. Different communities have varying laws and interpretations regarding tenants. Laws also change over time. In some cities, it might be wise to consult an attorney experienced in tenant/landlord law before finalizing a purchase contract. 

Family members

If someone from your family lives in the illegal apartment, it could be fine—until someone complains. This will lead to a visit from the city inspector. If he or she declares your apartment can no longer be used in this way, what will happen to your relative?

Final thoughts

Although often not considered, the risks of selling or buying a house with an illegal in-law  are substantial. Ignorance of the implications may not prevent serious problems for you down the road. In Part 2, the final article of this series, I will review local rules and regulations for a legal secondary unit and how a good agent can protect you.

Related Articles: Outlaw In-Laws, Part 2; What Is A Bedroom?, How Important Are Permits?;  Buyers’ Do’s and Don’ts, Part I and Part 2; Sellers’ Do’s and Don’ts, Part 1 and Part 2; and How To Interview Agents, Part 1, Part 2, Part 3, and Part 4