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.
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.
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
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.
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.
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.
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?
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.
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