Posted by Nate on January 26, 2001 at 15:30:02:
I have a saying… “Don’t look for trouble if it won’t come looking for you”.
This seems to me to be that type of situation. Your plan sounds good in theory, but in practice you will be “looking for trouble” in several ways. I actually looked at a house like this recently, when I was looking for my personal residence.
There are several issues at play here that I will try to summarize briefly for you.
If you do not need the rental income from the basement to make the deal “pencil out”, do not bother with telling anyone (lender included) that you will be renting the basement separately. Just do the deal as if you will be renting the main house out (or living in it yourself, if that’s the case…you didn’t say) and you should be fine for the short term. Then, figure out what to do about the basement later. (more about this in a minute)
If you cannot make the deal “pencil out” without the basement rental income, my gut instict would be to pass on the deal. Too hairy, too many potential complications on numerous levels. Probably not be worth the aggravation of getting financing, dealing with the former owner as a tenant, and the like.
You do need to be careful in buying the house out of preforeclosure and then leasing it back (even just the basement) to the owner if there is any option to repurchase the house. See other posts on this board recently entitled “USURY or CREDITOR FRAUD” for details. If you do decide to lease back, do NOT give her an option to buy. Also, be aware that you may have to evict her in the future (whyever she got into foreclosure will likely occur again) and that it can be harder to evict someone from an “illegal” rental unit, particularly when she knows it is “illegal” (as she does because she owned the house before). Even if you decide to keep the basement as an “illegal” rental unit, renting it to the former owner would probably be a bad idea considering you know she has bad credit from the foreclosure. After all, if she weren’t the former owner and just showed up wanting to rent an apartment from you, you would probably turn her down, right?
Long term, if you do get the house, there is not much benefit in trying to make the unit legal. Most cities kind of turn the other way at this arrangement. If you consider it, I would spend an hour talking to a zoning attorney in your area and try to establish what your likely costs (legal and otherwise) would be to make it legal, versus the possible costs (mainly the inability to separately meter utilities) of not doing so. You may find that the costs of converting far exceed the benefits of doing so.