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Property I am looking at has 1000 square feet illegal granny unit. Main house has 4000 square feet.

If I would buy property as-is and later attempt to legalize the granny unit as living space, then

  1. would my property taxes be reassessed? How to estimate by how much?
  2. could I be on hook for any penalties?
  3. anything else to be concerned about when buying such property?

The granny unit as of now shows up as "work shop" on blueprints and county assessor has not counted it in the legal living area.

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    What is a "granny unit" and what is illegal about it? – Hart CO Sep 6 '20 at 2:59
  • @Hart granny unit is basically ADU. It is illegal in this case because built without permits. And county would like to classify it as living space to impose higher property tax rate (than garage or workshop). – user389238 Sep 6 '20 at 6:24
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    @HartCO Wikipedia: Secondary suite – Flux Sep 6 '20 at 9:05
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Risks:

  • The local government discovers it and wants it removed. Now.
  • The cost to bring it up to code is a lot more than you expect.
  • The procedure for approval may require you to get permission from neighbors, and one won't agree.
  • It is impossible to get approved because it was built to close to the property line, or it is too tall, or too large, or the zoning forbids it.

In some jurisdictions in the US, the sale of the property triggers a reassessment. So does the issuing of a building permit. To see the impact, you might have to research other ones in your area, or ask your real estate agent for examples.

I wouldn't go forward with the deal until the unapproved construction has been corrected. If you go forward all the risk is on you.

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    I'm not clear on what an illegal granny unit is, but if it's an addition done without permits then it would be fairly customary for buyers to either get a variance or have seller get it properly permitted, sale conditional on a satisfactory resolution. – Hart CO Sep 6 '20 at 3:04
  • @HartCO: Yeah, it's basically an addition (or sometimes separate structure on the property). The thing is that California recently enacted a batch of laws aimed at encouraging such units, making it easier to build them or get them retroactively approved. But these state laws interact in complex ways with local laws, so the exact way to handle the situation can vary from place to place within California (which is what I've said in my "answer", such as it is). – BrenBarn Sep 9 '20 at 22:57
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This isn't much of an answer, but: the recent California law changes dealing with ADUs are new and their interaction with local law (building codes, etc.) is complex. The ramifications of the changes have yet to be fully fleshed out in practice. A lot can depend on the extent to which individual cities and counties embrace the new laws and try to encourage ADUs versus resisting the laws and trying to restrict ADUs as much as the state law will allow them to do so. It will also likely depend on "how illegal" the unit is. If it is up to code in terms of the actual construction and was only illegal due to zoning (i.e., too many units on the property), that's one thing, but if the construction itself has issues (i.e., it's not built to safety standards for habitable space) that could be much more of an obstacle.

You'd be well advised to seek out someone with expertise in local real estate matters (e.g., an attorney, a real estate appraiser, or some kind of planning/permitting consultant if you can find one you trust) who can give you an accurate sense of the situation in your area. Or, even easier, just tell the seller you're not going to buy the property with these legal encumbrances and they'll have to legalize it themselves or you'll just walk away from the deal.

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  • The property taxes are the biggest wildcard risk that I am not sure I fully understand. Basically one solution could be to ask seller to legalize ADU before I buy. Then in CA my property taxes would be assessed on that sale price. However, if I buy as-is and later legalize myself, then living square footage on file with assessor would increase by ~25%. Would my property taxes also increase by ~25%? – user389238 Sep 9 '20 at 23:13
  • @user389238: There's no simple answer to that. Some might consider that the value of the main house was diminished by now being crowded by an ADU. I would say the simplest option is to do what you just mentioned: tell the seller to get it worked out and then negotiate the purchase once the unit is fully legalized. (I meant to mention that in my answer but forgot, just added it now.) – BrenBarn Sep 9 '20 at 23:18
  • And risk losing the property because another buyer is willing to take the risk (buying As-IS). I would pay a license contractor that is knowledgeable of electrical, building and plumbing code to check on the quality of the ADU construction. I would look at the electrical subpanel and any 240v outlet setup. – Programmer66 Sep 10 '20 at 3:40

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