Non-Compliant Basement Apartments Could Be Financial Sinkholes

The prospect usually sounds attractive: buy a home, rent out the basement and watch your mortgage whittle down to nothing faster. But if the unit falls on the wrong side of the law, making an offer on a property could easily morph into a legal nightmare with a bad return on financial investment.

Is The Unit Even Legal?

One of the first issues that a buyer needs to find out is whether a property's secondary unit is permissible. Municipal zoning may specify granular details regarding what's legal and what's not for in-house rental suites. Some municipalities may even ban them altogether. The prospective unit needs to pass this basic test before even beginning to move further down on the buyer checklist.

If local laws allows for the existence of the rental unit, the next step is to check whether the unit is up to par with building codes, fire codes and electrical safety codes. Some municipalities provide certificates confirming a unit's compliance. Buyers can also request the seller to provide permits obtained before the unit was constructed.

The Risks Of Renting Out An Illegal Unit

If the apartment was built without the right zoning, code and bylaw checks, be sure to obtain a lawyer's advice. Buyers need to be aware of their options, potential legal problems and the possible financial consequences.

If discovered, an illegal unit could be ordered dismantled by the municipality. The owner could face fines, orders to legalize the unit or in extreme cases, possibly even jail time. The home insurer may refuse to approve claims for incidents involving the illegal unit. If that happens, the buyer may be on the hook to cover a tenant's costs for injuries and property damage.

When looking for a property with a basement or in-law suite, work with a registered real estate agent experienced in these properties and who is also aware of your after-purchase plans. Seek the advice of a real estate lawyer to navigate code and by-law issues and to ensure the addition of appropriate conditional clauses in the Agreement of Purchase and Sale.

In short, when considering a property with a secondary rental unit, get your legal ducks lined up before, not after, making an offer.

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