First, Check Out the Town Zoning

Your first move should be a call to the town zoning department. In most subdivisions, zoning laws limit houses to single-family occupancy. That doesn’t mean you can’t take in a boarder or two, although that may violate local ordinances. If the tenant is a relative, you shouldn’t have a problem with adding an in-law apartment. Most zoning departments, insurers, and mortgage lenders will go along with that kind of addition.
But if you want to create an apartment and rent to a nonrelative, check the zoning first. If that is prohibited, you may be able to get a conditional use permit or variance. This entails going to the zoning department and filling out the paperwork. There may be restrictions on how utilities are set up as well as inspections for building code compliance. A hearing may also be required to give the neighbors a chance to protest.
True, this is a more expensive and time-consuming way to go, but in the end it’ll be worth it. Some homeowners ignore zoning rules because the city or county is lax in enforcement, and they know they can get away with it. They possibly can for a while, but it usually comes back to haunt them. Administrations change, and all properties are eventually put up for sale. If they sell or refinance, a mortgage lender may want to see the permits. Or the insurance company may deny a claim if you’ve violated the policy terms and your home is now a pile of ashes.
Also, if you’re buying a home with an apartment, garage, remodeling, or addition, you’ll want to verify that building permits exist and the house is zoning compliant. Otherwise, you can end up with fines and expensive upgrades. You can also get extended title insurance coverage at closing that insures the previous owners have complied with all zoning and building permits.
Brandon and Julie had this problem when they made an offer on a home with a basement apartment in a great neighborhood near a university. The apartment had been rented out for years, and several other homes on the street also had basement apartments. No one questioned whether it was zoned for a rental. However, when the appraiser checked the zoning, she found it was zoned for single-family homes and adjusted her appraisal down.
Although the city zoning department said it hadn’t and wouldn’t enforce the zoning in this case, it still wouldn’t approve the house and apartment for duplex zoning.
This created a sticky situation. As a single-family house, its appraisal came back $12,000 under sales price. The sellers were upset because now the genie was out of the bottle and the home couldn’t be sold as a duplex, lowering the value considerably. And no mortgage lender would finance an illegal duplex. The buyers, rather than walking away from the deal, offered to buy at the reduced price, and reluctantly the sellers accepted.
The bottom line is that before you buy a house with an apartment, check the zoning and verify any required permits. It can save you costly tax, insurance, and zoning headaches later on.