DEAR BERNICE: We purchased our home a number of years ago. The previous owner converted the garage to mother-in-law quarters without a permit. It has a stove, refrigerator and a separate bath. Our agent is telling us that we have to convert it back to a garage. Is this really necessary? –Wanda B.

DEAR WANDA: This is a very difficult situation. The answer to your question is "maybe." Please investigate the following issues.

DEAR BERNICE: We purchased our home a number of years ago. The previous owner converted the garage to mother-in-law quarters without a permit. It has a stove, refrigerator and a separate bath. Our agent is telling us that we have to convert it back to a garage. Is this really necessary? –Wanda B.

DEAR WANDA: This is a very difficult situation. The answer to your question is "maybe." Please investigate the following issues:

1. Check the permits on the property. It’s important to know whether a permit exists for the garage addition. For example, if there is a stove or plumbing, were the proper electrical and gas permits pulled for those installations? When we had a water heater that went out, the company that installed it pulled the permit for us. We didn’t have to do anything.

2. Depending on your location, not having a permit can mean big trouble. Some places have no building code, no permits and no inspections. You are free to do whatever you choose. On the other hand, if you live where they enforce building codes, not conforming to the requirements can have serious consequences.

To illustrate, I’ve seen building inspectors in Los Angeles force owners to convert their beautiful garage conversions back into garages. The primary reason is that the code requires a certain number of covered parking spaces. If the property violates the code, the city has the power to force the owner to convert the property back so it does conform to code.

The owner could apply for a variance, but those can be difficult and costly to obtain. In fact, the worst case I ever heard of was a woman who expanded a 1,200-square-foot house to more than 4,000 square feet without a permit. The city required her to demolish all the work she had completed.

3. Check the zoning. If you are zoned for single-family residential on your lot and your garage conversion has a kitchen and bath, this may be considered a second unit. If you’re not zoned for two units on the property then the city can demand that you return the property to a single-family residence.

4. Was a permit required at the time the property was improved? If the building laws changed after your conversion was made, you may be grandfathered in based upon the old code requirements. The challenge is what happens if there is damage to the structure. In one case, there was a duplex on a lot that was too small to have the required parking. When the property was damaged in an earthquake, the city would not allow the owners to rebuild the duplex — all it would permit was a single-family residence.

5. Was the work done to code, even though a permit was not obtained? Sometimes non-permitted additions are done to code and can be eligible for a permit. If the changes don’t meet code, there is a much higher probability that the city will require you to change it back.

6. Disclose, disclose, disclose. Regardless of your decision, you must disclose the facts in writing to your buyer. Converting the current in-law quarters back to a garage may lower your property value or make it harder to obtain a price sufficiently high enough on the appraisal to close the transaction. …CONTINUED

Bottom line: Investigate carefully; see what risks are involved; and whatever you do, disclose the truth about the property to all prospective buyers.

DEAR BERNICE: I was trying to get into real estate by buying foreclosures. I personally don’t have the cash or the credit, but I have investors who will pay cash if the property meets their criteria. This has been hard to do. Is there a way you can help me? I’m trying to make a living at this, but so far it’s not working. –Larry T.

DEAR LARRY: This may sound harsh, but you probably should be glad that you didn’t find anything for your investors. The reason? Locating properties, discussing the price, and being paid for doing so normally requires a real estate license. If you are not licensed, stop engaging in this activity immediately. To see how serious the penalties are for acting as an unlicensed agent, visit the Web site of your state’s real estate regulatory agency.

In some states it is legal for an unlicensed individual to receive a referral fee. In many other states, however, only licensed individuals can be compensated. Even if this is legal, you have a host of other issues. You could tell an investor about a property, but unless you have a signed referral agreement the investor has no obligation to pay you.

If your state does allow referral fees and you are unlicensed, you may want to refer the investors to a real estate agent. Be sure to get a signed referral-fee agreement from the agent.

Another issue: How educated are you in terms of investments? Do you understand how to calculate vacancy factors? Do you know how to evaluate a property’s potential in terms of appreciation vs. cash flow? If you are not familiar with these terms, the first step is to get educated. There are numerous books on this topic.

Sometimes an investor will take on a partner provided that person can do some kind of work to upgrade the property. You earn a piece of the profits by the "sweat equity" that you put into fixing up the property.

If you’re serious about getting into real estate, you may want to obtain a real estate license. That way you can be legally compensated from the commission. Until then, avoid engaging in any activity that requires a license.

Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of "Real Estate Dough: Your Recipe for Real Estate Success" and other books. You can reach her at Bernice@RealEstateCoach.com and find her on Twitter: @bross.

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