Updated August 16, 2026
The building still sells, but the unpermitted unit is usually valued at close to zero, and in some cases it is worse than zero because it carries risk the buyer has to absorb. A converted garage, a partitioned basement, or a bonus unit added decades ago produces real rent, and owners naturally count it in the income. Buyers and their lenders generally will not. An appraiser measures against the permitted unit count, a lender sizes the loan against the appraisal, and a buyer underwrites the possibility that the unit has to be removed, legalized, or vacated. In Los Angeles this is common enough that there is a well-worn path through it — but the path starts with knowing exactly what you have before a buyer tells you.
Pull the building's permit history from Building and Safety. The certificate of occupancy and the permit record establish the legal unit count. That number, not the rent roll, is the one everyone else will use.
Compare it to the physical unit count and the rent roll. A three-way mismatch — permits say 8, the meter panel says 9, the rent roll says 9 — is the signal.
Check the RSO registration. An unpermitted unit that has been registered and rented for years has an additional wrinkle: it may still carry tenant protections even though the unit is not legal. Illegality does not automatically extinguish a tenancy in Los Angeles.
Look for the tell-tale conversions. Garages, basements, rear structures, subdivided large units, and enclosed porches are where this almost always lives.
The appraiser excludes it. Appraisals are based on the legal unit count and legally habitable space. Income from a unit that does not legally exist generally does not support value.
The lender sizes the loan off the appraisal. Which means a buyer relying on financing cannot pay for that income even if they believe in it. This is the mechanism that turns "extra rent" into "no extra value" — it is not the buyer being difficult, it is the capital stack.
The buyer prices remediation risk. Legalization is possible in some situations and expensive; removal means losing the unit and potentially relocating a protected tenant; doing nothing means carrying the exposure.
Cash buyers behave differently. Buyers without financing sometimes do pay something for unpermitted income, because they are not constrained by the appraisal. That is one reason the buyer pool matters so much on these buildings.
Legalize it. LA has pathways for converting some unpermitted spaces into legal units, including the ADU framework, which has been the most productive route in recent years for garage and accessory conversions. Feasibility depends on the structure, setbacks, parking, and whether the work meets current code. It is a real option and it is not fast.
Remove it and restore the space. Clean, but it means eliminating the income, and if the unit is occupied by a protected tenant, it means a no-fault termination with the relocation obligation that goes with it.
Sell as-is with full disclosure and let the buyer decide. The most common outcome. The seller discloses precisely, prices the building on the legal unit count, and the buyer forms their own view of whether the extra space is upside.
Unpermitted units are material. So is a pending or prior code case about them. Sellers occasionally reason that the unit has been rented for thirty years without an issue and therefore is not really a problem — that reasoning does not survive contact with a buyer's attorney after close. Disclose the permit history, the physical unit count, the rent roll as it actually is, and any correspondence with the city. A buyer who is told clearly can price it. A buyer who discovers it has a claim.
Pull your permit history before you list, reconcile it against the physical building and the rent roll, and decide deliberately whether to legalize, remove, or sell as-is with disclosure. Then price the building on the legal unit count and treat the unpermitted income as upside you are not charging for. That framing is honest, it survives the appraisal, and in practice it produces a better result than putting the inflated income in the marketing package and defending it through diligence.
Do tenants in an unpermitted unit still have rights?
Frequently yes. In Los Angeles, tenancy protections can attach to occupied units even where the unit itself lacks permits, and removing such a unit can trigger no-fault relocation obligations. This is a question for a landlord-tenant attorney on the specific facts — not something to assume either way.
Can I just not mention it and let the buyer find it?
No. It is material, it is discoverable through the permit record, and non-disclosure turns a price discussion into a post-close claim. Every buyer of scale in this market pulls permits.
Will the extra rent count if I have a cash buyer?
Sometimes, partially. A cash buyer is not constrained by an appraisal and may assign some value to the income, particularly if legalization looks feasible. Expect it to be discounted heavily rather than valued at the same cap rate as the legal units.
Michael Sterman is Senior Managing Director Investments at Marcus & Millichap.
Thinking about selling? Get a no-obligation evaluation on your building.
Request Free Evaluation →