Bought a triplex that was legally a duplex. 41k to find out.

The appraisal told you on page one and it cost 41k anyway. That's the part I'd sit with. A residential appraiser describing a marketed triplex as two units plus finished lower level is not a clerical style choice, they're reporting what the assessor and the record support. I now treat any mismatch between the listing unit count, the appraisal unit count, and the tax card unit count as a stop-work condition. Three sources, and they have to agree before diligence continues.

I don't know enough to argue with anyone here, so a question. How does a unit like that get rented for years with no one noticing? Was the previous owner doing something wrong or is it just that nobody checks until you ask for a permit?

@ember mostly nobody checks. Enforcement in most places is complaint-driven or permit-driven, and verity walked into the permit counter and self-reported. That's the whole mechanism, and it varies enormously by city.

Verity, the refinance failing is the loss inside the loss. A 2-4 unit residential refi sizes off the income the property can legally produce, and the moment your third unit came off the rent roll your coverage was gone at any rate. Confirm sizing assumptions in writing with a lender before you count on an exit refi, because the purchase appraisal is not a promise about the next one.

6-foot-11 with a slab under it is a no. I've priced that twice for clients and both times the answer came back the same, you're not lowering a slab in a 1920s foundation for 34k, you're doing it for a lot more and possibly discovering the footings are shallow. The 34k number you got was optimistic, so in a way the deal saved you from a worse version of itself.

This is the exact thing I over-analyze about and it turns out that was the correct thing to over-analyze about.

I spent six months researching and it never occurred to me to ask a city whether a unit that exists is allowed to exist. Adding it to the checklist above almost everything else on the checklist.

The relocation payment stands out. You paid 2,400 and returned the deposit rather than fight, and I think that was the cheap decision. Requirements around displacing a tenant from an unpermitted unit differ by city and some places have real relocation ordinances, so anyone reading should ask a local attorney rather than assume 2,400 covers it.

The seller disclosure said three units, and that is the part I keep coming back to. Does that not do anything at all?

@juniper disclosure content and what a seller is on the hook for varies by state, and a seller saying "three units" is usually stating what they believed and rented. It isn't a certification from the city. That's the gap verity is describing. Whether there was any recourse is a lawyer question in every state.

875 for a garden-level unit against 1,150 and 1,100 upstairs. That spread was the building telling you something too. Cheap unit, separate entry, older building, that combination is where I'd now expect the permit question.

I'd name the cause slightly differently than @sextant. The appraisal was the last warning, not the first. The cause was underwriting a 6 cap on 37,500 of gross without ever asking which portion of that gross was durable. Take out the 875 and you paid 388k for a duplex doing 27,000, which is a 4.1 cap, and I don't think you'd have written the offer at that.

@arbor fair, and both versions point at the same fix. Underwrite the property twice, once on all rents and once on only the rents you can document as legal, and see whether you still want it at the second number. If the second number kills it, the deal was always the third unit and you were buying a permit question with a mortgage attached.

One more thing worth putting in writing for whoever finds this later. Verity's insurance carrier could have been the next problem if a claim had originated in that lower unit, because carriers ask about unit count on the application and price it. Nothing happened here, which is luck. Ask your carrier what unit count is on your policy and compare it to what you're renting, and get the answer in writing.