There are many state and local laws and regulations covering land use, but what reins supreme is the law of supply and demand. If there’s enough demand for something, even if it’s illegal, there will be a supply and the demand will set its price. That’s true for stolen cars, heroin, or apartments. California and Los Angeles are coming to grips with a housing shortage and that includes getting illegal housing into the legal market.
Follow the Money
A recent New York Times article discussed Los Angeles’ illegal housing market. The average price of a single-family home in California is about $800,000. Estimates for an average rent in the city vary, but Rentcafe states the average Los Angeles apartment is about 790 square feet and costs $2,563 a month.
If you put $40,000 down on an $800,000 house, with a mortgage interest rate of 3.5%, you’d need an annual income of about $146,000 to keep up the payments (assuming you have a conservative lifestyle). If you’re spending a third of your income on rent, to afford that average apartment you should make at least $102,000.
The average income in Los Angeles in 2019 was about $68,000, according to the US Census. When people need something legal but can’t afford it, they may turn to an illegal, cheaper alternative. That explains why illegal housing in the county is so popular.
The Nearest Illegal Housing May Be Next Door
Families may build it out of necessity, others may make a business out of it, or a unit may be a needed supplement to the owner’s income. The informal housing market is a critical supply of affordable housing. Cities lack the resources to tear it all down, but they don’t want to. Where would all these tenants live?
Illegal apartments may be well built and luxurious, they just don’t comply with zoning laws. Others are poorly built fire traps that are accidents waiting to happen. They span the area’s poorest and wealthiest neighborhoods. They may create a population in an area not designed to accommodate it. Schools fill up and parking becomes sparse. Firefighters, EMTs, and police are called to homes that shouldn’t be there.
Illegal housing isn’t always obvious, given its illicit nature. Instead of building up, most illegal housing spreads horizontally. It fills what should be open space in a lot, possibly violating setback rules that are supposed to keep structures a given distance from property boundaries. Informal housing could also be in basements without enough exits.
The Path to Legality
Over the past decade, the state’s population has grown three times faster than the number of housing units. To address (at least partially) the problem, the state legislature passed new laws to increase housing density and speed up new construction. Regulatory barriers have come down and single-family housing zoning has ended for most neighborhoods.
Due to these changes, there’s a route property owners can take to legalize illegal apartments, though it may require renovations and thousands of dollars, depending on the property. Los Angeles and Long Beach have new ordinances to facilitate these changes.
The Potential Costs of Renting Illegal Housing are Tremendous
Illegal housing can benefit landlords and tenants. Tenants get lower costs because the supply of housing increases and there may be a discount due to the fact the apartment’s not legal. Landlords enjoy lower costs of creating housing.
But there are serious, potentially high costs for both parties. Tenants desperate for affordable housing may put up with a landlord’s abusive and illegal actions to avoid eviction. Tenants may pay partial or no rent after threatening to report their landlord to the city.
If the illegal unit’s not up to building or fire codes, the potential liability for you as a landlord is enormous. You may think you have insurance coverage, but if you file a claim the carrier will want to know if the structure is up to code and you obtained permits to construct or renovate the building. If the answer is no, your claim will be denied. The cost to repair damage will come from your pockets, not the insurance company.
Coping with repairs would be bad enough, but what are the consequences if a tenant is seriously injured or killed because your unit didn’t follow codes? You may not want to think about it, but it happens.
In October, 11 people in New York City drowned in illegal basement apartments. There was a sudden storm, units quickly flooded, and tenants couldn’t get out. These landlords could face criminal charges, maybe manslaughter (engaging in reckless, dangerous acts that cause a death).
Under normal circumstances, if a tenant or their guest is injured or killed because of a defect on your property, you can file a claim on your insurance policy. If you’re sued, they’ll pay for your legal defense. If the unit’s illegal, your claim will be denied.
You’ll have to pay for your legal defense (probably five to six figures) and a verdict if you’re found liable (also five to six figures) plus punitive damages if you acted illegally (depending on the facts, maybe seven figures). The alternative would probably be seeking bankruptcy protection.
We’re Here to Help
If you own illegal rental property and want to explore how you can make it illegal, or you’re committed to doing this and want legal help, call Anthony Burton. We can discuss how the process works and how we can help. Call us at (949) 244-4207 or fill out our online contact form today.
