[quote author="jwlam" date=1248147901]Knife Catcher - as the new owner, you'll be legally responsible for the illegal structure. You said its a detached guest structure. There are a couple of things you can do: (1) try to legalize it by submitting plans. It's unclear whether this would be sufficient without knowing the physical layout of your property and the City's zoning code. However, it'll probably be costly because in order to legalize a structure, you'll need to expose some of the structure so they can inspect. This can be costly and cost prohibitive; or (2) You can demo the structure.
If you don't legalize or demo the structure, the City can do several things: (1) bring criminal action against you for violations of the municipal code, (2) issue you civil citations ($100, $500, and $1000 per citation for each successive citation), (3) get a civil injunction to order you to abate the illegal condition on your property, or (4) seek a warrant to enter on your property and demo the structure (this is the least likely unless there is an immediate threat to public safety (i.e., its about to collapse)).
Also, if you don't legalize the structure, the City can also deny you any other permits you might need for other things, such as building permits, variances, etc.
Hope this helps.</blockquote>
Now, keep in mind, all that will only happens if the city finds out about the unpermitted structure, which may never occur. Or it could happen tommorow. Some cities have inspectors who go looking for unpermitted stuff, or peruse satellite photos, but that's fairly unlikely. More likely is they find out because somebody tattles, or they go out to do something else and find the structure. That is, you file plans to build a pool and they see your unpermitted guest house, or you piss off an ex-girlfriend or neighbor who calls the city on you.
It's also unlikely that they will fine you prior to giving you siginificant notice to correct the problem-but correcting the problem may mean tearing it down. One thing about unpermitted structures is that they have to be brought up to today's code, not the code when they were built. It's possible it would pass when it was built two decades ago but wouldn't today.
It's also likely that if the person who built the structure didn't bother to get a permit, he might have done a lousy job building it as well. Insurance probably wouldn't cover damage caused by the unpermitted addition-if there was an electrical fire due to substandard wiring, you probably would be screwed.
If I was offering on a property with unpermitted additions or structures, I would value the propetry as if the structure didn't exist, minus tear down costs (so less than if it didn't exist). (I would tend to avoid them in general, however.)