I purchased a 2 family house in Peekskill, NY. The first floor has a full 1 bedroom apt , 2 bedrooms in the second with kitchen and living room, and 3 bedrooms and a bathroom in the attic. After totally rehabing (new floors, windows, walls, roof, paint, 2 new kitchens, bathrooms, heating and electric) the town comes in and tells us to remove sheetrock , heating, electric and bathroom from the attic because it was illegal. Now mind you the house was built around 1920’s and the attic was being used all along this time. We received a conditional approval from the Dept of state requiring a fire escape as well as a sprinkler system to legalize the attic living space (cost 25K) but by this time we ran out of money. The house was put on the market but without the finished attic living space we have no takers. It reduced the total living space by a third (we managed to loose a floor) Now I am in foreclosure due to non payment and looking at a large monetary loss. The house appraised at $505k in November, I owe $469K with fees. What are my options? What are the legal consequences. I am open to any suggestions 
Did you have the home inspected before you bought it?
Did the house appraise at $505 with the second floor included?
How did the town find out about the attic?
What kind of lending program did you use?
Whats the monthly payment?
the house has two loans. Approx payoff for the first is 365k and the second 100K. The house appraised at 505k without the third floor (attic) included. When the house was inspected for purchase there were no violations present they only found out because some workers left out some garbage and the inspector came in. Monthly payment is 4000.
Well first of all I would be contacting the inspection company that did yours and threatening legal action. Unless yours wasn’t qualified, or state is much different it’s their job to find things like that.
What you need to be doing is trying to get someone to Short Sale with you. Do you know what a short sale is? I’m going to assume you do. Look in your local newspaper and find ads that say “We buy houses”, normally they are all SS and will purchase properties behind like yours. Do a google search for terms like “Avoid Foreclosure”, its going to take allot of work and phone calls to find someone who will take the deal but it can be done.
Couldn’t you try and either: refinance it and rent out the units immediately, (any room to renegotiate with the lender/s for time-if you can make it to late spring you would probably have more potential buyers?)