A company connected with controversial developer Frank Vellar may have to demolish two million-dollar mansions built on the Illawarra escarpment, after an admission from Wollongong City Council administrators last night that the homes had been built in protected bushland where residential development is banned.

The grand Corrimal homes were built by Mr Vellar's family company Vic Vellar Nominees, however Mr Vellar was not involved with the company at the time of their approval.

Vic Vellar Nominees maintains the dwellings' location was approved by the council.

In 1993 the company struck a deal under which the council would rezone two small spots close to the road as 7b conservation zones, making construction there legal.

The homes however were built in the prohibited 7a zone.

After the council was sacked in March this year, administrators Gabrielle Kibble, Col Gellatley and Robert McGregor planned to give the land an E3 zoning - making buildings legal - but backflipped after a community outcry.

In a last-minute decision made at last night's council meeting, the administrators decided to leave the Vellar land zoned 7a, which means the mansions still have no legal status.

Speaking after the council meeting, Mrs Kibble would not rule out possible demolition of the buildings, pending the outcome of an investigation into the matter.

"There are substantial penalties, including demolition, but we are not making that decision tonight," she said.

"This happened to be a set of circumstances which were, I hope, completely unique."

Complicating matters is the revelation that the council file for the DA to build at least one of the houses has been defaced and documents are missing. Neither of the mansions have been lived in.

Dr Clare Leabeater from the residents group, Wollongong Against Corruption, said that significant public money had already been spent and would need to be spent on flood mitigation works downhill from the Vellar site.