How un-permitted additions can affect your new home purchase…
The topic of “un-permitted additions” frequently comes up with my buyer clients when we are looking for new homes.
Without the proper understanding of how they can affect your purchase, it can become a problem down the road – one you certainly wouldn’t want to have to deal with.
Here’s the basic concept of an un-permitted add-on:
A property owner decides to add a new room, like a bathroom, bedroom, den, or a guest house, perhaps, for personal use, but doesn’t go through the proper permitting procedures, safety inspections, and doesn’t obtain the necessary city certifications and sign-offs to make sure the work is up to code.
Here’s a typical scenario:
Let’s say an owner builds an un-permitted 4th bedroom that is 500 square feet.
A year later, he decides to sell his home through a listing agent. When the agent looks at the title report for the home, it indicates the home is 3 bedrooms, 2 bathrooms, and 1,800 square feet. When walking through the home, though, there are clearly 4 bedrooms, not 3, and the owner says the home is 2,300 sq ft.
Here’s where some agents get sneaky, and unfortunately, all too often we see this strategy in play.
When placing the listing on the Multiple Listing Service (MLS), the agent indicates the home is 4 beds, 3 baths, and 2,300 sq ft. This is intentionally false advertising to entice buyers.
There is a field on the MLS for private remarks that only Realtors have access to. This is where the agent cleverly says something to the effect of, “4th bedroom is un-permitted. Title report shows the home as 3 beds, 2 baths, 1,800 sq ft. Listing agent has no knowledge of permit status. Buyer to research and verify permit status at buyer’s discretion. Property sold as-is.”
The agent believes he has protected himself here. But on the public MLS, when buyers are using public search engine sites, such as Realtor.com, to browse for homes, this private remark isn’t seen.
This is false advertising. This is wrong.
The textbook states, “In California, if building permits were not obtaining or approved for non-original construction, the unapproved portion of the house must be identified as ‘unapproved’ in the listing.”
In our scenario, even in the private agent remarks, the agent never mentions the word ‘unapproved.’ What the agent needed to do was list the home on the MLS as a 3-bedroom, since this is what is reflected in the title records. Then in the private agent remarks and description, he could say, “The home contains an additional ‘unapproved’ bedroom.”
Why does all of this matter though?
Two reasons: Value and Safety.
A buyer’s lender will only fund their loan based on the appraised value of the home. An appraiser determines value based on the official permitted records, not the functional space.
So even though there is technically a 4th bedroom at the home, the appraiser will essentially pretend this doesn’t exist, and will come to his valuation based on the home being 3 bedrooms.
Even though the home has 2,300 sq ft of functional space, the appraiser will set the value of the home as if it were 1,800 sq ft as reflected on title.
A smart listing agent would set the list price based on a market analysis of 3-bedroom homes in the immediate area, not 4. Unfortunately, if an agent has already blurred the lines ethically in terms of their marketing, we shouldn’t count on them to price the home properly. Once in escrow, this could lead to frustrations and potential cancellation if the property appraises for lower than the list price, and if the seller becomes disgruntled and doesn’t agree to lower the price.
When I observe that a house has an un-permited addition, I disclose this to my buyers.
If they still love the home and want to place an offer on it, I will do a thorough market analysis of 3-bedroom homes in the area. At the time we’re offering, then, we’ll know if the list price is inappropriately high or if it’s just right, and we will base our offer strategy accordingly.
Say our offer gets accepted and you purchase the home with the un-permitted addition. The issue could come up again years later when you’re ready to sell the home. So long as the home remains un-permitted, technically, you’re only able to market and sell the home as a 3-bedroom and the value will always remain as such.
A buyer can obtain proper permitting, but if the work was done incorrectly, it could be a costly construction endeavor to transform the 4th bedroom into an official permitted addition. Once this happens, though, the home will get appraised as a 4th bedroom, and the value of that extra space will be utilized.
The simple fact is: If a seller hasn’t obtained the necessary permits, it means a new owner is relying on the workmanship and quality of whomever the seller used to build the un-permitted addition.
While a property inspector can give a sense of areas of concern, ultimately this still is an unknown for buyers. A buyer should be made aware of the risks of this, and should bring out any inspectors or specialists of their choosing while in escrow to make sure they are comfortable with the condition and have a complete understanding of the scenario from a safety standpoint.
Good real estate agents representing buyers will always let their clients know of any permitting issues they become aware of right away so you can adjust your strategies and approach to the home accordingly, make an informed decision, and ultimately feel comfortable and positive about your purchase.