What do appraisers do when there are no permits on an addition?

Real estate isn’t always black and white. What I mean is it’s rare to have one short standard answer to fully satisfy a question. The truth is an answer can vary depending on the property, location, or who you ask. Enter a lack of permits. How do appraisers handle it when there are no permits for an addition? Is it possible for a non-permitted area to be included as living space in the appraisal?

no permits on addition - by sacramento appraisal blog - image purchased and used with permission

I get asked this question almost every single week, and I’ve broken down my answer into four major parts. I hope this helps.

  1. Difference among Appraisers: First off, there is a spectrum for how appraisers respond to a lack of permits. Some appraisers take a hard-lined stance to say, “If there is no permit, there will be no value given to the area because it is illegal.” But other appraisers might take a different approach to discover how the market responds to the lack of permits. In the latter scenario, the appraiser is asking: Are buyers willing to pay more or less for the home because of the addition? In this case the best way to support an adjustment for the addition would be to find comps with a lack of permits. Of course there is a fat chance of actually finding comps, so an appraiser has to really exercise caution about counting the area as square footage. Ultimately a lack of permits does tend to carry a stigma for buyers, which causes many buyers to avoid the property. However, at the same time buyers are often still realistically willing to pay something extra for the addition. This is one reason why some appraisers might give a non-permitted area some value in the report (but the area may be considered as storage instead of living space).
  2. no permits on addition 2 - by sacramento appraisal blog - image purchased and used with permissionQuality: The quality of the addition is going to be a huge factor in whether buyers pay more or less for an addition without permits. Does it feel like the rest of the house? Does it have a real use? Does it have a permanent heat source? Is it something buyers actually want in the neighborhood market? Is the workmanship decent or shoddy? Buyers may also consider how much it would cost to get the area permitted.
  3. Depends on the Issue: If there is something minor that was added without permits (like a covered patio), it’s probably not cause for appraisers to start waving the red warning flag. But if there is something very significant that was done without permits, that’s a different story because it can deter buyers from wanting the house. For instance, I recently did some consulting for an agent for a property that had a non-permitted addition that increased the size of the house by 60%. After research it was my sense that the market would pay something more for the addition, but I still was not willing to say the area should be counted as square footage. In this case the addition was simply too much of a change, and it was bound to be a major marketability issue for a buyer obtaining a loan (see point #4).
  4. Loan Problems: Some lenders will not loan on non-permitted areas, and they ask appraisers to not include any non-permitted area as square footage. Other lenders will loan when there is a non-permitted addition, but they ask appraisers to consider how a lack of permits impacts value. Usually in the latter case the lender wants the appraiser to say something to the effect that the addition was done in a professional workmanlike manner – despite a lack of permits. An appraiser really isn’t licensed to say something like that, but lenders still try to get a definitive statement out of the appraiser nonetheless.
  5. Other: What else would you add? I’d love to hear any stories, points, and comments below.

Loan Officer James Clark with New Penn Financial says the following:

james clarkUnpermitted Additions are a big grey area when it comes to financing. There are so many different factors and people that come into play that make them difficult. Because of this many lenders will just say no. I have seen unpermitted additions obtain financing, but only if the appraiser is well qualified and writes a good report as to why. The appraiser will have to sell the reason to include it, and most of the time you will never get the full square footage value for the addition. Questions to ask when you have a property with an unpermitted addition: Does it make sense? Does it conform to the area? Does the addition actually add value to the property? Does it look like the rest of the house, or can you tell it was an addition? So be nice to the appraisers. I can say if you want the unpermitted addition to count for value or qualify for financing, it will come down to what they say in the report.

Five things to consider when there are no permits:

  1. Get the area permitted before listing it on the market. Then be sure the appraiser sees a copy of the permit (that has been signed off). A permit ensures the work was done to minimum building standards, and everything was done correctly.
  2. Just because there are permits doesn’t mean the market is going to pay big bucks for the area. For example, a garage conversion could technically add 400 extra square feet to the house, but taking away the garage is often a negative for value. A property with a conversion is not necessarily instantly more comparable to a house with 400 additional square feet. It’s probably better compared with other similar-sized homes that also have conversions.
  3. Just because an addition was added with permits does not make it living space. For example, an enclosed patio might be fully permitted, but it’s probably not going to be counted in the square footage if it doesn’t feel like the rest of the house, have the same quality as the rest of the house, and doesn’t have a permanent heat source.
  4. If you know an area is not permitted, try to provide the best possible information to the appraiser about when the area was added, who built the area, how potential buyers responded to the extra space when the property was listed, and even how much it would cost to permit the area (if you have that research).
  5. If you’re considering doing work without permits, realize you are signing up for some appraisal and loan headaches. A lack of permits is a good way to potentially kill a deal and/or harm your property’s marketability.

As you can see, there is much to consider when a property has a non-permitted addition. Not every appraiser will view the issue the same either.

Question: What else would you add? I’d love to hear your take and any stories.

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Comments

  1. says

    Have a listing coming up with a garage that has been converted to two bedrooms. Quality of workmanship is quite good. Both bedrooms have a closet and central heat and air. The bedrooms have been integrated into the home quite well. The area leading to the bedrooms has central heat and air, as well. The property is located in an area (Antelope) with a high demand for multi-generational housing flexibility. But, no permit. What say you sage one?

    • says

      Scott, thanks for checking in. It’s always tricky to figure out what a garage conversion is really worth. In my mind the key is to let the market speak by finding sales with conversions already in place. In an ideal world there will be some conversions that do not have permits, but that’s probably a slim chance. If you don’t have non-permitted conversions available for comparison, the next best thing is a converted garage that was done with permits. Will the market see this property as a larger-sized home, or will buyers view the property as more competitive to a smaller-sized home in terms of price (but with a converted garage / no garage space)? The sales will speak. I know I ran into a sales at 5416 Wooden Glen Pl last week while doing an appraisal. This one has a converted garage, but it also has a larger-sized lot, and may have been a residential care facility (not entirely sure). MLS states it was done with permits. I wish I had an easy answer for you, but let me know what you find after poking around a bit.

  2. says

    Well written article. A couple of additional points: Oftentimes it is not the appraiser who determines how an unpermitted addition is reported. Many, if not most, investors/lenders have specific guidelines that the appraiser has agreed to follow as a condition of accepting the assignment. That said, it is up to the appraiser, back by solid market data, to prove (or disprove) the value of an unpermitted addition. A smart homeowner or realtor will do what they can to help out rather than say ‘it was that way when I bought it’. #appraisal

  3. says

    Great post, Ryan! I think I talked to you about this couple of months ago. I bought a house from the auction (sight unseen) not realizing that the third bedroom was in the garage and the conversion was done without permit. I sold it but the appraiser did not count the square footage as living space, which is exactly what you told me. I was lucky on this one. Lesson learned!:)

    • says

      Thanks Jana. Glad that one worked out for you. It can really change the value when all of the sudden one “bedroom” doesn’t count in the square footage any longer. I’m glad you lucked out on this one. Congrats on getting the deal done. 🙂

  4. @AnneGraviet says

    Hey Scott & Ryan! I used that 5-bed house in NH as a comp for a BPO yesterday cuz my Subject had a converted garage. I wrote that, imo, its DOM suggests it’s overpriced 🙂

    I think it’ll be a tough sale because its such a rare bear and not sure many multi-generational families can afford to purchase, that’s why they’re living in a multi-gen home in the first place, kwim?

    • says

      What a small world. Thanks Anne. DOM certainly can tell a compelling story. I think your comment underscores the importance of finding several garage conversion sales so we can really get a sense of the market. Only having one sale is pretty limiting. We all know more data points tend to build a stronger case for value. Moreover, one sale doesn’t make or break a market, and one sale doesn’t necessarily reflect the market either.

  5. says

    Lots of great info. there Ryan. I started doing an appraisal on a house once that did not have permits and after the lender found out about it (before I finished the report) I had to quit because they said it would not be insurable. One think that concerns me is if lenders are looking for the appraiser to say it is ok. I think this is way to much liability for us. If something were to happen, such as a fire due to electrical problems or similar situation, I am sure the lender would come back to the appraiser because they said it was ok. Appraisers are asked to take on way to much liability in this regard. Just my two cents. 🙂

  6. Bryan lynch says

    I think the key aspect of talking about unpermitted additions or conversions is to use phrases like “appears” and remind the lender of the scope of work (if properly described) and remind the lender that you are not a qualified professional or licensed contractor and recommend the client to consult with a qualified professional in the same paragraph.

    The lenders are more involved in guiding the appraisers with their requirements.

    I’ve found many unpermitted additions seemly have value in rhe market as long as it conforms well to the remaining dwelling. The Question is how much? On the opposite end, I see issues with large homes with garage conversions thus creating a very large home with no garage which likely negatively impacts the home.

  7. Elva says

    Another note to consider that in most jurisdictions the SFDB design guidelines require a garage for residential units. The garage size (ie one, two, three) is most commonly decided by the number of bedrooms. For a garage conversion to obtain an approval (again in most jurisdictions) a replacement garage, or, offsite parking will more than likely be required. Check with the local planning department of the subject site for their guidelines and municipal code.

    • says

      Thanks Elva. I appreciate your comment, and it just goes to show how blog comments can really enhance a post. In some local areas an owner has to build either a garage or carport if the garage is converted. Of course code is enforced strictly in some areas and not so much in others, which is a different issue. Sometimes it does end up looking a bit odd though when there is a 2-car carport in the front driveway. But rules are rules.

  8. Jason Miller says

    Your article should be posted on every buyer’s refridgerator because there are many houses that were not built to code or the person signing the affidavit on the squarefeet and value perjured themselves!

    Thank you for this article, as “repent in leisure” because “I acted in haste”, its been brought to my attention the family member who built on the same land did not obey the law! We are in the midst of a Partition because the partners wanted more than the law allowed. Hiding sq-ft from the County and tax appraiser is going to affect even those who played by the rules but kept their heads in the sand. I highly advise everyone to not go in on “Family Real Estate” Partnerships because you don’t know what each member will build and if their going to be honest and obey the law, not everyone has your good morals!

    Partner C decided they could take a 1200 square-foot granny house and push it out to 2000+ square-feet and not tell the county or tax appraisers? Please listen to Ryan’s advise or you will end up in the biggest real estate quagmire ever like I am in now! Do things by the book, don’t build illegal dwellings and keep a eye on the family member that claim’s “I am a Christian, I would never cheat, lie or steal from the County or tax municipalities!” because guess who was the only ones to hide from the County and Tax man, it was not the naturalist!

    Looking back I wish I had hired Ryan before I bought because its going to cost a fortune to unwind all this “No Permits” mess!

    • says

      Jason, thank you for sharing your story, though I am very sorry to hear about your situation. What a frustrating and unexpected scenario. I got your email too, so I look forward to trading some thoughts there.

      • Jason says

        Dear Ryan,

        One Sept 3 I received a letter from Partner C’s attorney demanding a appraisal by Sept 25th, both Partner B and C have wanted this and I agreed. When I agreed they changed their mind to “no appraisal before listing the property as of 9-8-2016 they did a “about face”, do you have any ideas why they would change their position after I got a threatening legal letter?

        At first all the partners wanted a professional appraisal like you and now after they spoke to their attorneys they want to share the proceed’s three ways. Here’s what I don’t understand, I agreed to follow there demands before Sept 8 and now they don’t want anything they first agreed to, I got it in writings to show a judge if this goes that far.

        The instructions from Partner C’s attorney demanding we appraise this property by Sept 25 which we agreed to, no problem! They wrote this “We will not have a appraisal and this is non-negotiable!”. How can they legally tell me when the Real Estate contract state’s “Each party is to get a appraisal and their upgrades and improvements will provide them with monies. Each party agrees that their homes and improvements will be theirs, they understand in the event of a sale, they will get what they bought.” Now both B and C say they don’t want to obey the Contract, they want me to sign a “no appraisal”, “no county”, no tax man” information shall be spoken by any party.” I did not plan on sharing they broke the law, what do you think is on their minds?

        Can the County or Tax accessor come through the “Open Houses” to examine garage-conversions they have tried to catch for eight years now. Partner B built a illegal dwelling, garage to apartment and the County has been out to our property 5-8 times saying “If we catch you living in this house, we will take you to court. We had to move out their fridge, stove and hide their luxury bath tubs.

        Partners think they should get the same as me, my house was not built illegally, is the primary dwelling and has room to build legally without any encumbrances. Partner B think’s her garage-conversion should have more value than my home. Will a buyer get turned-off by the County visiting the garage-conversion that sticks out like a red thumb or should she get the same value as my legal house?’

        I did not know they were going to break the law, I am not in real estate like Partner C is, they do building for a living and now want to hide the fact they lied on the value of their house and square feet. This is why I would love to hire you or someone you know who can point out that “illegal additions” with huge encumbrances involving the County are not buyer friendly, do you think having the County’s warning letters and evasions of taxes are something that drag’s the value of the entire property down?

        Would you guess off the top of your hat, their illegal buildings has create problems for mine? I own 2 acres, have a 1600 square foot house and my other partner cheated so badly, I hate to mention they actually are ministers of a church I use to attend. Do you take on tough jobs like mine, would love to have you as my consultant!

        Can I ask you if you would allow those who built illegally to get measured as those who are law abiding people who are not afraid to pay their taxes and obey the law? Would you accept their proposal? I offered them to buy me out at a deep discount and they refuse, that’s why I want to hire you!

        • says

          Thank you for all of the details and sharing your story here, Jason. Let’s talk about your situation via email. I think that would be best on a few levels. I look forward to being in touch.

  9. aries64 says

    When we bought the house there was additional enclosed patio we are aware this was no permit. My point as long it was written and told the new buyer there was no permit I don’t see any wrong with that. We really like the enclosed patio that the risk we have to deal so we didn’t do anything we just leave it like that additional like a family room and extra space room.As long the new owner is aware no permit it’s up to them to buy or not very simple or if they buy it up to them to take them down or leave like that. Like what happened to our enclosed patio no permit when we bought and we enjoyed every minute of it more than 15 years still good.

    • says

      Thanks for sharing your story. I would feel similar even in my own house, especially with something like an enclosed patio. I would have a problem though if there was an entire bedroom and bathroom addition done without permits. But that’s just me. I’m so glad you’ve been able to enjoy the home.

  10. Christine says

    I bought a one bedroom condo last year with an overly large living room. At the center of the living room was dated accordion style room divider that cut the room in half. I removed the divider and had a dividing wall put in complete with a door. This new divided space is nicely done. It is compete with heat, a window and a full closet. I know I can’t list the space as a two bedroom, but how difficult can it be to resell or have it appraised? The wall makes sense. I’ve heard of sellers doing similar alterations and listing the space as an extra closet or extra storage or storage area.

    • says

      Hi Christine. Thanks for the comment. If it’s done well and there are no safety or functional issues associated with the wall, most appraisers are probably not going to ding it for value (because buyers would likely not ding it). Since it was converted without a permit (it sounds like that was maybe the issue from what you wrote), it’s unlikely it will be considered a bedroom by many appraisers though. In many cases when something has not been permitted a lender will simply ask the appraiser to comment on whether it was built in a professional workmanlike manner. An appraiser really isn’t the best party to make a call like that, but lenders still ask. Here are some other thoughts about a lack of permits in case it’s relevant. http://sacramentoappraisalblog.com/2014/11/04/what-do-appraisers-do-when-there-are-no-permits-on-an-addition/ Let me know if you have any follow-up thoughts or questions.

  11. Sharon says

    Hi Ryan. I know this thread is old, but you seem to offer some sage advice so I thought I’d leave a comment. We are very interested in a home in So. Cal. that “may” have an unpermitted bedroom. The fact that it “may” have an unpremitted addition tells me the seller probably discovered it when they went to list the house, otherwise I’d imagine they’d know. The MLS listing does not include the 4th bedroom, or the additional sqft’age. My question is: how would I find out if the bedroom has been permitted: is that something I go through my agent with, or is it something I ask of the city’s building department,? And how would I do that without turning anyone in? I’m also trying to get an idea of how much it might cost to get it retroactively permitted (and potentially up to code); that is, is it worth the potential hassle or is it best to walk away from these kinds of homes? Thanks!

    • says

      Hi Sharon. Thanks for reaching out. I’m glad you did. It’s hard to say what it means when MLS states, “there may be an unpermitted bedroom”. That could mean the seller and agent really don’t know or it could mean they fully know but they are using real estate disclosure language to give you a heads-up. I suppose you can have your agent ask the listing agent for clarification for starters. You can also ask your agent to look at previous MLS sales of the subject property to see if that area was listed or at least already built when the property last sold. You may get a sense of the age of the “addition” by how old the materials look too. Ultimately you can go down to the city or county and ask for clarification. As an appraiser I never want to say, “Hey, there is a weird addition and I want to figure out if it was permitted.” That could land me in hot water so to speak by raising red flags for the county, so I tend to ask things like, “What is the listed square footage of the property?; What is the bedroom and bathroom count? What do your records show was permitted in the past? (I would like to see an entire list of absolutely everything).” I like to try to poke around for information without raising red flags. If I were you I might ask these questions and then on a different call (key point) ask them what the process is like for getting something retroactively permitted. You may be able to get a sense of costs at that time. You might consider if the area would even meet code too as you’ll have to be comfortable either bringing it up to code or tearing it out. Likewise, keep in mind many people buy when there are no permits. You just have to know what you are getting into. If you move forward with the deal, just be sure the extra space is not jacking up the price too much (even though MLS states it is not included in the square footage). It is true buyers can be willing to pay something for non-permitted areas, but it’s also important to balance contributory value with what the permitting process might demand if you were to go that route. Does that help? I hope so. Keep me posted if you have any follow-up questions.

  12. Sid says

    Hi Ryan came across your excellent article and had a quick question that if you have finished the basement yourself without a permit (but with licensed people as applicable) how is it appraised. Any input ASAP would be greatly appreciated thanks 

    • says

      Hi Sid. Thanks for reaching out. It sounds like a finished basement and not living area. It might look nice, but it’s most likely an appraiser would still consider it a basement. If buyers walked in the area, would they say, “I’m willing to pay the same amount as I would for square footage upstairs”? Chances are the answer is no. Here is an article that gives a little more context on including basement square footage. http://sacramentoappraisalblog.com/2014/05/27/can-a-basement-be-consdered-square-footage/

      In short, how is the market going to respond to your basement? The best thing to do would be to find other homes with a similar basement. That will tell the appraiser how much (if any) the market is willing to pay for a finished basement. Being that there are no permits, that could be a red flag if electrical and such was not handled correctly.

      • Sid says

        Thanks for the prompt response! Also wondering that since this appraisal is for a refi mortgage will the appraiser be concerned about the lack of permits will that pose a problem in getting a loan.
        Not including the basement area is fine with me as long as it does not create a problem in appraisal and getting the loan.
        Thanks

        • says

          It’s hard to speak for the situation since I don’t know your market or the quality. Frankly, there can be a difference among appraisers with how they see areas like this too. If it looks like a finished basement, it’s hard to think that will be a loan problem since finished basements probably aren’t terribly uncommon. If it was a full-on living quarters with a kitchen and such, that could be more of a red flag. If you feel worried, just tell the appraiser you finished the area for storage and such. Emphasize that you know it is a basement and not living space. If you don’t have a heat source in the area too, it’s automatically disqualified from being living area anyway.

          • Sid says

            Do have a bathroom and a kitchen, let’s see how it goes. Thank you very much for your feedback and promptness.

  13. baduch says

    I’m going through a routine refinance and the appraiser is giving us a hard time over a cooktop that was added to a legal all permits pulled in-law suite in a single family zone. Is this even possible? we pulled all permits when the addition was done and the city signed off on the completed project.

    • says

      Hi Baduch. Thanks for reaching out. Is a cooktop legal per zoning? It sounds like you added it after you had everything permitted, so the stove may not be a part of what was considered legal. This is a valid question and likely the crux of the issue. Does zoning allow two stoves on one property? If everything is legal, there is nothing to worry about and you can maybe show the appraiser documentation. You can always call the planning department (without giving them an address) and ask them for the reference to code that shows if a stove is legal or not in an accessory unit in your area. If it is not legal for some reason it is likely the lender would ask you to remove the stove, the appraiser will come take a photo, and then you’ll hopefully be a-okay. Of course we all know the stove is going back in as soon as the appraiser leaves, so this is a very silly protocol. At the same time I get what the lender is doing – especially if they want to neatly package your loan to sell on the secondary market after the refinance.

      Any thoughts? I hope that was helpful.

  14. Forrest H Bray says

    Hi Ryan

    I have a quick question. My wife and I have put in an offer on a home listed with three bedrooms and one bath. ($134,000)The square footage is listed at 770. Here is the conundrum, it’s actually two bedroom home with a garage remodel into a 3 bedroom and yet the square footage of the new addition wasn’t factored in. This turned out to be a red flag for the appraiser, the county listing had it at 770 and the MLS had it as 1100 soft. He looked further into the remodel and found no permits were pulled. I’m hoping they used the existing electoral and don’t need to remove the drywall to inspect any of it. There may be some sort of FHA contingency that we may be able
    to circumvent the permitting.

    My question(s) to you are:
    1. Does the addition without permit warrant a price reduction on the appraisal?
    A. How does this affect us as the buyer
    2. Could we negotiate the price of the inspection and work needed into the sale contract.
    3. Is it something that can affect us as the potential seller 5+ years down the road?

    Thanks so much for any and all input.

    Forrest Bray
    Spokane WA

    • says

      HI Forrest. Thanks for reaching out:
      1. Does the addition without permit warrant a price reduction on the appraisal?
      The appraiser could likely consider this as a 770 sq ft house and then value the conversion separately, so it could end up impacting the value (though I don’t know for certain what the appraiser will do obviously). However, it may have already been considered in the appraisal. If the appraiser discovered the issue, maybe the appraiser already appraised it as a 2-bed or handled the issue in another appropriate way? I would look at the appraisal to see what the appraiser did.
      2) I suppose you could try to negotiate the price of an inspection, but that’s really between you and the seller. If the seller had a ton of offers, the seller might simply go down the list to the next person. However, now that the seller knows about the lack of permits, it would seem prudent for that seller to disclose, so other buyers may not be keen as well (or maybe they’re okay with it).
      3) A lack of permits can be something that haunts a property when getting a loan. Say for example it was appraised at 1100 sq ft today for the sale, but then an appraiser came along and appraised it as a 770 sq ft house for a refinance in the future. That type of stuff happens all the time. Lenders don’t always treat a lack of permits the same too, so there will always be a sense of ambiguity about the property to a certain extent because of the lack of permits.

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