The problem with non-permitted additions in real estate

Non-permitted additions can cause huge problems. Last week I wrote about how I valued a garage conversion without permits, and I wanted to follow up with some expanded thoughts. As I mentioned, in this situation I gave value to a conversion because I was able to show the market was willing to pay for it. Yet it’s not always that easy, so let’s dig deeper. By the way, props to Cynthia, Gary, and Bryan for stellar blog comments that prodded me to follow-up. Any thoughts?

54025005 - demolishing the old kitchen - exposing the studs, existing plumbing and electrical work

Issues when dealing with a lack of permits:

1) Lenders & Appraisers: Here’s the bottom line. Some lenders don’t want to lend on properties with non-permitted additions. In short, a non-permitted area might have legitimate value in the market, but some lenders will tell appraisers NOT to give the space any value. At the same time other lenders are okay with value being given, but they want appraisers to show a few comps with similar non-permitted areas to prove the market is willing to pay for the space (that’s tricky to find).

2) Illegal: Does the addition conform with what zoning allows? This is a key question. For instance, if zoning only allows one unit and the seller has a non-permitted second unit that hands-down would never be allowed, it’s an enormous liability for an appraiser to be giving value to something like that. Likewise, imagine if an addition was built within the setbacks on a site, which would make it illegal and maybe even a safety issue.

3) Building Department Reaction: Is it likely the non-permitted area can become permitted? What is it going to cost? This is where it’s worth giving the building department a call. I don’t recommend mentioning a specific address at first so you don’t raise red flags, but call and maybe ask about a hypothetical situation to see what the cost and feasibility might be for getting permits. Remember, not all markets are the same either. For instance, since 1976 the City of Davis has had a program where building inspectors visit all properties before they close escrow to ensure there are no code violations. In short, you can’t get away with non-permitted additions in Davis if you plan to sell (but you can elsewhere).

4) The Struggle of Different Opinions: A friend gave me a call to talk through a situation with a garage that was converted into a second unit without permits. The appraiser gave little weight to the addition because of zoning issues, but the seller thought it should have carried more weight. There was a solid back-up offer on the table, but regardless of whether this addition was worth more or not, the thing I told my friend was there was no guarantee a future appraiser or lender was going to see the situation any differently. Owners in scenarios like this tend to say, “The lack of permits wasn’t a problem when we first bought the house”, but guidelines and what appraisers report might have changed over time. Moreover, not every appraiser or lender is going to see things the same way.

Advice about non-permitted areas:

1) Minimal value: Expect there is generally going to be less value for something not permitted than something fully permitted (thanks Captain Obvious).

2) Bigger is Bigger: Buyers seem to ignore smaller-ticket items that weren’t permitted, but the bigger something is, the more likely it is going to be a bigger deal that it wasn’t permitted. For example, there is a huge difference between a non-permitted covered patio and a 400 sq ft addition that was not permitted.

3) Glorified Storage: Keep in mind an appraiser might be instructed by a lender to count a non-permitted area as storage instead of living space. So that second story attic conversion might be really sweet, but an appraiser might end up treating it like storage instead of extra square footage.

4) The Easy Answer: Getting permits can help avoid future loan problems. Be sure to keep a copy of the permit too so any appraiser or buyer can see everything has been signed off.

NOTE ON GIVING VALUE TO SOLAR: This is off-topic, but there was a recent class on solar and it was apparently mentioned I do not give value to solar systems. That’s not accurate. However, I have said a LEASED solar system does not get value because it’s personal property. Just wanted to clarify. You can read this post and another for some thoughts on solar.

sacramento-appraisal-blog

Questions: How have you seen a lack of permits impact a transaction or appraisal? Would you buy a home if it had an addition that was not permitted? Did I miss something? I’d love to hear your take.

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How I appraised a property with a non-permitted garage conversion

How do we value a non-permitted garage conversion? Today I wanted to share a real life example of a property I appraised. I’ll keep things fairly brief because it’s impossible to get to everything in just one post. Though I do have a 10-minute audio clip for more depth on conversions. Any thoughts?

UPDATE: Read part 2 of this post HERE.

garage-conversion-sacramento-appraisal-blog

Garage Conversion Formula: It would be nice if there was a one-size-fits-all value adjustment we could apply to any conversion, but that’s not how it works because conversions vary tremendously in size and quality – not to mention some neighborhoods accept them and others really don’t.

Golden Data: In this case the conversion was nicely done and was even on a crawl space like the rest of the house. I searched the neighborhood for garage conversions over the past few years and literally found none. But I did have one very lucky bit of data since the subject sold four years ago on MLS as an arms-length sale. This means I was able to look back in time and find how the subject fit into the context of neighborhood prices.

garage-conversion

What I wrote in my report: Based on the previous sale in 2012, it is clear the market recognized the subject property’s extra size as square footage and paid for it as such in the marketplace. The lack of permits on the garage was definitely disclosed in MLS. At the time of the sale in 2012 the market was willing to pay about $15,000 (6%) less for the subject property compared to otherwise similar homes that had a garage. In today’s market were no recent sales with a garage conversion, so the appraiser used historic data to give a downward $15,000 adjustment to Comps 1-3. The garage adjustment would really be reasonable anywhere between $15,000 to $20,000, but since the subject has been upgraded extensively in recent years it made sense to adjust at the lower end of this range since upgrades lessen the negative for not having a garage.

If I didn’t have a previous sale: Without a previous subject sale, I’d need to find other garage conversions in the neighborhood or search in a competitive area of town to try to find a reasonable adjustment for the lack of a garage (and lack of permits). In some cases I would maybe consider the cost to turn the conversion back into a garage – especially if the conversion was shoddy or minimal to cure. Still other times I might ponder the cost to permit the conversion or the cost to actually build a garage if there is space to do so. Remember, the adjustment at $15,000 made sense here, but it could be FAR DIFFERENT in other situations.

Garage Conversion Video: This audio clip is ten minutes or so and could be good as background noise while working. Watch below (or here).

Note on permits: As an appraiser it’s a liability to assume everything in a non-permitted conversion was done to code. What if I recognized value for a conversion but then in the future an owner had to rip out the non-permitted area? Can you see why some appraisers (and lenders) won’t give value to something unless it was permitted? Yet we still have to ask, “Is the market willing to pay something for this non-permitted area?” This is not an easy question to answer, but it is vital nonetheless. Hopefully we can find some comps, but more than that we need to disclose everything clearly, use logic and professional judgement, and maybe reach out for opinions of other trusted professionals too.

Questions: How do you deal with garage conversions? Any other insight? Did I miss something? I’d love to hear your take.

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The problem of an addition behind a bedroom

Imagine a home owner adds a “Bonus Room” on the rear of a house. It’s nice to have the extra space, right? Well, imagine one of the rear bedrooms now no longer has a direct exit to outside of the home. Is that going to be an issue?

bedroom without egress - by sacramento appraisal blog

The Problem: This home above has an addition of a Bonus Room that essentially removes direct exterior egress from one of the bedrooms. No big deal, right? Well, it actually is a big deal because by definition a bedroom must have two methods of egress. If you didn’t know, according to International Residential Code (R310.1), a bedroom needs to have one doorway that opens to the interior of the house and one doorway or window (of adequate size) that opens directly to the outside of the house (read here for more on what makes a bedroom a bedroom). Thus when an addition of a Bonus Room, Family Room, or Whatever Room blocks the secondary egress in a bedroom….. Houston, we have a problem! All of the sudden a room that was previously considered a bedroom is technically no longer a bedroom. If you’re interested in reading the nitty-gritty of various national codes on the subject, check out this document (pdf).

not a bedroom - sacramento appraisal blog

Impact on Value: Being that I’ve seen this issue twice in the past month, I thought it was worth kicking around some thoughts. Like most things in real estate, we need to look at the problem from a few different angles:

  1. The Lender: Keep in mind a lender might not want to lend on a property when there is a blatant safety issue. Or a lender might ask for the addition to be removed, a secondary egress to be added in the “bedroom” if possible, or for the appraiser to not consider the room as a bedroom any longer. Ultimately the appraiser can ask the lender for some direction or advice, but at the end of the day the appraiser has to communicate very clearly and make decisions that will lead to a credible value.
  2. Not Code Enforcement: Let’s remember it’s not the appraiser’s job to enforce code violations or stop a deal from moving forward if there are code issues. Increasingly lenders want appraisers make comments as if they were home inspectors, engineers, or code enforcement officers, but the appraiser’s job is to come up with a credible value. Bottom line. At the same time, appraisers need to know enough about building code to be able to recognize a blatant egress issue, disclose the issue, and consider if there is any impact on the value (there may or may not be).
  3. Less Bedrooms: Decreasing the bedroom count could impact value since a property is likely less marketable with less bedrooms.
  4. Permits: Let’s realize this addition may not have been done with a permit in the first place, so the appraiser is going to have to figure out what the market is willing to pay for a house that has some non-permitted space. Some appraisers will not assign any value to a non-permitted area, saying “no permit = no value”, while others will try to figure out how much the market is willing to pay for the house in its non-permitted state. Read more on a lack of permits here. Remember that some additions increase the functionality of a floor plan in a positive way, whereas other additions make a floor plan very funky (in a bad way).
  5. The Whole Enchilada: Ultimately, I find myself looking at the “whole enchilada” or entire package of a house when trying to figure out how a layout like this might be seen in the market. For instance, in a recent appraisal consulting assignment, an owner hired me to help him see the market since his house was not selling. On paper it looked like the house should be valued toward the top of the market because of its much larger size, but in actuality the lack of upgrades and funky floor plan (that blocked egress from one bedroom), ended up meaning the house attracted zero offers and was more comparable with the bottom of the market. The way I knew the house was more closely aligned with the bottom of the neighborhood spectrum was finding a few odd floor plan sales (that was lucky), the subject having zero offers at a higher price range, and even a previous sale of the subject property from years ago that showed it sold at the bottom of the market at the time despite its very large size.

I hope that was helpful. By the way, thank you to home inspector Ken Ives for a good conversation on some of the above points as I prepared this post.

Questions: Any thoughts, insight, or stories to share? Did I miss anything? I’d love to hear your take.

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10 uses for an unpermitted pool

Can you tell just by looking that this is an unpermitted pool? It’s often obvious when something is done without a permit because it just doesn’t seem right, something might feel odd and many times there is a quality issue. The pool is about 5-6 feet deep with half the pool being above grade. This one definitely ranks on the lower end of the quality and aesthetics spectrum too.

Unpermitted pool - Sacramento Appraisal Blog

Unpermitted pool - Sacramento Appraisal Blog

Unpermitted pool - Sacramento Appraisal Blog

A pool like this is definitely a “drain” on value since more than anything I had to consider the cost it would take to remove the pool. However, this pool might actually come in handy though if the owner wanted to keep it for other uses. Here are some spoof suggestions that might work:

  1. Giant koi pond.
  2. Neighborhood cage fighting tournament.
  3. Raised garden bed.
  4. BBQ pit for a block party.
  5. Play pen.
  6. “Time out” area for the kids.
  7. Alligator habitat.
  8. Skate park.
  9. Partially constructed bomb shelter.
  10. Dog kennel business.

Moral of the story? Don’t install a pool without a permit. It’s not a good idea because it can literally end up damaging your property as well as harming your property value.

Can you think of any other potential uses?

If you have any questions or Sacramento area real estate appraisal or property tax appeal needs, contact me by phone 916-595-3735, email, Twitter, subscribe to posts by email or “like” my page on Facebook