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?
I get asked this question almost every single week, and I’ve broken down my answer into four major parts. I hope this helps.
- 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).
Quality: 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.- 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).
- 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.
- 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:
Unpermitted 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:
- 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.
- 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.
- 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.
- 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).
- 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.
If you liked this post, subscribe by email (or RSS). Thanks for being here.
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?
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.
Very thorough article on analyzing appraisals and unpermitted areas. Thank you Ryan.
Thanks so much Gary. This is a gray area, so it can be challenging to unpack the issue. Hopefully it will be spur on some constructive conversations.
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
Thanks Mike. I appreciate you saying that. I agree that there needs to be solid market data to support the value. Bottom line.
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!:)
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. 🙂
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?
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.
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. 🙂
I’ve had some of those too, Tom. I completely agree with you about liability also. Thanks for the comment. Well said.
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.
Well said, Bryan. I appreciate your take on things. Thanks for the insight.
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.
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.
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!
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.
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!
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.
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.
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.
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.
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. https://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.
Opps. I responded to your comment without realizing what article your comment was on. Classic move on my part to give you the link to the article you just read. Ha ha. 🙂
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!
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.
Hi Ryan: Thanks SO much for this insight. It is very helpful. I do have some follow up questions, but since they are more specific to the property would prefer not to post them here. Is there a way to contact you privately?
Sure thing. Send me an email (listed on my contact page https://sacramentoappraisalblog.com/contact/). Just make sure to put something appraisal-related in the subject line so I don’t delete you as spam. 🙂 I’ll be looking forward to talking.
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
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. https://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.
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
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.
Do have a bathroom and a kitchen, let’s see how it goes. Thank you very much for your feedback and promptness.
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.
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.
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
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.
I’d converted a den space into an extra office room by adding 2 walls (nothing much else was done) without a permit. Will it effect the appraisal when I want to refinance my house? Should I let my loan agent or the appraiser know ahead of time?
Hi Henry. It’s so hard to comment without seeing what you are talking about. Whenever something is not permitted it injects an element of uncertainty into an escrow. Thus we don’t know for sure how appraisers, lenders, and buyers would respond. This is why it’s impossible to answer for sure. With that said, I think it’s a great idea to let your loan officer know. If the loan officer is concerned, then maybe an underwriter can look at this or a staff appraiser for the lender. Most likely it’s just a waiting game though to see what the appraiser says. Keep in mind if it’s just an enclosed area, let’s probably not overthink it. If the cost to remove is really minor, it could be no biggie. So take that with a grain of salt and definitely open up conversation with your loan officer. Best wishes.
Hi I am looking at a house I may possibly want to purchase. I just found out that the mud room and seperate bonus room in between the garage and house is not permitted. I found out by doing some of my own research that the heating and air is not allowed to be hooked up to these 2 areas because they run off the same unit the services the garage and the other bonus room above the garage and it could cause a carbon monoxide issue. The sellers do not seem like they want to budge much on price they feel it is priced to sell. Although they are including these rooms in their price and will not even budge on out dated kitchen and paint. My question is how can these unpermitted spaces affect my loan if I decided to purchase house?
Hi Carissa. Thanks for reaching out. This can be a tricky situation to negotiate because if there are multiple offers, the seller is in control. But if the seller only has your offer, then negotiation might be more prone to happen.
I think I’d have to see it to make a determination. If it’s a clear safety issue though, then it’s fitting for an appraiser to ask for repairs or removal. If this is a blatant safety issue it should be something a home inspector would catch too. Of course if the lender is made aware it’s hard to imagine a lender not wanting to see correction too if there indeed is a safety issue.
It gets interesting how this could affect value though because it depends on the quality, what buyers might pay for a space like this, and what it can be used for. Just because a lender has a problem doesn’t mean buyers will have an issue. If the quality of this space is okay, could it maybe be considered storage? Are people willing to pay something for the area because of that? These are good value-related questions.
In short, there is no definitive answer here and the only way you’re going to know is to go through the process. However, have your loan officer ask the lender / underwriter if this might be an issue. That’s certainly what I would do to start things off.
Hi Ryan,
Thank you very much for responding so quickly! I am a first time home buyer and I am extremely nervous and just want to make sure I do not spend $330,000 on a house I end up having major problems with! Or dump 4-5 grand on dudilegence and inspections to find out my lender says sorry we will not lend on this house!
Again thank you,
Carissa
I hear you. Be objective and try to spend your emotions here. You don’t want to buy a lemon. I highly recommend you have a home inspection. It might also be a good idea to have a contractor look at. it just so you know how much it might cost to fix if you need to do so. Sometimes the best thing to do is walk if there’s something better out there. I’d ask your agent and loan officer for starters what they think of this one and if there are likely to be issues with financing. If everyone is iffy, that might help you make a decision before you start dumping money into an appraisal, home inspection, etc…
I’m a homeowner and was googling to find out an answer to my question.
I don’t have unpermitted work, I have work with a roughly 3 year old permit where the permit hasn’t been closed out. I finished about 1000 square feet of my 1200 square foot basement. I haven’t completed the 1/2 bath and the last inspector who came to inspect told me I need to drywall a closet that is under the stairs as fire block. I haven’t done those two things. The rest of the work in the basement is complete. I’m curious what the appraiser will say. I live in MA and the rule is that a building permit has to be displayed in the front of the house. I’ve had mine in my dining room window for 3 years. I’m thinking of taking it down and seeing if the appraiser will say anything.
Sorry for the late reply here. I’ve had some health issues and I’ve been away from my desk. I’m just finally starting to get back (not even fully back yet). I think it’s OK that a permit is open, but If there is any unfinished work that might pose a safety issue, that’s where it can become something the appraiser calls out to be repaired. Most of the time an appraiser wouldn’t even know a permit is open, but obviously that wouldn’t be the case if seeing the permit in your window.
My mother-in-law bought a new house in Abq in 1973 an added a large family room with a door and porch. Same flooring as kitchen. It is hooked to the heating,has Windows and a closet and a built in counter/shelves. All of this was done without a permit and I assume the taxes went up and were paid for the last 25 year’s. She died awhile and we found out during probate.we want to sell it but have not put it on the market yet. Are we going to get fined? Can we get grandfather ed in??
Hi David. On one hand it sounds like you are concerned about taxes, but on the other hand it seems like you think this space was accounted for in the taxes too. No matter what, keep in mind in most areas it seems the Assessor is not involved in verifying the legality of additions during real estate transactions. I do know a couple cities in California where that happens, but otherwise it’s very rare. Thus I wouldn’t worry much about this unless you live in an area where code enforcement comes in before escrow closes to verify whether everything is legal or not. I’m not a lawyer of course, but it seems prudent to disclose the lack of permits to the buyer in the contract or however it seems prudent per your agent. Best wishes.
Hi Ryan!
As a first time home buyer, I found your article very informative!
I am facing an issue of similar nature. We are debating making an offer on a small single family home, that was built entirely without permits. The listing price is just slightly below that of permitted homes of similar size. As a ballpark number, how many percent lower should the value of this property be to reflect the lack of permits? Of course this would have to be an all-cash deal. The home has been on the market all summer, was pending for a while but the buyers couldn’t get financing.
Very much looking forward to hearing back from you!
Hi Christina. There is no ballpark number here. If I were you I would exercise extreme caution. You are correct that financing is very unlikely, but I would at least check a few things: 1) Was the property built to code?; 2) How easy will it be to get permits on the property?; 3) What sort of fines if any will you have to pay to bring this property up to code?; 4) Are there any safety issues in terms of electrical, plumbing, etc…? (sort of relates to question #1); 5) Other (maybe I’m forgetting something).
Being completely built without permits is an entirely different thing than having part of the house that was not permitted. It is more of a black and white issue for obtaining financing and there could be severe consequences too if the local government does not allow the building to continue to exist. This is why I would recommend finding out about the permitting process, what is possible, and what everything is going to cost. You should definitely seek a discount based on the cost of these things, the time you’re going to have to invest, and the risk inherent in buying a property like this. It sounds like they are getting offers, but if nothing is sticking, that might say something about value…
Personally I wouldn’t recommend a property like this unless you are really sure permits are going to be possible. Or better yet, could your offer be contingent on the seller getting permits?
Thanks a lot, Ryan, for your fast response! This is what I figured!
The county seems very willing to cooperate in getting the structure up to code and issue as-built permits, yet there are some code violations, that the officials are unsure how to address. I agree with you, it makes sense to sort this out before closing.
I just don’t understand, why someone would build a quality home and neglect to pull the permits…
Thanks again for all the good information!
I’m glad the county has been cooperative. It sounds like you are asking all the right questions. Good luck.
Hello Ryan,
My 82 year old father was a hoarder with no viable income except his SS. He had a first mortgage for the house and a second for his 30×60 metal garage All on about 8 rural acres. Needless to say if he didn’t sell he would loose any equity he had in the property. I worked diligently for a year to get him to realize that selling was his only option. Used my savings to fix it up. It was listed and a Price was set at local comps, not a lot of comps because of being a country property. The listing agent ask if I had a copy of the plat, I found an old one with the original Deed. Since COVID-19 all the municipal buildings were closed so I gave the listing agent what I had on hand. an offer was made the very next day. He agreed to ten thousand less than the asking price that was based on comps. Both the agent and I were not sure it would appraise for the full asking price. An appraisal was done by the buyer Or his bank, I never received a copy. I was told buy the realtor that the house came in at 1k above the offer. But that My father would need to pay and have the house painted before the lender would agree. I did paint the house. Then moving forward he had to pay for some other repairs. So all and all he was Given about 20k less than asking price. We settled and were given an extra 30 days to vacate the large garage my dad had built for about 40k. The new owner is a talker and slipped up and mentioned that the 40k garage was not included in the appraisal. No one ever asked if it was permitted. We didn’t know it wasn’t included in the appraisal, I would have tried to find out if the county made a mistake and corrected it. We would have not excepted the contract for that price. No wonder the buyer wanted to act so quickly on the deal. We have one week to vacate as per the contract. I feel like My dad has been taken advantage of.
Is there any recourse?
It’s so hard to say in the situation. There are many moving parts. The truth is the buyer may not be correct in thinking the garage was not included. I think I would look to the actual appraisal itself for the definitive word about the garage. I think sometimes agents and buyers don’t always interpret appraisals correctly. Then I would go from there. Hopefully the appraiser discussed the garage and whether it was given value or not. Or at the least just look to see if the appraiser listed a garage being present or not.
Hi Ryan hope you Can’t answer my question my house is on the market for sale and I have a buyer they’ve already applied for a mortgage 10 years ago I had a bathroom installed upstairs the builder stated he would get all permits necessary I go to find out that there are no permit what do I do now do I pay the fine if there is one the builder has long since past how do I resolve this please help. I have lost the Receipt
Hi Louis. I think you can go down to the building department and see what their procedure is for getting something permitted. There may be a penalty you have to pay, but that’s something you can ask about. Personally I would ask some general questions without revealing my address first.
If you plan to sell without getting it permitted, just realize whenever there is a lack of permits there can also be uncertainty. Thus we never know for sure how an appraiser, lender, buyer, etc… will respond to a lack of permits. I find many banks simply ask the appraiser to verify it was built in a professional workmanlike manner. I don’t know that the appraiser should really answer that question, but it does happen. If that’s the case and the builder built this (presumably it’s to code and nice), it might not be any big deal. Lenders sign off on non-permitted stuff all the time. If an appraiser recognizes value for it the lender might ask the appraiser to support that value somehow though, and that can get tricky. If you are not padding the price for the third bathroom then this may be less of a value issue. But if you priced it based on three bathrooms then this could be a value issue because it really wasn’t permitted.
Ultimately you’re just going to have to ride the wave that comes and see what happens. I probably wouldn’t overthink it or worry too much unless you live in a strict jurisdiction where code enforcement requires non-permitted items to be permitted or torn out. Just be ready for the possibility that an appraiser might not recognize value.
Thank you so much Ryan!
Worse comes to worse I’ll beg for mercy ?
Thank you so much Ryan!
Worse comes to worse I’ll beg for mercy ?
Ha. Well, hopefully you don’t have to go that far. Just remember stuff like this sells all the time. I get being stressed and there is uncertainty, but hopefully it ends up being no biggie. I think it’s to your advantage if you get a ton of offers with the full disclosure of a lack of permits.
Hello Ryan,
I purchased my home a year ago and had no intension of selling. The large bonus room was converted into a beautiful 5th bedroom with walk-in closet and full bathroom. I also had enough room to add a small office which served well when I was forced to work from home. I recently placed the home for sale. My home shows like a model and the quality of the bonus conversion appears to be done by the builder. You would never know unless it was communicated. Since the conversion was walls in, not walls out a permit was not taken out. The appraiser gave it zero value. Although he noted the conversion was done in workman like quality, he ignored the entire space. I am terribly disappointed. Is this correct? Even if walls in, no value for the conversion other than a bonus room?
Hi Maria. How do you know the appraiser gave it zero value? Was this area included in the square footage of the house in the appraisal report? If so, then the appraiser likely did give it value. Could it be possible the appraiser did not recognize this area as a fifth bedroom because there were no permits, but the area was still included in the square footage (and therefore given value)?
Hi Ryan. Great post. Can the appraiser tell the township/zoning board that there is an addition without a permit? We had a 2nd kitchen installed in the garage which was not allowed due to fears we would turn it into a rental unit and now we are trying to transfer the deed but an appraisal is needed since there is a loan attached. The rest of the garage and additional bathroom have the permit but this was extra. Just curious about potential ramifications. Thanks so much!
Hi Nishlina. Thanks for reaching out. In my mind an appraiser needs to be careful about disclosing what is at a property. The appraiser is not there to be code enforcement. Thus when I call to verify if there are permits on something I don’t typically say, “Hey, is there a permit on file for a second story addition or not? Because when I was at the house there is definitely an addition.” I would instead say something like, “Can you tell me what living space you show on file as permitted?” That’s a much different question and it discloses nothing about the property. Ultimately in my opinion appraisers need to use careful language when talking with local government. With that said, an appraisal is typically only shared with a lender client, so I wouldn’t be overly concerned about local government hearing about your kitchen unless the appraiser actually calls them and has a discussion about it. Sometimes I do hear of appraisers or lenders asking for a second kitchen to be removed. In this case maybe everything will just fly under the radar. Best wishes.
Thanks so much Ryan and here’s an update.
The appraiser would not appraise the house until we removed the stove from our 2nd kitchen. Making life difficult here in Jersey.
I wonder if the lender required that and the appraiser is simply following instructions. Or I wonder if this is coming from the appraiser himself. Whatever the case, hang in there. I hope things go smoothly from here on out. Thanks for the follow-up.
HI! I am in escrow right now with a house in Diamond Springs, CA that was listed on MLS as 2300 square feet. According to the tax records, the square footage is only about 1000 square feet. Nothing in the listing says anything about unpermitted additions, but there is clearly a converted garage and a converted porch. There seems to be other space added as well. The house is large for the neighborhood. We are in the inspection period right now, so I can run, but we do like the neighborhood and the price was ok (considering this crazy market) at $375K. We even offered over asking and there were multiple offers. There is no central heat and air. I look forward to seeing the seller’s disclosures, but have a feeling they will reveal what I already suspect: no permits. I think the house is listed lower than comparable homes of the same size. Wondering how much you think no permits will affect an appraisal? We plan to add HVAC and upgrade the electrical, but I am very nervous about the appraisal. This is El Dorado County. I think non-permit work is very common. Do you have any experience in these situations, being so near to my county?
Hi Jay. Thanks for checking in. Non-permitted stuff is pretty common in El Dorado County on one hand, but on the other hand this is really significant. Whenever a house has this big of an addition without permits it infuses uncertainty into the transaction. What is the appraiser going to do? What is the lender going to do? How will the buyer and seller negotiate? I actually have a blog post about valuing a home with a huge non-permitted addition here. Maybe check that out for some of my thoughts if you wish. https://sacramentoappraisalblog.com/2019/02/05/how-do-we-value-a-house-with-a-huge-non-permitted-addition/
One thing for you to consider here is a permanent heat source must be present for a traditional loan to be able to close. So I hope you guys can figure that out. Regardless of what an appraiser does with the square footage, there needs to be a heat source. In case it’s useful, here is another post about that. https://sacramentoappraisalblog.com/2018/03/22/what-type-of-heat-system-is-needed-for-a-loan/
Best wishes.
Hello,
To what extent does an addition without permits affect on a refinance. I own a manufactured home on 10 acres and a couple of years ago I converted a covered patio attached to the home into an office, I called the city about permits and they said this was a State issue, I called State, they said they would come take a look, took our info, never showed up, I called again, left a message and still no answer so I completed the office project which is only 10 x 15, will this cause me a huge headache when the appraiser comes or as long as the house is intact (except for the roof since we just got it all done 6 months ago and it covers what is now the office) and we get it appraised as-is be okay?
I am hoping of course this will not be a problem, however, if it is, what can I do to fix it?
Hi Violet. I would definitely talk to your loan officer before an appraiser comes out. It can be a big deal to have an addition on a manufactured home because the home was not originally designed for that addition. So has structural integrity been compromised? That’s the question at hand. My advice? Talk to a loan officer first about this and see what that person says.
Hi. I am hoping you can help us. We are in escrow for a manufactured home. We have been approved for an FHA loan. We just found out that there might be a detached garage that was built without a permit. Our loan officer will not approve the final loan if this is the case. We have been searching so long and this house has everything we want. Is there anything we can do on our end to take care of this issue and appease FHA?
Hi Barb. Why won’t your loan officer approve the loan? That’s the big question in my mind. If there was an appraisal done already, did the appraiser mention this or call for the structure to be permitted? If not, then maybe the lender has their own supplemental standards. I would ask the lender of their reasoning and ask them if this is stemming from HUD guidelines also. Sometimes lenders are following guidebooks and other times they have their own standards they’re bringing to the table.
Hi Ryan,
my parents bought a home over 25yr ago with an inlaw in the Sunset with a bathroom and three separate rooms and an entrance from the garage with a seperate entrance from the side of the house. The house throughout the year has had many updates. the door from the garage was sealed off with new wall, a kitchenette was added and one of the large rooms was divided by a wall to make two small rooms and bathroom updated. Now it’s going to be put on the market, we got a report and the down stairs bathroom and family room was permited prior to my parent’s purchase. We were told to remove the stove and fridge before selling. why just fridge and stove? there’s a microwave above the stove with an exhaust does that need to be removed? Also, when removing the stove, is it ok to just cap the gasline? If we don’t remove the stove etc, does this affect appraisal and loan or can we not sell as is? the permit report also shows the garage had a permited storage space, however my parents removed it without knowingit was a permited space. Can that still be accounted for even though the walls have been removed? does it have value?
Thank you in advance.
Hi Eva. Sorry for the delay. I’ve been riding the couch all week and just finally getting back up to speed. Anyway, these questions unfortunately are something I would defer to your local code authority. Or who is telling you to remove the stove and fridge? And what is the reason? This doesn’t sound like an appraisal issue, but either a code issue or lender issue.
If your parents removed a wall, and there is no longer a permitted space because of that, it doesn’t make sense to me to account for that space since it does not exist.