I delivered bad news recently. Well, it was helpful news for the buyer, but maybe bad news for the seller. There was a 700 sq ft home addition that turned out not to be permitted as living area, and I was the guy to let everyone know. Oh dang!! Let’s talk about this and highlight two important things about permits.
Two things to consider with permits:
1) Signed off: It’s one thing if a permit was pulled, but the most important thing is that it was finaled. If a permit is not finaled, it’s sort of like getting a marriage license from City Hall but not actually getting married. The thing is the marriage license is only the beginning of the process, and it means very little by itself unless it results in a marriage ceremony. The same thing is true with permits in real estate. The beginning part of getting a permit matters, but unless the permit is actually signed off at the end, then the act of pulling a permit means very little. Thus when someone says, “We pulled a permit,” a good follow-up question might be, “When was the permit finaled?”
2) Getting specific: In the situation above there was one big problem. The large addition was basically an attic conversion on the third floor, and it was only permitted as storage in the eyes of the county – not as living area. This reminds us that sometimes after being told an area is permitted, we might consider asking a clarifying question, “What was it permitted as?” After all, it can be technically correct to say an area was permitted, but was it permitted for the actual use it’s being said to have been permitted for? That’s the real issue.
Appraisers and non-permitted areas: There are times when appraisers might include non-permitted areas in the value, but there is no one rule for appraisers to apply in all cases because each situation is different. Though my sense is when an area is very large most appraisers probably won’t include it in the square footage because it hasn’t gone through the most basic process of becoming legitimate in the eyes of the building department. In other words, it’s one thing to include a non-permitted covered patio in the value because that’s pretty minor and so common in many markets, but it’s another thing to include an addition that represents 20% of the total square footage of a house. You can read more about the problem of non-permitted additions here.
I hope this was helpful or interesting.
Questions: What is a third thing to consider when it comes to permits? Any stories or wisdom to share? Anything else to add?
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One big one I run into with non permitted additions is insurance issues. If something happens in the non permitted area and the insurance company finds out the area was not inspected for code compliance….then there is a potential issue that the incident in not an insurable event. I encourage home owners to get permits to protect themselves.
I’m so glad you mentioned that Mark. Thank you. Real estate can be so emotional that we fail to really ask the big questions. What if the house did burn down or flood though? What would insurance cover? That’s something we ought not gloss over.
I came across an interesting thing regarding apparently permitted square footage. The Realist report (i.e. County records) can show additional square footage even though that square footage was never permitted. I had the mis-conception that for that measurement to show up in the county records it had to have gotten there through the permit process. Actually, the county may discover that additional useful space and update their records just so they could make an updated assessment.
Good stuff Jim. You are 100% correct. Just because it is listed in Realist does not mean it is permitted. The Assessor has an advantage in listing the square footage for more so they can tax you more. 🙂
I have also seen the Assessor include non-permitted area in the tax roll.
Great stuff to think about Ryan. Non permitted areas are something that if an appraiser should have uncovered it in the normal scope of work and missed analyzing how it influenced value, that appraiser could be subject to additional liability. If the appraiser is working with a lender, the first thing to do would be call the lender or AMC and discuss. That lender might have special rules to follow for non permitted areas or, better yet, the appraiser might find out that the job is done.
Thanks Gary. Well stated. I agree about calling the lender (or client) first and talking through the issues. At times it’s also nice to have an assignment cancel too if it quickly becomes much more complex. 🙂
I would say too that if public records and the appraiser’s sketch are off by too much, that might be the first red flag to start digging deeper. The thing is it can be difficult to find the right information in that it is time-consuming. This is why if a Realtor or owner has information about permits already, it is such a help to share with the appraiser.
Ryan,
What are your thoughts on unpermitted remodels, we bought a house where the kitchen and bathroom were obviously remodeled, and I went down to the county building department to check permits. Their were none. The work was well done, and inspected by a contractor and home inspector. How would you value these remodels in the appraisal? Would you be worried about false statements not disclosed by the seller?
Thanks.
Hi Mr. Vargas. Good question. Honestly, it seems like few investors get permits for a remodel, so good or bad it’s pretty common actually. Of course in some areas permits are going to be found on everything because the city runs a very tight ship in terms of enforcement. Though in other areas it’s really not that way at all. Ultimately we have to know the local area, know what buyers expect, and know what is happening in the neighborhood as we value properties. The truth of course is the proof of value is in the market. If most other stuff out there is not permitted, then we have many examples already how the market feels about a lack of permits. In that sense we really wouldn’t have to give much thought to the remodel because the market has already answered the question for us when we look to the comps. However, if a market is more sensitive to permits, then it can be a bigger deal for value obviously. Though here’s the thing. I would venture to say many buyers don’t investigate and they probably don’t even care as long as the quality is good. It seems like it’s cases where there is a question on quality or a future problem where buyers start asking questions about what was permitted or not. As far as false statements and/or proper disclosure, I think I’d defer to real estate agents and attorneys to speak to that. Thoughts?
Ryan
A third consideration is whether or not the market of buyers recognize and give value to un-permitted areas, or to non-living areas. In some communities, despite the insurability issues, buyers will find utility in these undocumented areas as living spaces. A good case in point is San Francisco. Many undocumented garage conversions and subterranean bonus areas are marketed and purchased. Often the purchase price is indistinguishable from homes where all of the living area is documented and permitted.
Russ Hitomi
Certified General
Roseville
What he said…. Everyone, this is a golden comment. Thank you Russ for enhancing this post. I think you’re 100% correct. Sometimes we hear the statement, “No permits, no value.” I understand that idea, but I think your example underscores the reality that the market may be willing to pay something despite the lack of permits (and despite the real issue of insurance too). In the case I mentioned above, it’s not like the 700 sq ft would be worth nothing because there are no permits on file. The truth is buyers are going to pay something for the space. Absolutely. Supporting that might prove difficult though unless there are examples in the market. Of course some lenders won’t touch properties with a lack of permits, but that is not the trump card for value though either. Just because a lender tells an appraiser there is no value to be given to a non-permitted area does not mean that is the way value works or buyers behave.
I second what Mark Anderson mentioned above. I started an appraisal on a property that had major additions and renovations. After spending a good amount of time on the property inspection I eventually found out that the owner had not obtained permits for the work and did not have the stamp of approval by the city building department. Suffice it to say that the lender wanted nothing to do with the property because it was uninsurable. Great point, Ryan.
Thanks Tom. Yeah, lenders tend to have a problem with a lack of permits in many cases. Or they might just ask the appraiser to state it was built in a professional workmanlike manner. That’s a risky statement because we don’t really know as we didn’t see it built and we have no idea if everything conforms to code.
I will say along the lines of what Russ mentioned above, in some areas a lack of permits really might not be a big deal for value. Though that really depends on what we are talking about. For instance, on my desk right now I have an appraisal in a post-WWII starter neighborhood and there are many garage conversions in the neighborhood. It really does not look like there is a value difference between those with permits and those without. There could be an insurance issue when there is a lack of permits of course, but that’s not always a hit to market value.
Great article Ryan. Phenomenal advice for all parties involved.
Another thing that I would add is that just because a permit was finalized, doesn’t mean that the work was done correctly…
I once had a duplex in Oak Park where the electrical was grounded to the gas meter… and the City of Sacramento signed off on it! YIKES!
You really have to be thorough and not only check with the city regarding permits being pulled and finalized, but also have someone check their work and make sure that there aren’t any additional risks in purchasing the property.
Ultimately, inspect what you expect.
Thank you Wes. I am so glad you said that. You are 100% correct. I imagine most city inspectors do a fabulous job, but sometimes stuff falls through the cracks for whatever reason.