It is an all too common situation. You find the perfect home in the perfect neighborhood. Even the price is right and actually almost too good to be true. Then you find out why….the improvements were done without permits. The seller insists they used licensed contractors only and were merely trying to avoid city permitting fees/hassles and avoid higher property taxes.
There are a few major risks a buyer needs to be aware of when making a decision whether to buy such a home:
1. Make sure during your due diligence period that all unpermitted structures are thoroughly inspected inside and out to ensure the work was in fact done to code and properly. If at a later date, you have a fire or water leak that is related to some defect that has been hidden by the seller or one of his contractors as part of the unpermitted work, your insurance company could deny all or part of your claim. If the sellers are agreeable (many are not for fear of opening up a can of worms) it is always advisable to get the work permitted and/or contact the city to find out what they would need to get the improvements permitted before the close of escrow.
2. Unpermitted additions do not add value for appraisal purposes. A 1,200 square
foot home with a 500 square foot unpermitted addition will get appraised as a
1,200 sq ft home. The same will occur with an unpermitted rental unit.
Appraisers are being very conservative these days. Low appraisals have
caused many deals to fall apart in today’s tough lending environment.
Property’s with a lot of unpermitted additions might need a buyer with a lot of
cash to avoid the need for a loan or formal appraisal.