Without the proper understanding of how they can affect your purchase, the issue can become a problem down the road – one you certainly wouldn’t want to have to deal with after the fact.
Here’s a common scenario I often see:
A property owner decides to add a 500 sqft 4th bedroom to his home, but doesn’t go through the proper permitting procedures to ensure the work is legal and in accordance with city codes and regulations.
A year later, he decides to sell his home through a listing agent. The title report for the home indicates it has 3 permitted bedrooms and is 1,800 sqft. When walking through the home, though, to the naked eye, the agent sees 4 physical bedrooms, not 3, and the owner says the home is 2,300 sq ft.
Here’s where some agents get sneaky, and this is something for buyers to watch out for….
To cover himself, the agent will mention in private remarks that the 4th bedroom may or may not be permitted, he has no knowledge of the permit status, and the buyer should verify at his/her own discretion.
This is false advertising. This is improper, wrong, and a violation.
It isn’t enough for the agent to feign ignorance. In California, if building permits were not obtaining or approved for non-original construction, the unapproved portion of the house must be identified as ‘unapproved’ in the listing.
What the agent needed to do was list the home on the MLS as a 3-bedroom, since this is what is reflected in the title records. Then in the private agent remarks, he could say, “The home contains an additional ‘unapproved’ bedroom.”
Why does this matter to a buyer though?
Two reasons: Value and Safety.
More than likely, the shifty agent will set a list price reflective of the home as a 4-bedroom, even though the price should be based on it being a 3-bedroom.
A buyer’s lender will only fund the loan based on the appraised value of the home. An appraiser looks at the official permitted records, not the functional space. So even though there are physically 4 bedrooms, the appraiser will base his valuation on the home being 3 bedrooms.
If an appraiser does his job right then, he may value the home at less than the agreed upon purchase price, and this could cause seller frustrations, possibly leading to cancellation. This would have then cost the buyer time and money not to mention the disappointment of not being able to move forward with the home.
Or in an even worse scenario, the list price influences the appraiser regardless of the number of bedrooms and he ends up agreeing to the list price value. The escrow closes, but the home is overpriced, and when the buyer decides it’s time to resell a few years down the road, he may run into the permit issue again, facing the backlash of his home not appreciating and being worth what he originally was hoping for.
How can a buyer avoid this trap?
Regardless of what the MLS indicates as the number of bedrooms, I will always look up the title records for the home to verify this information is correct. When I observe that a house has an un-permited addition, I disclose this to my buyer.
If they still love the home and want to place an offer on it, I will do a thorough market analysis of 3-bedroom homes in the area. At the time we’re offering, then, we’ll know if the list price is inappropriately high or if it’s just right, and we will base our offer strategy accordingly.
Say our offer gets accepted and my buyer purchases the home in full knowledge of the un-permitted add-on. My buyer now knows that so long as the 4th bedroom remains un-permitted, the value of the home will always remain reflective of a 3-bedroom.
A buyer can obtain proper permitting if he so desires, and update the title records, to bring a true 4-bedroom value to the home. Or the buyer may simply want to enjoy the home without the permitting, but at least he is aware of the issue and still feels good with his decision to purchase.
The simple fact is: If a seller hasn’t obtained the necessary permits, it means a new owner is relying on the workmanship and quality of whomever the seller used to build the un-permitted addition.
If we discover the home has an un-permitted addition, my recommendation is always to have a thorough inspection of the addition. We would have a property inspector at the home no matter what once in escrow, but extra attention needs to be given to the un-permitted add-on because there is an added safety-risk with un-permitted construction.
Good real estate agents representing buyers will always let their clients know of any permitting issues they become aware of right away so they can adjust their strategies and approach to the home accordingly, make an informed decision, and ultimately feel comfortable and positive about their purchase.
by Jeremy Howard
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