J Mario Preza, Real Estate Pro in Burlingame, CA

How do you handle a flip house with illegal additions (rooms) in the basement?

Asked by J Mario Preza, Burlingame, CA Tue Dec 21, 2010

San Francisco is notorious for having creative homeowners put in living quarter where the basement or the garage used to be, essentially blocking out the garage, converting them into "bonus rooms" or "mother-in-law" units. It isn't that the workmanship may be entirely bad, but it is a problem when there are no permits from the city when time comes to validate the space for appraisal purposes, or worse, when you need to disclose such additions. How do you handle this situation when the house is entirely remodeled by an investor who now wants to sell the house with these bonus rooms when representing the buyer?

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The buyer needs to know that the offer price should reflect the property without the unwarranted work. In the present lending environment the secondary mortgage market isn't placing value on unwarranted space. If the property is listed in the tax records as a 2 bed / one bath property but is being advertised as a 3/2 the lender will not fund.
If the property marketing matches the tax records and there is bonus space the appraiser can place a modicum of value but not as much as if the space was permitted and appearing on the tax records. In other words if the comparable 2/1 house sold for $400/SF and this unwarranted space added 200 SF it would not add $80,000 to the comparable value.
Biggest key is for the buyers to be aware of what they are buying and to infomr the sellers that times have changed - they should have pulled permits. Then take full advantage of the seller to get the space for your buyers at the current market discounted rate.
Lesson should be - get permits and don't do work that isn't allowed.
0 votes Thank Flag Link Tue Dec 21, 2010
Jed Lane, Real Estate Pro in San Francisco, CA
I work with a couple of investors groups who buy fixers and flip them. For the most part, they will tear out all the unpermitted work, and rebuild with permits. Since they often have to reconfigure these fixers, it is more easy to remove the nonconforming parts of the house, and do it right, than trying to work around them.
It makes disclosures easier on the resale side, and we can get a higher price after we flip it.

Good luck
1 vote Thank Flag Link Tue Dec 21, 2010
Those issues would need be resolved . If city has not approved the remodel lender may not approve the loan. In these situations sometimes easier to move on MORE problems you can imagine when a person does not understand real estate all particulars involved.

Lynn911 Dallas Realtor & Consultant, Loan Officer, Credit Repair Advisor
The Michael Group - Dallas Business Journal Top Ranked Realtors
0 votes Thank Flag Link Tue Dec 21, 2010
My first guess would be to disclose everything. If the buyer is still comfortable with moving forward after disclosing all of the material facts, then there shouldn't be much concern. Most problems arise when the seller holds back material information and then later the buyer finds out.

Good luck!
Web Reference: http://www.jameswehner.com
0 votes Thank Flag Link Tue Dec 21, 2010
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