I agree with Karen: you and the seller need to do some more due diligence. You both need to determine (via inspection) what if anything needs to be torn down, are the modifications up to code, are there any special use or varience issues at play (and will they transfer to the buyer), how these changes might affect the buyer's tax basis, etc.
Instead of asking the seller to pay for the extra inspections, I'd make arrangements to order them, get cost estimates, and ultimately use all of this to negotiate a lower price. I'd also make it a point to disclose all of the issues discovered in writing, and remind the seller (or his/her agent) that henceforth the seller will have to disclose all of them upfront if s/he opts to not sell to your buyer. (I only do that to play hardball on properties with issues where the seller appears to be trying to hide stuff.)
The good news is that you are still in escrow. If you have not removed contingencies for home inspection...then don't. You need some time to look into all this.
Some things to find out:
1) local ordinances regarding permits....can the new owners be required to make changes, tear down, etc if someone comes out and finds things were not done properly.
2) Thorough inspection of anything which was involved in the renovation. Might include geological, electrical, structural etc.
I would make the case that these new inspections, if they have a fee....should be paid by the seller since they clearly knew the work was done without permits. Their agent should have gone over the disclosures forms with them to make sure they know how to fill them out.
The main question for the buyers..would they have walked away or paid less if they knew there were no permits? If the city is not going to care, and can't come back to them. If the work was done properly....then no damage was really done. But if not....then you have the right to ask for concessions, or walk away.
If this should ever happen to your clients, it's best to call in experts to look at the home. As agents, we do not have the expertise to determine what is a "minor" or a "major" repair nor whether those same repairs will be permittable or not. Look for an architect or construction conformance specialist to come to the home to evaluate the repairs. A construction professional should be able to determine if the work was done "to code" or might need to be removed or repaired to prevent further hazards.
Until you have that report, however, it's unwise to approach the sellers or the listing agent with a request for a reduction in the price. If the problems are minor, for example, and will require only a bit more work to be permittable, then asking for repair money could jeopardize you or your clients purchasing the home they want. Also, waiting to have the inspection report is important because the sellers will, most likely want to see the report before agreeing to any repairs.
Grace Morioka, SRES, e-Pro
Area Pro Realty