I posted an answer to this same question in another Trulia thread. It is just as applicable here and the answer was:
Additions that have not been properly permitted have also, most likely, not been properly inspected to ensure the addition was built to local codes and requirements. Additionally the homes size (square footage) has been changed and not properly reported to local property tax authorities. If the mortgage company does not discover this through the appraisal process then the insurance company might. If neither catches the "illegal additions" and the mortgage does complete these are the possibilities at a later date:
1. If you ever experience a claim on the home with your insurance carrier, especially if it deals with the illegal addition, then your insurance carrier may refuse to cover the claim as the home has had improperly permitted additions, changes, modifications to it.
2. If the local taxing authority discovers the changes and determines when they were made they might assess you retroactively for the amount of taxes, penalties and interest they could have collected.
3. If the local building department discovers the illegal additions (the taxing authority will advise them if they find it) then you may be subject to penalties, potentially have to remove it or at least parts of it for inspections, etc., etc.
4. If in the future your mortgage company discovers that you have illegal additions, and that you were aware of them, they might also have methods of redress to prevent any issues with the loan such as prematurely calling in yuor loan with an immediate payoff demand. The mortgage company is not going to want to expose themselves to potential future liabilities and have many avenues of redress to prevent them of which this is one.
5. If the illegal additions violate local zoning ordinances, setback requirements and/or extends onto your neighbors property then your title insurance company is most likely not going to cover this situation either. It can result in you bearing the full cost of rectifying the problem.
6. If your illegal addition causes your neighbors any problems, or your relationships with your neighbors sour, then they can "drop a dime" on you to the local building department and get the ball rolling for any/all of the above to occur.
7. If you are lucky to not experience any of the above and try to sell the home later it may then be discovered and cause you significant grief in the sales process. First off you know it is an illegal addition and will have to disclose that. Even if you don't and the new buyer discovers it prior to closing and backs out you now can not avoid disclosure. Also when it is discovered any of the above actions can again be started.
If you know or suspect a home has illegal additions to it then you should perform additional due diligence before your option period expires. It is a simple thing to visit the local building department and check the history of the home for its original build size and ANY permits that may have been requested for additions, major upgrades, modifications, etc.
Sellers are required to disclose these things but Seller Agents are not required to research a home to make sure the seller tells them the truth when they sit down to fill out the foreclosure papers when listing the home. If you read the MLS terms I believe it also states that what is listed is not guaranteed to be what is actually there. There is generally a statement that says:
"All information provided is deemed reliable but is not guaranteed and should be independently verified."
Don't expect your Agent or the Seller's Agent to provide you reliable information in regards to this issue! They are protected by their contract with you, the above MLS statement, the disclosure notice improperly filled out by the seller and a whole host of other barriers to protect themselves. Agents are in the business of getting people to sell and buy homes and are unfortunately not REQUIRED to specifically perform these types of checks for their clients, whether a buyer or seller.
Good luck on the home buying process.
Emmanuel J. Scanlan
PS Inspection & Property Services LLC http://www.psinspection.com
TREC License # 7593
International Code Council, Residential Combination Inspector #5247015-R5 (Electrical, Mechanical, Plumbing and Building)
Certified Infrared Thermographer (ASNT-TC1A Standards)
Texas Residential Construction Commission, Third Party Warranty Inspector #1593
Texas Residential Construction Commission, Inspector, County Inspection Program
Texas Department Of Insurance, VIP Inspector # 08507061016
Hayman Residential Engineering Services, Field Technician
CMC Energy - Certified Energy Auditor
Knowledge is power, but sharing knowledge brings peace!!
Remember, permits insure the "minimum of building standards" have been developed to protect the consumer. Permits are well worth the few hundred dollars they cost.
Regardless of location, unpermitted additions cover a range of possible implications from nothing at all to "opening a can of worms."
Our recommendation, if considering this type of transaction is to make certain you gather your facts and clearly understand what the local municipalities position is on these matters will be and avoid the can of worms.