Any and all renovations done without permits must be disclosed during a transaction. If a purchase is (1) completed by a buyer, (2) insured and then (3) the property is damaged in such a way as to require intervention by the insurance company, (4) compensation by the insurance company could potentially be refused based on the lack of permits.
In addition, as mentioned below, (1) if the city (or county, if applicable) was made aware of the issue, (2) the property could be red-tagged, (3) the current owner would be required to bring the property into compliance with all applicable codes (4) within a period of time specified by the local building officials or (5) face serious financial penalties as well as (6) being required to vacate the premises until all issues were remedied.
This is NOT a risk most normal buyers will assume. As mentioned by Dp2, an investor might be willing to purchase the home and assume all liabilities. However, it would be, in essence, similar to buying the home on the courthouse steps: it would be for mere pennies on the dollar.
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Assuming that's the case, then he has a few options: 1) sell for a low cash offer, and be forced to bring some equity/money to the table; 2) sell via short-sale, and possibly be required to sign an unsecured promissory note for the difference; 3) do deed-in-lieu (provided he only has 1 mortgage lien on the property); 4) sell via creative financing (eg seller financing, lease-option, etc); and 5) equity partnering.
If he's looking for the most that he can get from this sale, then the last 2 options (creative financing and equity partnering) are his best options.
I've been selling in the Danville area for 21 years now and have bought a home in Alamo with an unpermitted bathroom and we sold it that way without a problem. I've also listed homes where the owners have done work that was not to code and unpermitted. I've listed those homes for slightly under the market price and sold them to contractors who understood what was involved. It will definitely limit who he can sell to comfortably. And in this market when it is hard to attract qualified buyers he can have a real problem. Among the issues are electrical and plumbing and some or a lot of that could be in the walls and they would have to be opened so that the inspectors can see what was done. Who did the work? Did he, a friend/cousin, or a handyman, or a licensed contractor who wanted to get paid under the table?
You've received excellent advice from Ron & Debbie and Scott. I'd like to add my own perspective, based on 18 years in real estate and 9 years on my city's Code Enforcement Board..
If I were talking to your friend, here's what I would say: You've created a serious problem, not an insurmountable one, but serious nonetheless. Selling the home As-Is does not absolve you from disclosure requirements under the laws of your state.
Many (perhaps most) real estate companies have their Sellers fill out and sign a multi-page disclosure form at the time of listing the home. These forms ask specific questions about everything, including whether any work has been done without permits. So, yes, doing work without permits does catch up with you when you sell.
The situation you describe is more common than you might think. Often, homeowners hire someone to do work on their home and discover, after the fact, that the contractor didn't obtain a permit. There actually is something called an "after-the-fact permit." Look for licensed individuals with a background in home building and a knowledge of local building codes who can give you an estimate of what it will cost to obtain the proper permits after the fact and bring the property up to code.
You need to get this estimate first, so you know what you're dealing with. My concern is that at, this point, you may not be able to pay to have this work done. With the real possibiity of a short sale looming, you may want to see now if you can get your mortgage payments reduced. Consult with an attorney to review your options and decide how to proceed.
There are Buyers for every home. If this one is in a desirable location, perhaps a builder would buy it in a short sale. Good luck.
Maggie Hawk, REALTOR
Watson Realty Corp.
Your insticts are correct. Not only are buyers skittish about any out of the ordinary conditions but appraisers are incredibly picky and will call the unpermitted and out of code issues and the bank that represents the buyer may put the RED LIGHT on the transaction. The best thing that he can do at this point is to have a home inspector go through the home, tell him what needs to be in code and then fix it. At that point the City or County will send someone out for permitting. This applies also if he intends to short sale the property. The only option he may have is to walk away and let it go to foreclosure, whereby he no longer is the legal owner. I suggest that he speak to a real estate attorney if he is considering either of those options. I can suggest one if he is interested.
Good luck to him,
I'm Danville based and work with local clients, mostly buyers. I can tell you they are skittish about details. Today's buyers are looking for clean inspections, permits and value. If the permits aren't there, the value isn't there, and the likely outcome is not a clean inspection.
When we market a home we must identify the square footage as per public records or per appraisal. The tendency is to verify stated square footage regardless, using public records. The variation becomes a huge red flag to the buyer.
Do what you can to get him to approach the city.
Vickie Nagy, CA DRE#01363932, Keller Williams Realty
The best way is the honest way to go to the city and make it legal. If not a lawsuit down the road from a future buyer is a good bet .
Good luck with working things out
Selling a property as-is goes to condition. As-is condition IS NOT everything, major systems still must operate. A sellers property disclosure is NECESSARY...if he or she tries to hide this issue, they will probably end up in court later. Better to handle it now NOT later.
Debbie Albert, PA
Coldwell Banker Residential
Come clean or you just might be in court later.
Call the building department and ask them what steps need to be taken. The seller can fix this and transfer a clear title. Don't you want a clear title? Any fines (if any) will be paid by the seller. It is usually a double the permit fee. It is just not that hard to fix it.
Debbie Albert, PA
Coldwell Banker Residential
The seller can get permits and pay the fees and fines and everything will be fine. A buyer can do this as well after close. If the home was constructed to current code it will likely be a matter of opening up walls so the inspector can review all wiring and plumbing and foundation. This is a risk though becasue the inspector an require upgrades to must recent building standards and if the foundation or construciton is subpar. Then demolition is the only solution.
To answer Ms. Brickman's question -- the majority of the work was done by him with the occasional help of friends. He hired people here and there to do things like pouring cement. He's no dummy as far as construction, but he's no contractor either. A mutual friend that helped out said that he was aware of at least a few code violations -- and that's just the 20% of construction that he witnessed.
The first rule in transfering property is disclose, dislclose, disclose. As long as you disclose any known defects to the next buyer, you'll be ok. If your friend is considering a loan modification, please let him know he can do this himself rather then paying someone $3500 - $5000. I've seen loan mod offices disappear overnight!! If he needs assistance with the loan mod paperwork, I can help him out at no charge. I provide that to everybody under water right now as a way of giving back to the community. Wish your friend good luck.
Before going to the city, it would be best to find out what the 1500 sq. ft. structure would be worth in today's real estate conditions. To do so, contact a local agent who can help establish pricing. If it is determined that he owes more than the value, he will then have to make a decision about the home. 1) Keep the home, perhaps obtaining a loan modification. 2) Do a short sale with full disclosures that the 1500 sq. ft. addition is built without the benefit of permits. Short sales are sold "as-is". 3) Foreclosure. It would be advisable for your friend to speak with a real estate attorney to discuss which option is best for him. Once he has focused on what is the best avenue, obtaining a bid from a licensed contractor who is familiar with Danville's building codes (or the city he lives in since you said 'near' Danville), would be a big plus and would give potential Buyers peace of mind. It would also give your friend an idea of what he needs to do to get his property up to building codes should he choose to keep it. Just so you know, Danville can give permits for properties after the fact. They just require more paperwork.
Best of luck.