David, Home Buyer in Santa Clara, CA

What happens when you try to sell a house with unpermitted bedroom and bathroom additions that makes the house different than what's tax records?

Asked by David, Santa Clara, CA Fri Jan 24, 2014

I'm wondering what are the pitfalls as a flipper if I buy a house that has had additions made without permits such that there are more rooms and bathrooms than what's in public records?

I'm looking at a house for sale that physically has 3 bedrooms and 2 bathrooms but records show it only has 2 bed/1 bath. I called the building permit department for the city and they said the owner did pull permits for the additions but never completed the require inspections and let the permits expire. The additions look like they were professionally done by a contractor but just not permitted.

If I were to buy it, update everything, and resell it, what would be the pitfall of selling a house like this to a financed buyer? Would lenders not care or would they still consider the house a 2/1, not a 3/2? How would it affect the appraisal?

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8
Huey Nguyen’s answer
Hello David,

I agree with my colleagues here.

Regarding lenders: Only the permitted square footage and rooms would count towards the appraisal value of the property. So the third bedroom and second bathroom would not count towards the appraisal value decreasing the value of your property and perhaps the eventual sales price, if the buyer is not willing to pay the difference. I have even seen a lender hold up escrow and force the seller to obtain the correct permits in order to move forward. Certainly, this kind of property would not be up to FHA guidelines. Please check with some lenders to see what the current guidelines are.

Regarding the building department/permits: A neighbor could report that you have unpermitted rooms, and the city could force you to obtain the proper permit and restore the structure to its original permitted state. This could also happen, if the city were to inspect your property independently. From there, if you would like to obtain permits to add a bedroom and bathroom, there would be additional expenses for that.

Every city has its own procedures, and you should check carefully with the planning/building/permits department to obtain detailed instructions regarding how to proceed. Your licensed contractors will be able to help with these matters as well.

Please contact me for more information. I can help you.

Good luck,


Huey Nguyen
0 votes Thank Flag Link Sat Mar 29, 2014
Unfortunately sometimes final inspections aren't done because other work was also done without a permit. Inspections are done at several different stages of the work. You could look to see which inspections were done. By viewing the details of the permits you can make a better guess about potential problems. The home may be a good investment even though final inspections weren't obtained. Most building departments want to see property made safe and don't go on a crusade to punish property owners. Santa Clara home values http://julianalee.com/santa-clara/santa-clara-statistics.htm ...
Juliana Lee
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0 votes Thank Flag Link Sun Feb 9, 2014
From the lender stand point:
Appraisal will give you credit for the portion of the home that is permitted.
Any work that is done that adjusts square footage, makes changes to plumbing, electrical, etc. needs to be permitted or it will not be utilzed by the appraiser for value.
This may be fine for a cash buyer, but resale value will definitely be effected.
Any future buyers who so desire to purchase home will need to have permits to justify value.

Another thought, work bay 'look professional' but concerns arise with electrical and plumbing work done to code.

If you are thinking of selling this property, I would either request permits (which you likely will not get) or find another property,
0 votes Thank Flag Link Tue Feb 4, 2014
David, thanks for your post. As a "would be" flipper, homes with complications such as this are fraught with problems that can quickly reduce your expected ROI on the home. Depending on the City where the home is located (and that's an enormous component to the question of "whether or not" this is a good investment), the following scenarios can occur when you begin working on the home: 1) the city could "red tag" the property, requiring YOU as the new owner, to remove all of the modifications at your cost and restore the home to its original 2/1 configuration thus setting you back a significant amount of funds and time for repairs; 2) an owner in the area can report the illegal modifications to the City and then, see No 1, mentioned previously; 3) the City might agree to review the modifications under a new permit application, but you will be required to open all of the walls and bring anything up to current building codes, which might be more expensive than simply removing it and starting from scratch. Lenders may or may not care about the lack of permits, but any future buyer and their lenders will definitely care especially if you keep the property for less than six months. My suggestion, if this is not going to be a home that you live in and retain for at least long enough to work out the "kinks" with the City and permits, I'd pass. Just my two cents.
0 votes Thank Flag Link Fri Jan 31, 2014
As the other agents stated, financing could be a problem. Keep in mind that getting final permits is going to depend on what is available for the inspector to see. If they closed up walls before framing, plumbing and electrical were inspected they are not going to be able to pass those. You may need to open up walls.

If you can get them inspected and pass then it will make selling much easier and possibly gain more money.
0 votes Thank Flag Link Sat Jan 25, 2014
Many lenders, especially FHA, could care enough to possibly not lend on it. Because the seller pulled permits & let them expire, you should go back to the city & ask what inspections remain for them to complete & how much it will cost. If it is just the final that should be fairly easy but if all there is are the permits they may need inspections that require demolition (examples would be to see the construction, the wiring, and the plumbing behind the drywall). Good luck.
0 votes Thank Flag Link Sat Jan 25, 2014
Talk to the city about getting the finals for the addition. I did it for one of my client. Otherwise the unpermitted square footage will not count for the appraisal.
Web Reference: http://talisrealestate.com
0 votes Thank Flag Link Fri Jan 24, 2014
Lenders would definitely care. Also appraisers would have to go by the county's assessment of size and configuration. To get too value on the sale you should get these items permitted.
0 votes Thank Flag Link Fri Jan 24, 2014
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