Tim Johnson,  in Huntington Beach, CA

In escrow with a house that has no permits on a major recent renovation....and not disclosed....what to do?

Asked by Tim Johnson, Huntington Beach, CA Tue Aug 4, 2009

We are in the process of buying a house and the seller did not disclose on the disclosure docs that much of the work on a recent total remodel was done without permits....what is the best course of action?

Should we negotiate pricing and see if we can get the house less expensive? Can we get the permits after we close? What are the implications as it relates to insuring this work? What are the liabilities?

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Dp2, , Virginia
Wed Aug 5, 2009
As an investor, I like to stumble upon properties with these kinds of challenges, because most retail buyers run away from them as fast as they can.

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.)
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Karen Parsons…, Agent, Laguna Beach, CA
Wed Aug 5, 2009
Hi Tim,

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.

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Grace Morioka, Agent, San Jose, CA
Wed Aug 5, 2009
Hello Tim and thanks for your email.

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.

Good luck!!

Grace Morioka, SRES, e-Pro
Area Pro Realty
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Amy Mosley, Agent, Mission Viejo, CA
Tue Aug 4, 2009
The big question is : Are you buying an REO or a short sale ? If so unfortunately this is often the case. If you are getting an unbelievable deal (even if it is not a short sale or REO) you may want to weigh the plus and minus to make a decision. The main thing to remember is that this issue will come up when you go to sell the home so you may have to deal with it in the future. Is it a great deal ? There are so many factors in each individual situation so it is hard to give black and white advice.

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