James--I recently covered this topic on my blog, Inside San Francisco Real Estate. Here is the excerpt, which I think will provide some necessary background on the concept of unwarranted space:
"In real estate circles, San Francisco is famous for the prevalence of â€œunwarranted,â€ or â€œillegalâ€ rooms. Many buyers ask me about the ramifications of these rooms, so I thought Iâ€™d share today.
Unwarranted rooms are those which have been built without involving city permits and inspections. In a major renovation situationâ€“for example, adding a unit or bedroom and bathâ€“you or your contractor will apply for a permit from the city. Once the permit is granted and the work is done, one or several city inspectors comes out to the property to sign off on the work. This signoff ultimately goes on your propertyâ€™s 3R, or building permit history, report. This is one report that is provided to future buyers if you decide to sell your home.
The fundamental issue for prospective buyers is that the work may or may not have been be done in accordance with city safety codes. This is particularly important when it comes to the electrical and plumbing work behind the walls, which a city inspector approves. Another downside is that if you purchase a home with any sort of prominent, unpermitted work and decide to do a subsquent renovation with permits, an inspector can notice the unpermitted job while examining the work related to your current, unrelated project during a scheduled visit. In the case of an unwarranted unit or simply a bedroom and bath downstairs, inspectors can then ask to see plans and permits, or require that you furnish such documentation.
Finally, if you decide to buy a house with an unwarranted unit and rent that unit, you will run into problems if a neighbor decides to notify the city."
And to continue, there are some contractors who will add rooms without permit--same goes for termite work. The risk you run is a fee for permit violation if the work were reported by a neighbor and the city came out to investigate, as well as additional costs incurred if the city requires that everything be done to code.