How does non-permitted work impact the buying or selling of a home?

Building InspectorBefore we can discuss the impact  non-permitted work has on a home, it is important to talk about what a permit is and why it is required for work completed on a home.  Permits are typically issued in accordance with a city or county ordinance.  Therefore, not obtaining permits for required items is unlawful.  Permits are the simplest way for a governing body to manage the construction practices of a community for the general welfare of the residents.  From the ground up, local inspectors confirm that construction is being completed in a manner that meets building code standards.   These standards were created to insure the building is  structurally sound and safe.

If you are using a contractor, they will be able to identify what work requires a permit.  In Santa Clara County, any work totaling over $500 requires a licensed contractor.  A non-licensed contractor may not know the building codes and may not be aware of permits required.  A great site for finding information about a contractor is the Better Business Bureau.  You can also try The Prime Buyer’s Report for reviews and ratings of local contractors.

Directly from the Santa Clara County web site:

When Is A Building Permit Required?
A building permit must be obtained before you erect, construct, enlarge, alter, move, repair, improve, convert, or demolish any building or structure.  This includes decks over 30 inches high, patio covers, sheds over 120 square feet, fences over 6 ft. high, and retaining walls more than 4 ft. in height, measured from the bottom of the footing to the top of the wall.  Fees are calculated based on the size, type and valuation of construction. Typical codes that apply: Uniform Building Code, Uniform Mechanical Code, Uniform Plumbing Code, National Electrical Code, and State building codes.  For single-family dwelling, a good reference is “Dwelling Construction Under The Uniform Building Code”; also check your public library.

Many cities and counties have on-line permit search capabilities.  For San Jose, simply go to San Jose Online Permits and enter the parcel number of the property to find what permits are associated with the property.  Certain permits may not be available on line and you can go directly to the planning board in the city hall complex and request a printed copy.  The planning department can also answer questions you might have about a specific permit.  Recognize that the permit records are not perfect and there have been incidences where the only record of the permit is the copy that the owner or contractor very wisely kept. Also note that certain changes to a home may have been completed prior to a building code requirement and may have been grandfathered into the system.  This is typically recognized when the tax records state additional square footage, rooms, or bathrooms as a part of the tax records but no permits are recorded.

If you are a seller of a home and you are aware of non-permitted work on your home you must disclose this information to the buyer via the Transfer Disclosure Statement (TDS) form.  Certain sellers do not have to complete a TDS.  The TDS makes the assumption you have lived in the home and have intimate knowledge of the dwelling.  Therefore, foreclosures (REOs), trustee sales (including probate sales) do not require a TDS.  In these cases, a buyer must be even more diligent in their investigations of the property.

As a buyer, the investigation of permitted work is a key part of the purchase for several reasons.  Non-permitted work can impact the value of the home.  The appraiser measures the square footage and compares to the tax records.   The converted garage is an obvious flag for an appraiser.  Realize that some garage conversions were allowed and permitted previously in the county.  Any permits should be provided to the appraiser.  The lender may challenge non-permitted work and require a remedy to the non-permitted addition.  The underwriter can ask to see final permits and/or require the property be returned to its “original state”.  If you are a buyer, this may be the moment you decide to walk away.  Be sure to understand contingency periods during the investigation of the property, appraisal period, and underwriter loan approval in order to protect your deposit.  This is particularly important when purchasing from a non-owner occupant (i.e. REO, foreclosures, trustee, probate).

Recognize as a buyer or seller, bringing the non-permitted change to permitted status there may be at significant cost.  For the seller, there may be fines.  The inspector can not see electric work through the walls and destruction of the drywall in order to evaluate the electrical work may be required for inspector approval.  Foundations and plumbing can also require significant destruction for adequate exposure.  Worse case scenario, the inspector is called out and determines the structure, remodel, etc. must be completely removed and the property returned to its original state.  Yikes.

Because permits are a reflection of building codes which are meant to insure safety and general welfare of a community, insurance companies do not smile favorably on claims created by non-permitted work.  Electrical fires and flooding due to non-permitted work can result in a denied claim.  Earthquake insurance claims can be denied if non-permitted additions are determined to be cause of structural issues.  Another reason to keep personal copies of all permits and contractors licenses in a safe deposit box or durable personal safe.

Non-permitted work on a home creates challenges on both the selling and buying sides.  The reality is that as a REALTOR®, I deal with this challenge more times than I care to admit.  In many cases, the issue can be resolved with the least amount of pain and stress.  Trips to the planning department (bring lots of quarters for parking) can be a daily adventure.  Having licensed contractors available to provide evaluations on remedies and estimates for those remedies helps sellers and buyers determine the impact.  The unfortunate results can be a very large difference in opinion about the value of the home due to non-permitted work.  It is a sad conclusion when a home that could have sold for $650,000 limits the buyers willing to buy due to the fact the seller failed to obtain a $5000 permit.

Before you decide to complete work on your home or before you decide to purchase a home that has non-permitted work,  determine the effect on value.  Do your homework about permits and work with licensed contractors and a REALTOR® when trying to determine the challenges and value provided by any additions or remodeling  associated with the home.  Whether seller or buyer, ask lots of questions before making a decision about the impact of non-permitted work.

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