In a hot seller’s market, buyers often make concessions in order to win a bidding war. Home buyers might waive the inspection and appraisal contingencies, offer above-asking or submit an oversized earnest money deposit. Unfortunately – in their rush to beat out other buyers and close on their dream home – buyers often fail to do their due diligence. In some cases, this could mean buying a house with unpermitted additions. Of course, buying a house with unpermitted work is not always the new homeowner’s mistake. Sometimes, buyers intentionally purchase a house as is. They do so knowing that the garage conversion, swimming pool or other renovation was completed without permits because the house costs less. Other times, the seller fails to disclose unpermitted additions. A seller might do this because they did not know about the work or because they did not want to risk a low appraisal. If unpermitted work was cleverly disguised, the home inspector, appraiser or title company might even have missed it! Regardless, the buyer now has a house with unpermitted work. That unpermitted work could complicate their mortgage, get them in legal trouble with the city and/or cost them lots of time and money. So what do you do if you bought a house with unpermitted work? From how you legalize an addition to who is legally and financially responsible, here are ten FAQs about buying a house with unpermitted work.
10 FAQs About Buying a House With Unpermitted Work
#1 Which Home Improvements Require Building Permits?
Some minor home improvements – like painting the exterior or refinishing the deck – do not require permits from the local building department. Others require permits in some municipalities but not others. Generally, any renovations that affect the safety or structural integrity of a building will require the homeowner or project manager to apply for permits. Tim Parker explains in further detail in his article “Home Improvements That Require Permits” for Investopedia.
Parker writes that “making any major changes that alter the footprint of your home requires a permit.” These major changes include “additions, decks, certain fences, certain plumbing and electrical work, as well as siding projects.” Adding skylights or cutting new windows, creating a new entrance to the home or updating your HVAC system could also require permits. Your city’s building department might also require a permit “if renovations or construction projects cost more than a certain amount.”
#2 Why Do Homeowners Remodel Without Necessary Permits?
Homeowners might remodel without proper permits for a number of reasons. Elizabeth Weintraub explains in her article “Should You Buy a Home That Was Remodeled Without Permits?” for The Balance. According to Weintraub, “if you were to poll 100 people…and ask how many pulled a permit,” more than 80% might say no.
They Didn’t Know a Permit Was Needed
First, the homeowner might not know that permits were required for their project. This is common when the homeowner has chosen to DIY their project rather than consulting with a design-build firm or GC. Some homeowners assume that when they sell as is, they will not need to provide permits for any renovations. However, this is not true.
The Permitting Process Was Too Expensive and Time-Consuming
Second, the homeowner might have decided the permitting process was too expensive, time-consuming or complicated. Weintraub writes that “remodeling permits can cause delays.” Oftentimes, the city building department “is running behind and becomes backlogged by several weeks.” In this case, the homeowner must pause all work until their permit is approved.
Permitting Requirements Were Too Unpredictable
Third, the homeowner might think restrictions and requirements set by the city are impossible to meet. In many cities, permit requirements vary from inspector to inspector. Weintraub notes that “sometimes, the city code is open to interpretation.” In Weintraub’s example, a homeowner hoping to convert their garage is told different things by different inspectors.
By one inspector they are told an “18-inch trench for electrical work is needed.” Another inspector “says 24 inches is needed, or else a shut-off switch is required.” In short, some homeowners feel that applying for permits is just too much of a hassle.
#3 How Can You Find Out if Renovations Were Permitted?
Any real estate agents viewing the home’s listing on the MLS will probably know about some renovations or remodels. However, they might not know about the legal status of those improvements. This is where an appraisal, home inspection and/or title search come into play.
As part of the home buyer process, your lender will likely require you to pay for a home inspection and an appraisal. Chances are, either the appraiser or home inspector will pull permits or ask the seller to provide documentation of recent additions or renovations. Major improvements might also pop up during the title search, which most mortgage lenders require before financing a home purchase.
Should you discover unpermitted work after closing, you must get in touch with your local building department and a city inspector. If a permit was required and the previous owner applied for that permit, your city building department should have all documentation on file. If they did require a permit, but none was filed, the building department should be able to advise you on what to do next.
#4 Does the real estate agent or previous owner have to disclose unpermitted work?
In our recent post “What Do I Do? Undisclosed Defects Discovered After Home Sale,” we explained that sellers in most states are required by law to submit a real estate disclosure statement. As part of the disclosure form, sellers must make buyers aware of easements, material defects and certain home improvements. We note in our post that many state governments also “require sellers to disclose a death in the home.” Others require disclosure of “neighborhood nuisances” and appliances they plan to remove from the house after closing.
Lena Katz outlines which improvements sellers must disclose in her article “What Is a Real Estate Disclosure Statement?” for MillionAcres. According to Katz, “disclosure statements should include information on all renovations and improvements — both finished and unfinished, permitted and unpermitted.” Renovations done without a building permit could complicate real estate transactions. Still, sellers and real estate agents are required by law in most states to disclose this information.
The home seller and the seller’s agent should provide the buyer with their disclosure “after the offer is accepted.” Usually, this is “after the earnest money deposit (EMD) is in escrow, but definitely long before closing.” Usually, the buyer receives the seller’s disclosure form before the inspection and appraisal. The listing agent is also required by law to include unpermitted additions as part of the property’s description on the MLS (Multiple Listing Service).
As such, the buyer’s agent might already know about unpermitted work before receiving a disclosure statement. If the seller or the seller’s agent knowingly withheld information about unpermitted work, they might be legally obligated to fix the issue. We explain the home buyer’s legal course in greater detail below.
#5 Can you finance a house with unpermitted work?
Many mortgage companies will finance a house with unpermitted work. They will do so as long as the buyer and/or seller plan to legalize these improvements either before or immediately after closing. The Central Coast Lending resource “Non-Permitted Additions” explains.
According to the California mortgage broker, “lenders will accept properties with non-permitted additions and alterations.” However, “there isn’t a single set of rules to follow for obtaining financing for such properties.” In short, “what works for one loan, might not work for another.”
There are insurance and liability issues with poorly executed home improvements. As such, “the most important consideration that lenders take for non-permitted additions is the quality, or ‘workmanship’, of the completed project.” If the improvements could threaten the buyer’s safety and are not easily fixed, their mortgage broker might not agree to finance the purchase.
How Appraisers Value Homes with Unpermitted Additions
Your lender might agree to grant you a mortgage even after discovering unpermitted work. However, they might not let you borrow enough to cover the purchase price. This depends largely on the outcome of the appraisal. In some cases, your appraiser might not value the house at what you need to borrow in order to match the list price.
For example, a house listed with three bedrooms might be demoted to a two-bedroom if one was an unpermitted addition. Your mortgage lender will probably only finance the home purchase up to the appraiser’s valuation – not beyond it.
You might have the option to cover the gap yourself. You could do so either by paying with money already in your bank account or financing with a personal loan. Keep in mind that taking out another last minute loan could hit your credit and alter your debt-to-income ratio. This could cause your mortgage lender to pull their offer if the underwriter considers the credit report change too substantial.
#6 How do you legalize unpermitted work?
Remediating unpermitted construction can be complicated and in some cases – e.g. when an addition is constructed over an easement – might even be impossible. In many states across the country, the legalization process will resemble that which is outlined on the City of San Jose website.
According to the San Jose Department of Planning, Building and Code Enforcement, homeowners should begin by contacting their city’s building department. If the unpermitted work involves plumbing or electrical wiring, the building department will direct homeowners to schedule a code enforcement inspection.
City inspectors assigned to the case will “provide information on the next steps needed to legalize the work.” Homeowners should take a different approach if illegal improvements are still visible – unlike unpermitted electrical work and plumbing. In this case, homeowners should apply for proper permits “as if it were a new project.”
Keep in mind that once you receive direction from the city, “any delays or negligence during the enforcement process can result in a citation.” In rare cases, homeowners might be unable to legalize unpermitted additions and will be directed by their local building inspector to reverse those improvements.
#7 Should I Still Buy the House if I Know Work Was Done Without Proper Permits?
The short answer to this question is “it depends.” If the seller notifies you about unpermitted work in their disclosure statement, you might be able to get them to pay for legalization. This could mean receiving a credit from the seller to cover future permit applications and fines. It could also mean a reduced sale price that takes this unpermitted work into consideration. Just make sure that the appraisal value matches the new list price and that your lender will still finance the purchase.
If the unpermitted work is extensive, potentially dangerous and/or far too expensive to legalize, you might want to walk away. Always consult with a real estate professional, mortgage broker and/or real estate attorney during the home buying process. Consider getting a city inspector involved if you are unsure about an addition’s permit history.
#8 Can the Buyer Get in Trouble for Unpermitted Work Completed by the Previous Homeowner?
Unfortunately, the short answer to this question is “absolutely.” In her article “Buying a House Remodeled Without a Permit? Here’s What You’re on the Hook For” for Realtor.com, Margaret Heidenry explains. Heidenry notes that “if you haven’t signed the purchase agreement yet, the seller can be held accountable for obtaining and closing out permits.” However, “once the contract is signed, the buyer assumes all responsibility for work done without permits.”
As a result, the new owner of a home with unpermitted work could lose their financing or insurance coverage. They might also end up paying massive fines to the city and/or bring the unpermitted additions up to code at their own expense. In some cases, they might even be forced to demolish an addition due to code violations that cannot be resolved.
Though rare, your mortgage could fall through if permit records show your dream home is not up to the current building code. Sheila Olson explains in an article for Ownerly.com. According to Olson, “your mortgage lender can call in the loan if they learn you knowingly bought a home with unpermitted work.” If this happens and the bank calls for immediate loan repayment, the entire balance is due right away.
Should a city inspector discovers unpermitted work after reviewing city records through the local permitting department, you might also owe money to the city. This could be anything from unpaid property taxes to a variety of other fines. It is likely that the inspector will tell you how to legalize the work. They will expect you to do so at your own expense.
When Unpermitted Work Must Be Demolished
As mentioned at the beginning of this section, the city could force you to remove the entire project. One situation in which this could occur is if an addition was built over an easement area. In her article “FAQs About Easements on One’s Property: Answers to commonly asked questions about property easements” for NOLO, Ilona Bray, J.D. explains.
First, Bray defines the term “easement.” Simply put, an easement is “a legal right to use someone else’s land for a particular purpose.” Utility easements are perhaps the most common type. These easements “grant a right to a utility company or local municipality to use someone else’s land” and disallow the landowner from interfering.
If the previous owners constructed an addition over an easement area, the city might tear it down. In addition, they might “also sending you a bill for the demolition.” Bray notes that “such an outcome might seem extreme.” However, “if the sewer line bursts below your new addition and needs emergency repair, the city would need to take immediate action.” The city would then expect compensation from the homeowner.
#9 Does Homeowners Insurance Cover Unpermitted Work?
Your homeowners insurance coverage policy probably will not cover damages and/or repairs related to unpermitted work. However, your title insurance policy might. In our post “How Much Are Closing Costs for Home Buyers?,” we explain. We note that “most buyers will pay for title insurance in order to protect their mortgage lender from fallout from a bad title.”
Writing for Rocket Mortgage in her article “Title Insurance: What You Need To Know,” Victoria Araj outlines what standard title insurance policies cover. They cover “all the common claims filed against a title, including outstanding liens, back taxes and conflicting wills.”
While a standard title insurance policy might not cover unpermitted work, a premium policy probably will. The NOLO resource “Discovering Unpermitted Construction When Selling Your Home” elaborates. According to NOLO, you must be able to “prove that you did not know about the unpermitted construction prior to purchase.”
Should you meet these requirements, “your insurance may cover the cost of permitting.” If you do end up having a premium title insurance policy that covers unpermitted work, “you may be compensated thousands of dollars.”
#10 Can I Sue the Previous Owner if I Discover Unpermitted Work After Buying the House?
You might be able to sue the home inspector, previous homeowner and/or listing agent if you discover unpermitted work after a sale. If the seller or real estate agent failed to disclose the addition’s permit history, you could bring legal action against them.
Similarly, you might be able to sue the inspector if they missed an obvious issue. To learn more about your legal recourse, read our recent post “What Do I Do? Undisclosed Defects Discovered After Home Sale.”
Keeping Track of Maintenance, Repairs and Renovations as a New Homeowner
As a new homeowner, you want to know absolutely everything about your property. Finding out that an addition was built without a permit or electrical work was done illegally can be a shock and a huge headache. It is each homeowner’s responsibility to keep records of maintenance, repairs and other changes made to their property. Organizing all this information can be incredibly difficult. Imagine if a record of all the work done to your home was easily accessible and verifiable – from breaking ground twenty years ago to routine maintenance last month. This would eliminate so much of the stress and uncertainty surrounding the home buying experience.
It would also streamline communications between the homeowner, their lenders, their city planning department and other third parties. Pulling permits, looking up warranties and reviewing repair records would be simple and straightforward. When it comes time to sell, no one would worry about undisclosed issues. With our new Blockchain Home Registry, you can take control of your home’s data. Learn more here.