Should Sellers Seek After-the-Fact Permits?

said on September 14th, 2010 filed under: Lake of the Pines, Negotiating

When homes being prepared for sale, should the seller obtain after-the-fact permits for non-permitted additions?  Non-permitted additions pose a dilemma for both the seller and the listing agent.  Of all the elements of home value, the size of the home, expressed in square feet, is the most important—at least in today’s market when the home appraisers are driving the real estate bus.

Consider this house currently for sale at Lake of the Pines, California.

Acacia front

The county assessor has the house recorded at 1100 square feet.  The current owner bought the house at 1600 square feet.  It includes a non-permitted 500 square foot downstairs suite with a bedroom, den, laundry and half-bath.  At the current market average of $150 per square foot, that downstairs suite is worth $75,000

Without the non-permitted 500 square foot suite the house is worth $165,000.

With the non-permitted 500 square foot suite suite the house is worth $240,000.

The seller, naturally, wants to include the non-permitted space in the Multiple Listing Service (MLS) description, saying “I bought it at 1600 square feet and didn’t have any trouble with the appraisal.”  I explain, “That was during a time where you could get an appraisal for a ham sandwich.” 

In the aftermath of the real estate crash, appraisal practices have tightened, and there is no way non-permitted space is going to be included in the appraisal, at least not at the same price per square foot as legalized space.

The seller pulls out her ace of spades.  “The extra rooms were built by a contractor and he built it to code!”  This revelation is tossed on the table as the seller gleefully reaches out to rake in all the chips.  “Not so fast,” says the dealer (me).  First of all, the contractor built the addition without a permit—and the requisite inspections by county officials.  The build was in violation of his contractor’s license.  And, frankly, my dear, the county doesn’t give a damn who built it.  Even if it was built to code in the past, it will not be up to current codes, especially in the area of electrical codes which seem to change hourly.

This brings us to these three questions: 

How does the seller go about obtaining an after-the-fact permit? 

1.  Have a qualified professional draw a complete set of plans as required by the county.  (Hint: in this development process the seller may be able to include additional improvements to add even more value.)

2.  Commission a Title 24 study by a licensed engineer.  This is an energy assessment required of all building projects.

3.  Apply for the after-the-fact permit at the county building department.  Keep in mind that permit policies differ greatly from county to county.  Here’s a link that will give sellers some idea what’s required in getting the permit in Nevada County.  Submit  plans, Title 24 assessment, and pay the fee—and maybe the penalty.

4.  An inspector will make an initial visit to the property and determine what he needs to see inside the walls, so some sheet rock will be removed.  How much?  In Nevada County, at least 25% of the sheet rock must be removed.  No way to tell, maybe a little more, maybe all of it.  He may need to see a portion of the foundation exposed.  Who knows?  It depends on the scope of the work and how pissed off he is about it.  In Nevada County, California, the building inspectors are not happy about non-permitted work, especially if the current owner is responsible for it.

5.  Remove, expose, excavate whatever is required by the inspector. 

6.  The inspector will return, examine the gaping holes in your walls, ceilings, floors, landscaping and make his list of requirements.  He will modify or approve the plans. 

7.  Complete the work per the inspector’s wishes and the approved plans. 

8.  The inspector will make (hopefully) his final visit and sign off on the permit.

How much will it cost?

A lot.  Plans, Title 24 study, permits, penalties, and the actual costs of demolition, upgrades, corrections and finishes.  But, let’s say that to legalize the 500 square foot addition, it will cost the seller $20,000.  Since the seller stands to make $75,000 on the sale with the additional square footage, it would seem obvious.  Do it.  Spend $20,000 to net $55,000.  But . . .

There are two major problems (and several minor ones).  The first problem is that the seller simply may not have $20,000 for the project.  It’s also difficult, emotionally, to spend that much money on a house the seller is planning to sell as soon as possible.  The second problem involves risks . . . 

What are the risks of starting the after-the-fact permit process?

Once the seller starts the process and alerts the county building department to the non-permitted addition, there is no turning back.  There is no way for seller to change her mind.  Only two outcomes are available:

1.  Complete the project to the county’s satisfaction—regardless of the cost.  What if it cost, not $20,000 but $80,000?  Do you want to be the realtor who advised the seller to get the after-the-fact permit? 

2.  Demolish the addition(!) and restore the property to its original condition.  That’s right, Nevada County can—and will—require the seller to tear down the entire addition if it cannot be brought into compliance.  And here’s the really sick part:  the county will require the seller to pay for a demolition permit.  Really adds insult to injury, doesn’t it?   Do you want to be the realtor who advised the seller to get the after-the-fact permit?  

So, what do you do?

You list the house at 1100 square feet. 

Or, you list the house at 1600 square feet, but disclose to the buyer and the buyer’s agent that 500 square feet is non-permitted. 

You do not recommend to the seller that she seek an after-the-fact permit unless the house is impossible to sell without that permit.  Even in that dire situation, you make sure the seller is aware of the risks and releases you from liability.  (Yeah, sure, that’s really going to save your ass in court, but do your best.) 

Here’s an example of unavoidable after-the-fact permitting from a property we sold earlier this year:  The house was a barn conversion sitting on 26 pretty acres.  To get an appraisal for a fair price, the sellers needed one more bedroom, easily accomplished by finishing an attached garage.  But the converted barn/house was only permitted for one bedroom, so that when the county inspector arrived, he would certainly discover the non-permitted second bedroom.  Even more serious, the dwelling had a puny little septic system rated for a single bedroom.  To get the property sold, the seller had to: 

1. add the third bedroom,

2. legalize the second bedroom, and

3. triple the capacity of the septic system. 

Do you want to know what happened?

The sellers accomplished the after-the-fact permit process, and we sold the property for a fair price. 

We all lost sleep.



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