Q: How do you handle a gigantic unpermitted addition when needing to sell? Must one come clean with the city or are buyers willing to overlook it?
A friend of mine (I know what you’re thinking, but really it’s not me) has taken his 1,500-square-foot house and made it a 3,000-square-foot house plus two-car garage, completely without permits of any sort. He lives in a million-dollar neighborhood.
Now he’s decided that he can’t carry the mortgage anymore and needs to sell. While the addition is a substantial improvement to the house in space and quality, I am positive that some of the work is not up to code. He thinks that he can sell "as is" and free himself of the problem. I think he’s got a serious problem on his hands.
I think his best bet is to come clean with the city, fix the code violations and pay the fine. I believe if he tries to sell without permits they will find out anyway and fry him. The additional factor is that he bought at the height of the market — even if the house were permitted, I think he’s close to underwater. Any advice? –K.C., Danville, Calif.
A: I’m sure you’ve heard the adagé that all that matters in real estate is "location, location, location," and the life cliché that "time heals all wounds." Reality check: When it comes to a flawed home being sold, the adage should be "disclosure, disclosure, disclosure," because that’s the transactional cure to whatever ails your friend’s home.
He has two real options: confess the unpermitted construction to the city or sell the place without permits for the addition. It seems to me that selling it "as is" is much more realistic here, for several reasons.
First off, it is not at all strange in your area for people to sell properties with unpermitted construction work. Homeowners do work without permits, most often, to save money — not necessarily on the actual construction work or even on the permits, but on the property tax increases that go along with permitted additions, especially those that add significant square footage and value to the home, like your friend’s.
In California, a large addition can cause a major hike — thousands of dollars per year — to the home’s property taxes on an ongoing basis. Accordingly, many homeowners hire licensed contractors and have construction work done to code without obtaining permits for it.
However, even when the construction quality is impeccable and complies with the municipal building codes, it absolutely must be disclosed on sale to have been completed without permits. If the unpermitted construction is an addition that increased the number of bedrooms, bathrooms or square footage, the listing and marketing documents should represent the property as having only the permitted number of beds, baths and square feet. The MLS listing and marketing materials can reference the unpermitted space, but should reference it as just that: "unpermitted" or "unwarranted" extra rooms.
Additionally, the seller’s disclosures should specifically inform prospective buyers what work was done without permits, and should encourage buyers to get their own inspections and satisfy themselves with the condition of the property. When construction work has been done with no permits, sellers should take care not to suggest that the work was done "to code," even if that’s what they asked the contractor to do.
If your friend prices the property attractively, taking the unpermitted space issue into consideration, there are many buyers who will take on such a project, even knowing that there are code and permit issues. But let’s be clear, by attractive pricing, I mean he’d have to price it lower than a home of similar size where all the rooms and square feet were "legal."
If he prices it right, buyers may bite. Many San Francisco Bay Area buyers are unafraid of unpermitted additions. Why? Well, it may cost a buyer less to take on an unpermitted addition and correct it than it would to construct the addition themselves or to buy a fully permitted home of the same size.
And, the fact is, many buyers simply don’t care whether the space is permitted if they are satisfied with the condition — and everyone has different standards about what condition is satisfactory to them.
Under California’s standard purchase agreement language, the buyer cannot report the seller or bring government inspectors into the property to call attention to the unpermitted addition.
Many homes with unwarranted work are sold every year in California without the sellers being subject to any governmental action for it; the key issue is to ensure that adequate and accurate disclosures are made to the buyer before sale.
If your friend self-reports to the city, he’s probably facing the regular permit fees plus additional fines upwards of 50 percent of the permit fee — and that doesn’t even include the cost of correcting the work, which the city may require him to do before he is able to transfer title, once it is aware of the issue.
Unpermitted construction in California most often operates on a "don’t ask, don’t tell" policy — the city won’t come in and randomly inspect or require you to fix your home, but once it becomes aware of the issue it can and will come down hard on you until the work is done to its standards (which are often imposed to the most stringent level on known offenders).
If he’s close to upside down on the home, it seems very unlikely and even unwise for him to self-report at this phase of the game. He could very quickly end up in a situation where the city won’t allow him to sell without doing some major work and paying some major fines, but he can’t afford to do the required work or pay the required penalties either.
He would do better to resell the place "as is," with full disclosure about the issues.
There is one in-between solution: If your friend does have some cash at his disposal, it might be a good idea to have a licensed contractor come inspect the property and do the work to bring it as close as possible to code compliance — especially on any health and safety issues — without necessarily involving the city.
