Unpermitted Additions, Can I get financing?

“Additional bedrooms and square footage other than noted with assessor!”

There is a 2,500 square foot home for sale in my neighborhood that has been on and off the market for over 2 years. Priced at only $140,000, this 16 year old home on over 2 acres seems too good to be true. This home has been listed by at least 3 different agents and has fallen out of contract numerous times.  Why? The description contains “Additional bedrooms and square footage other than noted with assessor!” Is this why it hasn’t sold? You couldn’t duplicate this home for twice the price and yet it continues to fall out of contract. building_and_safety

I regularly see homes listed for sale with unpermitted additions. If you are considering one of these homes, there are a number of things you need to consider. Most municipalities require a building permit prior to starting an addition or alteration to a structure. If you purchase a home with an unpermitted addition in Washoe County; you may be subject to paying an investigative fee in addition to the permit fees.  If the new owner voluntarily discloses the unpermitted work within 90 days of receiving ownership, the building official may waive the investigative fee. The 90 day period for disclosure does not begin until the new owner knows, or should  know that work was performed without a permit. If the unpermitted work is noted in the listing, the buyer has 90 days from the transfer of title to obtain the permits or be subject to a fine up to $4,000

Can I get a mortgage?  

Is the addition or alteration up to code? For both Conventional and FHA loans, the appraiser needs to do a complete analysis of the home and any unpermitted additions require a more detailed review and explanation by the appraiser. The quality of the work will be the key to obtaining a mortgage.

Conventional Loan

Properties with “unpermitted” structural additions are acceptable under the following conditions:

  • The quality of the work is described in the appraisal and deemed acceptable (“workmanlike quality”) by the appraiser;
  • The addition does not result in a change in the number of units comprising the subject property (e.g. a 1 unit converted into a 2 unit). Rental income from an unpermitted accessory unit may not be considered.

Conventional ARM Loans

  • If the appraiser gives the unpermitted addition value, the appraiser must be able to demonstrate market acceptance by the use of comparable sales with similar additions and state the following in the appraisal:
  • Non-Permitted additions are typical for the market area and a typical buyer would consider the “unpermitted” additional square footage to be part of the overall square footage of the property.
  • The appraiser has no reason to believe the addition would not pass inspection for a permit.Permitted and unpermitted additions are acceptable for an FHA loan. The appraiser needs to do a complete analysis of the home. Unpermitted additions require a more detailed review and explanation from the appraiser.

Comments and issues that the appraiser should address:

FHA Loans

  • The appraiser must indicate the conversion or addition was completed in a workmanlike manner.
  • Comparables should be used that reflect the same type of unpermitted and permitted additions or conversions.
  • The appraiser must state that the property is in compliance with local zoning requirements and conforms to the subject neighborhood and the market.
  • The non-permitted additions may not render the subject illegal per local zoning.
  • The appraiser must state that there is no effect on the value and marketability.
  • The highest/best use needs to be residential in nature.
  • If a garage was converted without a permit, the appraiser must show the value as a garage, not as a converted room. The appraiser must also estimate the cost to cure for re-conversion back to a garage. If the garage is converted to a living space with no extra plumbing or electrical work, no permit is required if the appraiser indicates it was completed in a workmanlike manner, the comparables to support the value, and the lack of car storage is not prohibited by local ordinances.
  • If the appraiser can obtain comparables that are the same as the non-permitted living space, no adjustment to the property value is necessary. If the comparables do not have a similar living space the room must be valued based on its original use (as a garage). The appraiser must also estimate the cost to cure for restoration back to a garage.

VA Loans

  • VA does not require enforcement of any local building codes for properties that have had additions made to the subject property without obtaining a building permit from the local building code enforcement authority. Unpermitted additions are acceptable on VA financed properties; however, the property may not violate zoning restrictions and must be eligible for rebuild if destroyed. The appraiser must confirm the ability to rebuild in the event of full or partial destruction, citing the specific source of his or her data, e.g., the name, position and telephone number at the municipal agency or documented with a “rebuild” letter from the local zoning authority.

USDA Loans

  • Unpermitted additions are not allowed.

Can you get financing for home with unpermitted additions? If the work has been completed in a “workmanlike manor” and the addition, repair or renovation is in compliance with local zoning ordinances, the answer is likely yes. I suggest contacting the local Building Department to determine what they will require. You need to determine the costs involved to bring the property up to code and obtain a certificate of occupancy. Also, the tax assessment will likely increase once you have gotten your permits and certificate of occupancy. If you are considering a home with an unpermitted addition, you most likely will not know if financing is available until after the appraisal has been completed. Also, the likelihood of unexpected expenses is great. Be sure to do your due diligence prior to making an offer.