Unpermitted Spaces

[cparra101]

We are currently in the market as a buyer, looking at potential homes. We are coming across a significant amount of properties with unpermitted spaces which naturally make us un-easy. Since it is a seller's market, the risk mitigation items like appraisal contingencies are not an option, as sellers are passing our proposals with contingencies. So, we are now in a cross road where we need to take the risk of appraisals coming in around our asking price since we do not have enough to cover the down payment AND significant money if the home appraises for below our offer due to square footage calculations.
Having said that, I'd appreciate some thoughts on the current situation:
Prospect Home is listed at 2,258 SF that includes unpermitted rec. room and bonus room. The rec. room (251 SF) is a converted garage that is connected to the home but has a wall unit to heat and cool (similar to those you find in hotels). The sun room (306 SF) is connected to the house via an old exterior double doors. We are waiting for a walk-thru to see if there is direct duct to the sun room or if the are either using a wall unit (similar to the rec room) OR keeping the double doors open to condition the space. I looked up the county's tax assessor information, and their last data shows the home as 1,701 SF (doesn't include sun room or rec room - I am assuming).
I've tried to read different resources online and asked two lenders about how an appraiser would go about calculating the SF and I am getting different points of view.
I am posting this to see if any of you experts could give me some additional insight if the rec. room and/or sun room COULD be counted by a lender's 3rd party appraiser by the description above.
Do appraisers look at county data and/or if spaces have been permitted? Do appraisers take into account items in the property disclosures (both rooms are noted as potentially not being permitted)?
Overlooking the non-permitted comment: 1) would an attached to the house rec. room with a stand alone unit count towards the SF? 2) would an attached to the house sun room with double doors into the house be counted towards the SF?
Lastly, we are waiting on confirmation that there is no duct into the sun room, IF they did run duct to the sun room, would that change the sun room situation?
I do get that whatever responses I get, are purely non binding and personal experiences and thoughts.
I am trying to gather enough knowledge to make a financially responsible offer that doesn't put us at risk.

Thank you.

 

[alebrewer]

So, in general, a residential appraiser is engaged, for Fannie/Freddie assignments, to count the unpermitted areas as GLA so long as: (1) they're finished out in similar fashion as the remainder of the home (including HVAC), and (2) the market recognizes the area as GLA (gross living area). Specifically, the guidance is as follows (from the selling guide):
"If the appraiser identifies an addition(s) that does not have the required permit, the appraiser must comment on the quality and appearance of the work and its impact, if any, on the market value of the subject property."

FHA takes it a bit further, as follows:
"The Appraiser must treat room additions and garage conversions as part of the GLA of the dwelling, provided that the addition or conversion space: • is accessible from the interior of the main dwelling in a functional manner; • has a permanent and sufficient heat source; and • was built in keeping with the design, appeal, and quality of construction of the main dwelling. Room additions and garage conversions that do not meet the criteria listed above are to be addressed as a separate line item in the Sales Comparison Approach (SCA) Grid, not in the GLA. The Appraiser must address the impact of inferior quality garage conversions and room additions on marketability as well as Contributory Value, if any."

One of the challenges in answering your question is that appraisers are not uniform in how they treat such areas. At the end of the day - whether an appraiser counts it as GLA or not - the appraiser should be addressing any value of the addition based on market participants perception.

In the example you cited - the area would most likely NOT be included in GLA, as it's not part of the HVAC.

 

[TerryRohrer]

Here is a standard for measuring homes that may help. This isn't the lastest version, but should be close.

https://www.homeinnovation.com/-/media/Files/Standards_Development/Square_Footage/2020_Z765/ANSI_Z765_-_DRAFT_20200207_-_no_cover_art.pdf

One thing I would do is call the building department with jurisdiction over permitting and find out what the consequences are regarding unpermitted work. It doesn't matter where I'm at if the work is done and then found to have been done without proper permits. However, my understanding is that there are jurisdictions that can and will require the work to be removed when that is found to be the case. If you are in one of those places, I certainly would not pay someone for something you may then have to pay to destroy!

 

[CGinMN]

Ale is correct. Appraisers have to measure to a standard, known as the ANSI standard, which defines finished area as follows:

So the rec room and sun room do not meet that criteria. However, that does not mean these do not contribute value that is similar to finished area. Instead, it just means these areas will be valued in separate line items on the form.

And yes, some of this is open to each appraiser’s individual interpretation, but this is my best guess.

 

[CGinMN]

If, as you say, a significant amount of properties have unpermitted areas, that tells me there is some market acceptance and the marketability is not likely impacted.

 

[ucbruin]

It's not going to remain a seller's market forever....
I wouldn't buy a home that I had doubts about....

 

[The Bob]

I'd call the local zoning/planning dept and ask how they view unpermitted areas. Some care more than others. In my area you can sometimes get them permitted with a fee/inspection.

 

[cparra101]

It's not going to remain a seller's market forever....
I wouldn't buy a home that I had doubts about....

This is what we are weighing. For this particular house, we see the risk as lesser than other homes that we've seen. Other homes had major renovations and additions without permits.
For this house, the rec. room could easily be converted back to a garage with the proper permits and we also could request a retro-active permit on the sun room (with inspections).
Of course, this the risk that we are evaluating. Seeing that the market is crazy with above market offers, and we are wanting a home (been renting forever), it is a risk to purchase any home right now.
I appreciate your thought though.

 

[CGinMN]

Just because you might not be able to use an inspection contingency due to market conditions, doesn’t mean you can’t do your due diligence and get a home inspection.

 

[cparra101]

Just because you might not be able to use an inspection contingency due to market conditions, doesn’t mean you can’t do your due diligence and get a home inspection.

Yes, we are trying to do our due diligence with research. Unfortunately, home inspection doesn't play much in this current market because there are, in my opinion, a lot of irresponsible buyers who put crazy offers out there (waiving this and that). And do not get me started with the due diligence fee in this current market. We are going in with an educated offer and if we get beat, we get beat. I am not putting ourselves out there like some others.