Discovering Unpermitted Construction When Selling Your Home

Before putting your house on the real estate market, you might want to think about whether buyers will raise questions that you yourself never did, concerning whether previous owners carried out major repairs or improvements. Specifically, they might wonder whether the house includes any additions to the original construction, such as a sunroom, extra bedroom, or new bathroom; and if so, whether the work was actually permitted by the city. Unpermitted, DIY jobs are notorious for containing hidden problems, and can make future improvements and construction more difficult and expensive.

This article will discuss the issues involved and options for dealing with unpermitted construction as a home seller.

First Steps When You Suspect Unpermitted Home Construction

You might already suspect that you have unpermitted construction in your home. Maybe the style of certain walls, windows, or other finishes doesn't match up. Maybe a room juts out in an unlikely fashion, or construction isn't holding up well over time. To follow up on such suspicions, there are three basic questions to answer:

1. what was newly constructed
2. was a permit required for the work, and
3. is there a permit in place?

What Was Newly Constructed?

While this might seem like a simple question, the answer is not always clear. You think that a sunroom was added, but what about the closet in the hallway next to the sunroom? Were the windows part of the original construction or were they also an addition?

The best way to find answers is to consult the house's original blueprints, which contain a depiction of the house as first constructed. Ideally, when you closed on the house, the owner handed you the blueprints. But you might not be so lucky. If you do not have the blueprints, you could try to locate them by contacting the previous owner, searching the city's records, contacting your homeowners' association, or even contacting the original construction company.

If your house is in an area where neighboring houses look similar, you might get information about changes to your house by comparing it to neighbors' houses. Or, you could ask the neighbors if you can see their blueprints. While this won't give you all the necessary details, it might give you enough information to get started.

Was a Permit Required for the Construction or Repair?

Once you figure out what was actually constructed, you should determine whether a permit is required for such work. Not all construction requires a permit. Consult your city (or appropriate governing municipality) building office to review the appropriate building code to determine whether your construction needed a permit.

Building permits are required for most construction or remodeling projects, so as to ensure the safety of the structure. Some common exceptions include the construction of small detached buildings (such as storage sheds), certain fences and retaining walls, driveways, window replacements, painting, floor coverings, and certain roofing repairs or replacements.

Is There a Valid Permit in Place?

If you did not perform the construction yourself, you might not know whether there is a permit in place. You can contact the city's building department to search for existing permits, or search its website.

What Will You Tell Buyers About the Unpermitted Construction?

If you've determined that the addition in your house does not have, but requires, a municipal permit, what's next? You have two basic choices:

• sell your home "as-is," or
• obtain a permit for the addition prior to sale.

Either could be a reasonable solution depending on the circumstances and potential costs.

Regardless of your choice, one thing is clear. Once you know that unpermitted construction was done on your home, you must, by law, disclose the issue to all potential buyers. You'll most likely do this on a state-specific disclosure statement, which probably (as is true in most states) asks the seller to report any known legal issues or unpermitted construction on the property. See Required Disclosures When Selling U.S. Real Estate for more information.

Also, your published real estate listing (on the MLS or within other marketing materials) should clearly indicate if there is an unpermitted area of the house (such as "one bedroom plus unpermitted second bedroom").

If you choose to sell the house as-is, be prepared. Many buyers will not take the risk of buying a house with unpermitted construction. Buyers might also have difficulty obtaining bank financing (a mortgage loan) on such a house.

Those buyers who are willing to take the risk will likely want to pay less than what you think the house is worth. For example, if you have a two-bedroom house, but one of those bedrooms is unpermitted, the market value will likely be that of a one-bedroom house. This reduction in price could be significant.

If you choose to sell the house as-is, you do not need to disclose the issue to the city. In fact, when you are investigating whether a permit was issued, be careful how you communicate with the city. If possible, conduct an anonymous online search so as not to put the city on notice that you might have unpermitted construction on your property. The city could start an investigation and require you to obtain a permit, leaving you with no choice in how you handle the situation.

Getting a Permit for Your Construction Retroactively

Before you decide whether to try to get a permit for work that was already done, assess the process and cost involved in doing so. Permit requirements vary from city to city, so consult your city's building department for full requirements. Most cities require:

• Completing a permit application.
• Preparing a site plan for the project. If the work done on your house was extensive, you will likely need to hire an architect or other professional to draw the project in its as-built condition, or as it will be reconstructed in accordance with building and zoning codes.
• Scheduling an appointment for plan approval. You might be able to receive approval in person at an "over-the-counter" review. Or, the city could take several days or weeks to review the plans. The process might get extended even further if the city requires corrections and revisions to your submission.
• Getting the permit. You will need a permit before you conduct any construction on your property.
• Scheduling inspections. As you perform construction, you will need to schedule inspections throughout the process so the city can verify you are acting according to your plans.
• Complete your project and obtain final city approval.

If you are lucky, your city will have a process for retroactive permitting, which could reduce the cost and length of time involved. This means obtaining a permit after the construction has been completed, without knocking down the entire structure and starting from scratch. The city will likely require you to open up certain parts, but not all, of the construction and show that it was completed according to current building code.

If your city does not provide for retroactive permitting, you will not necessarily need to tear the entire project down and start over. You will, however, need to work closely with the city to devise a plan to permit your construction. The city may require extensive uncovering of past construction and strict adherence to the building and zoning codes. Without a written process in place, this could be a more difficult process to navigate.

As you are an innocent purchaser, and did not create the problem, the city will most likely work with you to resolve the issue. It may be flexible with deadlines and might not charge penalties for failure to obtain a permit. Some cities have laws protecting innocent purchasers. These laws protect purchasers from penalties or tax increases associated with the unpermitted work, so long as they had no knowledge of the issue when the house was purchased.

The direct permit cost will depend on the value of the construction. The indirect cost will depend on how your project was constructed. As stated above, most cities require that construction be done in accordance with current code. Bringing old construction up to current code can be expensive. You might also find that poor construction methods and means were used. Until you uncover your construction (which can be expensive in itself, involving things like removing walls over electrical wiring or uncovering the structure's foundation), you won't know how the project was constructed.

You might be wondering how you can determine the total cost of obtaining a permit before actually demolishing portions of your property. Consider hiring a contractor to evaluate your construction prior to contacting the city. A contractor might be able to determine whether your original construction was done in accordance with building code and thus how much work will go into bringing it up to code. A contractor can also guide you on how to best work with the city.

Who's Responsible for the Cost of Obtaining the Permit?

Can you defray the costs associated with obtaining a permit? After all, you were not responsible for the unpermitted construction. While the city will look to you, as the present owner, to remedy the issue, others might be legally responsible for costs associated with obtaining a permit.

Review the disclosure statement. Did the previous owner disclose the unpermitted construction? Based on that, should you have known? Or, did the previous owner lie or mislead information? If so, you could have recourse against the previous owner.

Your real estate agent or home inspector might share some responsibility for the unpermitted construction. Should one or both of them have discovered and informed you of the possibility of unpermitted construction at the time you purchased the property? If so, they might be legally responsible.

When you purchased your property, you likely received title insurance. Title insurance protects you, as the property owner, against encumbrances or defects in your title. See Title Insurance: Why a Home Buyer Needs It for further information. A standard title insurance policy will not protect you against unpermitted construction on your property. You might have, however, a premium title insurance policy or a title policy with special coverage (called an "endorsement") that covers unpermitted construction.

If you have this coverage and you can prove that you did not know about the unpermitted construction prior to purchase, your insurance might cover the cost of permitting (up to a certain amount, after you pay a deductible). As title insurance companies do not like to pay such claims, follow the instructions on your title policy carefully to maximize your chances of receiving full available coverage. It's up to you to find and review your title policy (it might be buried in a stack of your old closing documents!). Make sure to do so, because if you have the right coverage, you could be compensated thousands of dollars spent on correcting the issue.

Getting Help Dealing With Your Unpermitted Construction

Navigating issues involving unpermitted construction can be complicated. This is especially true when it also involves the sale of your house. Consult a local real estate or construction law attorney to help figure out the best solution for your situation.