Before putting your house on the market, you may want to think about whether buyers will raise questions that had never before concerned you, concerning improvements by previous owners. For example, does the house include any additions to the original construction, such as a sunroom, extra bedroom, or new bathroom? If so, was the work permitted by the city?
This article will discuss the issues involved and options for dealing with unpermitted construction.
If you suspect that you have unpermitted construction in your home, there are three basic questions to answer: what was constructed, was a permit required, and is there a permit in place?
What was 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 the answer is to consult the house's blueprints, which contain a depiction of the house as it was originally constructed. Ideally, when you closed on the house, the owner handed you the blueprints. But you may not be so lucky. If you do not have the blueprints, you may 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 may get some information about changes to your house by comparing your house to your neighbor's house. Or, you may ask the neighbors if you can see their blueprints. While this won't give you all the details you need, it may give you enough information to get started.
Was a permit required? 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 needs a permit.
Building permits are required for most construction or remodeling projects 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 permit in place? If you did not perform the construction yourself, you may not know whether there is a permit in place. You may call or visit the city's building department to search for existing permits. In many locations, you may conduct an online search.
If you've determined that the addition in your house does not have, but requires, a 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 may 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 typically (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 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 may also have difficulty with bank financing 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 of your house will likely be that of a one-bedroom house. This reduction in price may 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 may have unpermitted construction on your property. The city may start an investigation and require you to obtain a permit, leaving you with no choice in how you handle the situation.
Before you decide whether to get a permit, 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:
If you are lucky, your city will have a process for retroactive permitting, which may 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 may 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 may not charge penalties for failure to obtain a permit. Some cities have laws protecting innocent purchasers. These laws protect a purchaser from penalties or tax increases associated with the unpermitted work, so long as he or she 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 very 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 your project was constructed.
You may 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 may 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 may also give you guidance on how to best work with the city.
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 may 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 may have recourse against the previous owner.
Your real estate agent or home inspector may 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 may be 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 may 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 may 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 so that you can 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 the attic in a stack of your old closing documents!). Make sure to do so, because if you have the right coverage, you may be compensated thousands of dollars spent on correcting the issue.
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.