Calling out contractors, realtors, and lenders for help on this one...
I just purchased a property at auction on Monday. It looked like a deal with its current setup and square footage. However, I didn't even notice that there was illegal additional square footage (in the form of an extra family/living room) on the property until a few days ago; well, I knew it was there, I just didn't know that it wasn't a part of the legal square footage.
This addition needs a bit of work. It has some flood damage (from bad plumbing), so floors, trims, and some walls will have to be done (we're going to take out the plumbing altogether). The floor is sloped, so we'll have to raise it up a little. The roof also needs to be redone on this addition.
The alternative would just be to tear out the addition. Either way doesn't affect the actual legal square footage of the house. But it seems like such a waste. I'm estimating that it's only going to cost $5k - $10k more to fix it up as opposed to tearing it out, but it adds about 30% more square footage to the house and possibly $20k more in value.
I've talked to a realtor and a few contractors about making it "legal". They all say it's going to cost too much and make my profit margin way too thin, both from the extra work that needs to be done and the amount of time it'll add to the project timeline.
Ideally, I'd like to just fix up the illegal addition that was basically handed onto me when I got the property, and then list the property with the additional square footage. But I heard that the banks will not appraise that extra square footage, which would prevent buyers from purchasing. Or should I list it with the legal square footage and then mention there is additional square footage? Ultimately I think this addition will add value to the buyers, but I'm not sure if the bank, inspector, appraiser, etc. will prevent the buyer's purchase of the property.
Someone also told me to put "Buyer to Verify" on the listing to protect myself, but not sure if this would actually scare buyers away.
You probably won't like my opinion, but I would consider it unethical to turn around and sell the property since you have full knowledge of the illegal addition.
It's an unfortunate situation that no one would like to encounter when purchasing a property. Reach out to the local building inspector and explain your situation. Often, they will waive any sort of permit penalties if they understand the circumstances behind your situation.
I'd love to learn more about this topic. I see illegal additions on a significant percentage of the properties I check out here in Miami. Its never clear (to me, at least) whether it is feasible to keep these additions and make the necessary repairs to make them legal. Or does the fact that they were done without permits mean they have to be torn down regardless?
This is an everyday issue in my neck of the woods and I'd appreciate any insight that can be offered.
This may sound harsh but: You should have taken this into account when you purchased the property. Now it's your problem. You either fix the addition correctly or tear it down. Your "profit" is irrelevant; you have to do what's right. If you can't afford to do that, then you shouldn't be in the business of flipping house.
I fully intend to disclose my knowledge of the illegal addition; that it was there when I purchased it and I just rehabbed it. At the same time, I want to protect myself. I see the addition as value-add for the buyer, and I believe the buyer benefits from it, so I don't see too much sense in tearing it out. I'm not planning to rehab it badly either; I essentially am doing the same kind of rehab that I would as if this addition was legal. And I am definitely fixing it up to the standard where I would want to live in it (and I live in a new construction neighborhood, so my standards aren't low).
The formal process of making this addition legal doesn't necessarily add value to the buyers; either way when they walk into it it looks the same. But it would hurt me a lot because I'd have to tear out everything and strip it down and perhaps do some foundation work (it currently sits on a slab).
The property is in a low-moderate income area, and I don't believe the buyers will necessarily care too much about the legality of the addition (in the city's eyes) as long as the rehab is good. I can say this because I grew up in low-income areas, and it's what I want to focus on for my investing because I feel like it's where I can make the most difference. And ultimately, the house will be the nicest looking house on the block.
My only concern is that they won't be able to purchase it because of what the city, banks, etc see.
I had another 2-hour conversation with a contractor today and he suggested that I go ahead and strip it down enough to where I would have needed to anyway to do my rehab (e.g. take out all the floor and expose the slab), have the city come and inspect it and then explain my situation, and hopefully they can consider it as unfinished square footage. Then do the rehab, and then list it entirely as finished square footage. So kind of like acquiring a property with an unfinished basement, or doing a garage conversion. What do you think of this approach?
Nghi, I definitely think you need to inquire further before deciding. I wouldn't put $1 in rehab into the addition until you're sure you (or the future buyer) can get it accepted by the local county or municipality. Whether you want to tear it down or not, they may force you to (once they discover the violation, the fines can get hefty).....so there isn't much point in improving it now. Your contractor's approach seems fine, but I'm guessing this is going to end up costing you either way.
@Nghi Le you may want to look up a permit compliance consultant...that may be the wrong name but I can't think of it right now. Here in San Diego there is an architect that specializes in unpermitted additions and other items. For a small fee of around $2-300 he'll come look at the structure and give his opinion on what it would take to get permitted or if it is un-doable. He's gotten retroactive permits for about 400 structures and knows the process and who at the city to talk to to get it done for the lowest cost.
IMO it is worth it. Sometimes the unpermitted nature isn't too bad to work with especially if you're doing major rehab work to the structure anyway. In others it can be. There may be setback and easement issues.
I do Civil Engineering and we have a client that we processed a lot split for 20 years ago. The house now has an unpermitted bathroom on the back which isn't too big of a deal to get straightened out. However the corner of the bath sits over the new property line we created for him by about 3 feet...again probably fixable with a lot line adjustment. The BIG issue, that corner also sits across a storm drain easement granted to the city. Guess what the likely-hood of taking care of that is....nearly no chance.
A city inspector might have come by and given him the process to get the permitting straightened out. He would have paid to processing plans and correcting it only to find out after spending some money that he not only couldn't get it permitted but still had to remove it. That was the best $300 he could have spent and can now focus on just getting it removed which will lower the value slightly, but he really isn't going to be able to fix it any other way.
Thanks for the advice. I gave it some more thought and my conservative, risk-averse side really stepped in. I'm going to try my best to have the city recognize it. Worst case scenario will be the unfinished sq ft route. Will keep you posted.
What exactly makes it an "illegal addition"? Is it that it was built with a permit? Are there boundary issues? Did you have a survey done? Matt's advice is good.
@Art Allen We measured the house ourselves and the square footage of the house without the addition matched that listed on the county. We also found the original building plan of the house, which did not include the addition there (but did see a patio in that same spot), and we didn't see any permits for an addition. The only permit we saw was for a garage conversion.
Just wanted to give an update on my situation. We ultimately ended up tearing down the addition because we kept uncovering new problems with it:
- We couldn't bypass the city and go straight to the county to get the square footage accounted, and the city of Seatac has a reputation for being unreasonable. There was an investor down the street who took an additional 5 months to complete his project because the city told him he needed to do a few things and get extra permits, then changed its mind and said to do something else, then changed its mind again...
- We found out that the addition was built on top of the septic drain line. So we'd have to get the city's approval to let it remain there or dig and reroute it.
- We found out the roof wasn't exactly done correctly. The ceiling covered up a gutter that was running through the addition, where the roof of the original house connected to the roof of the addition.
- And some more little things...
The demo of the addition is mostly done now, and the project is about 60% completed. The house itself is solid and has brought several good surprises, and we've gotten compliments from several investors (I've invited a few to check out the property during the work-in-progress). It looks like the market is picking up and we have comps that support a higher ARV now, so we should be able to get a little more profit out of it too. Not too bad :-)