I recently purchased a single-family home in Hawthorne California, all cash for 500k using a hard money lender. The property was in bad shape and I'm using another lender to provide the repair cost of 50k. The home was initially a 3 bedroom 1 bath with a massive unpermitted enclosed den attached. I started the repairs and remodel yesterday and the plan is to turn 1 of the bedrooms into a 2nd bathroom and use the den as a master bedroom for myself. Repairs will be finished in two months after which I plan to house hack the property, the two permitted rooms will be rented out.
In order to pay the hard money lenders back, I will need to refinance the property. Will the fact that I have an unpermitted bathroom and bedroom massively nose dive my appraisal value? What is the impact of unpermitted rooms on the value if any?
Having un-permitted additions can have varying effects on the sale/value/getting a loan on a property. In some areas of LA escrow cannot close unless the building is up to code, for some loans, un-permitted additions are not allowed in the appraised value of the home. Some lenders it won't matter... I would speak to your lender about exactly how it will affect the loan.
Another thing to think about, is when it comes to selling the property... a buyer's lender might require permits in their appraisal/loan approval, so it could decrease the pool of potential buyers and price in the future.
@Alfred Edmonds We did not pull any permits, I was told by several contractors that it would take 1-2 months and extra funds to get the permits and everything up to code. We do not plan on selling the property anytime soon but we will surely need to refinance the property as soon as it is rehabbed. Thank you for the advice, hoping for a smooth appraisal.
@Kareem Arnold Don’t expect anything close to top dollar, you are operating under a scenario of illegal operations, so you need to lower all your figures and levels of expectation when it comes to “standard” programs, your building is not anywhere close to “standard”. Put it this way, if you have 3/1 permitted plus an unpermitted room (den), then you convert it to 2/2 plus the master bedroom (den), in reality, the only legal rooms is now a 2/1 (you lose 1 permitted bedroom that you turned to bath). So worse case scenario, during appraisal or during selling, the buyer/appraiser will price it to either pull the permits and it’s necessary repairs, or price it to convert it back to a 3/1. Either way you lose by not pulling permit. 2 months is too much, I pulled one in 2 weeks it’s only 2,500-3,500 out the door if i charged fees (permit itself was less than 1k). There are quick/over the counter permits that you could pull same day.
Everyone that has chimed in is correct. Get the permits while you are doing the work, it will pay off in the long run having extra square footage. Plus it’s cheaper to do it now while under construction.
Getting permits can take a while. The office in Culver City, CA is hit or miss. Some people told me they get stuff approved fast every time. My wife sat in the office for two days and said every single person she saw was denied or told to change stuff. Our permit has been in the office for 6 weeks or so, and this is the third time we brought it to them. We made the changes they wanted but every time some new guy would say go change this or that. Half the time they just make stuff up and pretend it is the law. Being a lawyer, I can figure out when it is the law and when it is not but at the end of the day I know it is just easier to grovel and kiss ***. If I give them a legal challenge it will take years and they will be difficult for me every time I try to do anything in the city.
@Jerry Murphy If they are minor corrections, your contractor should have a red ink and just sign it off from there. 6 weeks is... too much. I've done it in less than a week and first was simply to get all the corrections, comply them and be done.
Manolo D. did you do it in LA or Culver City? I've spoken to a few people and it seems to go both ways. Some people get results good and fast. But I've spoken to neighbors and contractors who say Culver is hit or miss. They just are unpredictable. And I am sure that some of the things they claim that the law requires is non-sense. Government bureaucrats do it all the time. But in the case of Culver City, when it is my property I've taken to time to do some legal research to know for sure. In the end it is usually just better to go along with them. They told my wife that the room had to be 80 square feet. Our design had 76. The law says 70. It is indisputable. It is 70. But whatever. The dude with the stamp said 80 so we made the closet bigger so it would go over 80.
BTW I think my contractor got it approved yesterday. He talked to my wife and sent someone to start work today.
@Jerry Murphy Law might say 70, city might say 80, other city/municipal codes might override them, happens a lot in LA. Yes it depends on your inspector, reviewer, but red ink over the counter does amazing things.