Buying a house with an unpermitted converted garage

[Melissa Faraias]

Hello BP community,

I am currently in the process of buying a house where the seller has converted the garage to a bedroom but without a permit. I contacted the permit office to get a retroactive permit but they said that they do not issue permits after the fact. I plan to rehab the house and flip it, but I am concerned that the square footage of the unpermitted garage will not be included in the appraised value and hence my sale price will be lower affecting my flip profit significantly. Even if I keep it as a rental, my DSCR lender may not take into account the unpermitted square footage as well. As per my contractors, the garage conversion seems to have been done well but I plan to have my structural engineer and subcontractors check the work thoroughly. The garage bedroom has a large windows, a closet, AC and electrical. I have not closed on the house yet and I am wondering what to do at this point. Any advice would be greatly appreciated. Thank you in advance.

[Sultan Ali]

Hey Melissa, I've run into this before. Most appraisers and lenders won't count the unpermitted square footage, so I'd run your numbers as if the garage is still a garage. Buyers might see it as a bonus room, but you can't rely on it for ARV or loan purposes. If the deal still works without that space, great, if not, you may want to renegotiate or even consider converting it back.