Need Help With A Major Renovation Decision - Pull Permits or No?

Question

I'm extremely torn on which general contractor to use and would appreciate any experienced investor's feedback on my situation!

Situation = converting a SFH into an up/down duplex. The basement needs a full renovation in order to make it a livable space. The renovation will include: kitchenette (framing, cabinets, countertops, appliances), LVP ~1,000 sqft, sound insulation in ceiling, 2 egress windows, install a up/down washer dryer, replace 5 vinyl windows.

I understand pulling permits would cost more and take more time. I have received advice from different investors that you can do this renovation without pulling permits and others say it's smarter to pull permits since this is going to be a new living space - if some one where to get injured / die I would be liable if I did not pull permits whereas if I pull permits I would be off the hook for a liability.

I've narrowed my GC options to two:

One contractor is insured but not licensed.

One contractor is insured and licensed and wants to pull permits. This option will easily be 7K+ more than the other GC.

My current thinking is it's a better idea to go the permit pulling route since this is a brand new living space despite the cost being higher and it taking a little longer.

I plan to cash out refi this property once the renovation is done and use that capital as a down payment for another rental in the greater Denver area.

Please share any advice / experience you may have had in your investing journey! I've had a terrible experience with a different GC on this property (stole money) which has hurt my confidence and really rattled my decision making ability. Thanks in advance for your time and feedback on this!

Paul De Luca · Answer

@Kyle Smith

Pull permits.

If you don't do things right on the front end, you might pay for it dearly later on.

Joel Forsythe · Answer

How would an insurance company cover any claim once they find out the work was unpermitted?  Your liability will be nearly infinite if there is loss of life anywhere in the relative future, own it or not. Now, how does that $7k look for basically a pretty damn good infinite get of of jail free card, letting your insurance company go after someone else for damages?

You aren’t just talking about a bathroom or kitchen makeover. This is an entire legal occupancy partially underground. It’s literally a death trap without proper fire egress and code compliant mechanicals.

Dwayne Byrd · Answer

One more vote for pulling permits. Do it right the first time!

Andrew S. · Answer

One more vote for pulling the permits.  On a project of this large a scale, it is essential.

Nathan Grabau · Answer

I would pull the permits. You are going to have issues if/ when you sell the property with it not being permitted, and it will likely cost you a lot more than 7k.

Chris Seveney · Answer

@Kyle Smith

Plain and simple/ If the local jurisdiction finds out you’re doing this work with an unlicensed contractor and not pulling permits, besides the potential for being fined, they can also make you remove all the work, and put it back to its current condition, or force you to pull the permits, use a licensed contractor and open up all the walls for them to do the inspections. Not to sound harsh, but even considering doing this sort of renovation without a licensed contractor or a permit is foolish.

Also, many states have programs where if there were issues with a license contractor, there are funds that can provide some type of remediation. If you’re not using Licensed contractors then there is no recourse.

Also, if there ever was an incident, insurance may not cover it if using unlicensed contractors .

Chad Kastel · Answer

Broadly speaking it's always correct to pull permits.   If you're going to evade that you better understand what you're doing, the risks, the local market etc.  How much is the total renovation without pulling permits?  What's your ARV post-pulling permits?    How do you think you'll sleep at night taking on that potential liability?

Brad S. · Answer

I agree with all the other responses and a few more thoughts:

* Appraisal Issue - As an appraiser, I would consider your property to be an SFR which was illegally converted into 2 units. This will most likely cause an issue with lenders (your refi, etc). My experienced guess would be, that a lender would not be okay with loaning with the property being used as a duplex, while it is legally an sfr.

* Liability - You would have additional unneccesary large liability, renting the property with unpermitted construction work. But, contrary to some of the advice you said you received, I don't believe you are ever "off the hook" liability wise, but you would be a lot more exposed unpermitted. What if without permits, the smoke/CO detectors were not installed properly or in the proper locations, or electrical or plumbing work were shoddy causing a fire or plumbing leak and mold and tenant health issues, etc. Your insurance may not cover you for unpermitted work and the harm it may cause.

Now, permitting doesn't fully cover you either, but not permitting definitely exposes you a lot more. In either case make sure your insurance is good and maybe have an umbrella policy.

Eliott Elias · Answer

Never go with the cheapest option, you will end up paying for it in the end. Do it right the first time and spend the brainpower focusing on making more money.

Shawn Burkett · Answer

My mentor always said to me when I had a question like this or one that was challenging.

“What is the right decision? If you make the right decision, it’s very seldom that it will be wrong.”

GCs without licenses in areas that require them are going to be cheaper but is that good thing?

After all, it is technically illegal to even bid a project in most states that require a license without one. This sounds like the GC without a license is undercutting another GC that has taken the time to take the contractors exam and business law exam in your state. Those take time and money. The process can be pretty painful in states like Florida and Louisiana and possibly your state also. He is doing it the legal way. The right way.

When you are licensed and pull a permit with your number, that job gets ran over to treasury department in your state so they can guarantee the GC pays taxes on the job among other things. It insured the GC doesn’t have any liens or major lawsuits, insures they follow proper safety protocols and Ada requirements, insured he Carrie’s workers comp and hires subs that carry it. There are many other things.

Again, he is doing things the right way. I think you already know the right answer from your comments. Good luck on the project! Those quick ones are always fun. Just make sure you have a detailed scope of work and schedule written out and attached to the contract in addition to any plans/drawings that you have as it can get hairy at the end when the little change orders start to add up. Also have a schedule attached but ask the GC to commit to a certain number of men to be onsite daily and have home commit to a certain amount of days to complete it. I’m sure you have that part but include that a work day is within 24 hours every day. They sometimes want to bill a change order for overtime when things come up. Nip that in the bud upfront and if he insist on it, have the overtime amount spelled out upfront inside the contract. This eliminates the leverage he will have when you are one week from completion and he hits you with an overtime change order and refuses to continue until it’s approved. This happens every day.

Trust me, those GCs and/or their subs already know where the plans are not clear and where they are going to hit you with change orders.

Again, good luck.

“Don’t let it happen, Make it happen”

SB

Need Help With A Major Renovation Decision - Pull Permits or No?

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