Equity Add | Permit or not to Permit?

Question

On The BiggerPockets podcast, Dave & Henry always talk about forcing equity with adding a bathroom or bedroom to a home. They never talk about permitting.
For example, Henry often talks about converting a sunroom by adding insulation, heating, and cooling to add additional square footage.
Is this permitted? Do permits matter? If not, the title will show a difference than what the MLS states. Will this affect the appraisal, price per square foot, etc?

I get that adding an additional bedroom or bathroom is a great way to add equity but if it's not permitted, is that a negative? The permit process can be very expensive and time-consuming.

Sidenote, they often talk about turning a single-family into a duplex. Is this permitted? If not, will it lower the value of the house?

Thanks! - Cleveland, Ohio

Bobby Macik · Answer

@Kenneth Garrett Thanks!

yes, I assume everything is very local 😂 If you're familiar with the Cleveland, Ohio Market or know someone who is, let me know. I really appreciate you're response.

James Jones · Answer

Short answer: yes, permits matter.

If you add a bedroom, bathroom, square footage, or convert to a duplex without permits:

• Appraisers may not give full value

• Lenders may ignore the added square footage

• Buyers may discount it

• You may have issues at resale

• Insurance claims can get messy

Unpermitted space often gets valued as “bonus space,” not legal living area.

In Cleveland specifically, zoning matters a lot.

Turning a single family into a duplex absolutely requires zoning approval and permits. If it is not legally zoned multi family, you are creating risk, not equity.

Could you sell it anyway? Maybe.

Will it limit your buyer pool and financing options? Almost always.

For BRRRR, this is critical.

If your refi depends on the appraiser recognizing the added bedroom or unit count, and it is not permitted, your numbers can fall apart.

Forcing equity only works if the market recognizes it as legal and conforming.

If you are holding long term and refinancing, permit it.

If you are flipping retail, permit it.

Skipping permits might save time upfront, but it usually costs you leverage, valuation, and exit flexibility later.

Kenneth Garrett · Answer

@Bobby Macik

You’re going to get  various responses.  Each jurisdiction is different on the rules as well as investors approach.

First off the code will require a permit anytime you start framing walls, adding receptacles, switches, insulation, heating, plumbing and or changing the layout etc, regardless of the responses you get.  Of course the answer is it depends on your project.  There are many cosmetic updates that don’t require a permit.

I would go on to the city website and read the rules on what requires a permit.  It’s generally pretty clear.

The process is a whole other story.  An over arduous process will have people just do the work and if you get caught you will have to deal with it.  In my opinion government should work with you not against you, but I understand the reality.  It doesn’t necessarily work that way in some places.

My perspective is going to be different.  I’ve been a building and zoning consultant for years.  I deal with permits on a daily basis.  I’ve seen people do dangerous work and create terrible situations.  At a minimum, do the work in accordance with the code, whether you get a permit or not.  At least if you choose not to get a permit it was done correctly.

I have heard Dave and Henry briefly talk about permits.  They are never going to tell you to break the law.  The decision is up to the individual.

Michael Wyatt · Answer

Hey, I noticed you tagged Cleveland.  I have done bath/bed ads (without altering sq ft) in a few areas of Cleveland with no permits.  Turned out fine. I have also pulled permits and that turned out fine as well.  Only a couple hundred bucks to pull permits and does not really add a whole lot of time to the project.  Caught a contractor (city POS inspector did) putting roof on no permits, the inspector said they needed photos of ice shield going down or I'd need to have someone rip a portion off to show it to them.  Thankfully I had these, but the point is it's totally up to the inspector whether you get caught and whether they deem the work ok or make you re do it.  I have heard people having to completely demo additions.  But - in any case, the real potential issue you may run into is on the resale.  You can list whatever you want to do on Redfin Zillow etc, But Tax records Public record, etc. is not going to be updated unless you have a closed out permit.  So that means the appraiser for the new buyer Is going off of that not what you decided to list on Zillow.

I come across this issue a lot on the Lending side when clients approaching with the property that has a square footage bed bath count that does not match Public record and so the valuation reflects that.  Easy tell that unpermitted work was performed.

Stuart Udis · Answer

Follow local building and zoning code requirements. There are many reasons investors try to skirt local rules, but the two most common are time and cost. Once permits are associated with a project, many municipalities require the use of licensed contractors, which can slow projects down and increase expenses. From my experience, this is far more common with lower-value real estate, where deals only “work” if corners are cut and cheaper, unlicensed labor is used.

As a general rule, you should underwrite every real estate transaction assuming the work will be done the right way. That means pulling permits, meeting local code requirements, and using authorized vendors. Doing so increases the likelihood of receiving warranties, working with higher-quality contractors, and having independent inspections along the way. While permitted work is not automatically done correctly, it is reviewed and, just as importantly, documented. That documentation matters for insurance purposes. As an example, if a catastrophic loss were to occur such as a major fire, discovering that a garage was illegally converted into living space without proper fire ratings or approvals can create serious coverage issues and expose the owner to significant liability.

Dan H. · Answer

My experience is even within a jurisdiction it varies widely.

In San Diego city there is a area called city heights.  City heights is below average for central San Diego, but I would not classify it as rough.   I suspect most areas are San Diego class c and San Diego class c is nicer than most area’s class c.  Virtually every property has unpermitted work.  I suspect more than half of the properties has an unpermitted unit.  This is accepted and common there.

In San Diego city there is another area called Rancho Bernardo (RB).  RB is class b and above.   The Trails is a neighborhood in RB that I suspect every property is over $3m.   I suspect there is no unpermitted unit in RB.  Neighbors would complain; compliance would red tag stopping the work.

Same jurisdiction with different expectations from compliance and buyers in those 2 areas.

Is your area like city heights or like RB?   I do not know, but you definitely need to know if you plan to go the unpermitted route.

Good luck

Bobby Macik · Answer

@Dan H. Exactly 😂 every city/neighbor/jurisdiction seems to vary...as well as every lender, appraiser, and buyers for that matter, for what they look for, want & need.My price point for Cleveland (West Side) is $100k-$150k. There are neighborhoods closer to lake where homes sell for $400K+ so this area has a wide price range in a small jurisdiction.

if you know of anyone in that area, let me know. Contractors, etc.

Thanks for your response, it's very helpful.

Kevin Sobilo · Answer

@Bobby Macik, a few thoughts:

1. Learn the process in your market. You are talking in gross generalities unless you actually learn the process and costs in your market.

2. Building permits for rehabs are not super expensive. In your market it looks like a permit might cost $5-15 per $1k of the contract cost. So, that would be $150-450.

3. Permit prices are somewhat fungible. If you purchase materials directly, they aren't on the contract and typically not part of the building permit price.

4. Title refers to ownership rights to a property. It isn't any kind of record to every bit of work done on the property.

5. Yes, not pulling permits is something that needs to be disclosed with a sale and could potentially affect the appraisal especially if the work is not up to par.

6. Converting a single family to a duplex is a zoning issue which is different than just a building permit. If you don't get zoning approval you are at much greater risk because you could be denied the ability to use the property as a duplex after all the work and money invested.

7. In many areas there are not great records and doing small jobs like insulating an heating a sunroom without a permit could be very normal and without much risk. In other markets that may not be the case.