Investment property without permits

[Spencer Woodring]

Hi All, 

I’m looking into an investment property where the current owner rents out the house by the room. After he bought the house, he added 2 bathrooms to make this more attractive to tenants. Unfortunately, He did not pull permits to do so, because his contractor told him that it would be 15k to pull them. 

I would like to purchase the property, but I would have to make sure everything if legal and up to code. I am a new investor and have never done anything like this before. Any help or guidance on how to cover myself legally and make sure I am making a good investment would be helpful. Also, I don’t know if this would hurt my exit strategy in the future if I decide to sell it. Thanks in advance. 

[Clayton Long]

Buying a property that has had substantial work done without permits is a HUGE risk. First there is the risk of the work having been shoddily done, which can cause obvious problems. But also, you inherit the responsibility of having that work permitted once you purchase the property - and permitting a bathroom isn't cheap (I recently built a permitted 2nd bathroom as an owner/builder in my house).

Having been on the losing end of purchasing a property with a significant amount of unpermitted work attached to it, I would probably just walk away - it's not worth the headache, both emotionally and financially.

However, if you are still intent on purchasing the property, regardless, then once you are under contract, use your right to inspection to have a city/county inspector walk through the property with you and have all the unpermitted work cited before you lose your deposit. This does a few things: (1) it makes it impossible for the seller to lie on the disclosure about the unpermitted work and (2) it gives you leverage in your negotiations.

Of course, the seller could refuse to negotiate with you. But he'd still be on the hook for remediating the unpermitted work before he could sell to anyone, anyway. An open case against the property will show up in a title search.

Eventually, someone is going to have to pay for that unpermitted work. Make sure it's the person who deserves to pay for it.