After the real estate bubble popped and the economy fell into recession, many homeowners decided against leaving their homes and “trading up” or investing in new property, and instead focused on improving what they already had.
As new home construction has declined over the past 5 to 7 years, residential additions and alterations have increased – and some of the work done hasn’t been permitted. What does this mean for current buyers and sellers? Will lenders accept non-permitted additions and alterations?
The broad answer is “yes”: lenders will accept properties with non-permitted additions and alterations, but there isn’t a single set of rules to follow for obtaining financing for such properties. What works for one loan, might not work for another.
Monica Chudgar, an appraiser and realtor, gives an example. “I appraised a home that converted the garage to a second unit with a full bathroom and kitchen. The lender didn’t want the stove in there, so the owners removed the stove and took a picture. After that, the loan went through fine.”
The most important consideration that lenders take for non-permitted additions is the quality, or “workmanship”, of the completed project.
“There are liability and insurance issues,” said Daniel Podesto, co-owner of Central Coast Lending. “When a lender agrees that the property is in acceptable condition, they can be held responsible to some degree.”
Lenders want to make sure that they are financing a safe, fully-functioning property. This is where “workmanship” comes into play.
“The concern is about the quality of the improvement,” said Podesto. “Was the project done by a person without experience? Or was the improvement completed the right way by somebody with skill?”
Appraisers pay close attention to alterations that involve plumbing and electricity, and make note of any issue that could suggest faulty work. Non-permitted plumbing is often a bigger red flag than other renovations such as electricity, said Podesto. To ensure the quality of the work, the appraiser will look for water damage, leaks, and dry rot on surfaces.
The “workmanship” of any addition has another important impact on a property beyond safety: market value. Appraisers will adjust the value of any non-permitted additions based on the relative quality of the work.
“It depends on the quality of construction,” said Chudgar. “If it is the same quality as the rest of the home, I will give it more value.”
The value per square foot of the non-permitted additions might be lower than the rest of the house, but Chudgar said that the market will help decide.
“Most of the time, the addition will carry value. It all depends on the utility for the buyer,” said Chudgar.
In some cases, the lender might offer a loan, but not add additional value to for the improvement. In other words, the loan-to-value ratio only reflects the non-altered area.
The most common types of non-permitted addition or alteration are garage conversions and utility rooms. Some lenders will only lend on non-permitted additions if the property is attached, though Central Coast Lending recently closed a loan on a detached garage with non-permitted plumbing and electric renovations.
To conclude: homes with non-permitted additions are eligible for conventional financing. Some lenders have stricter guidelines than others, and it might take some shopping around to find the right loan. The Central Coast Lending advantage is that (as brokers) we are able to do the shopping for you, and find the best loan terms for your unique situation.
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