Appraisal using actual SF versus permitted SF

[Tom Fidrych]

Where I live in California, it is not uncommon for homes to have unpermitted additions. This is primarily due to the slow and cumbersome permit process and high permit fees. During the 2006 bubble, appraisers used the actual SF to come up with a value. When the bubble burst, it wasn't uncommon for foreclosed home owners to have the unpermitted work red tagged to stick it to the bank. Thereafter, appraisers would only use the SF recognized by the county appraiser. When I refinanced my home, the loan officer confirmed this change and said they wouldn't lend on homes with too much unpermitted square footage and would use the county appraisers SF value.

Last week I was at a party and a guy says he bought a 1225 SF place for $700K and only 625 SF is permitted but the other 600SF was unpermitted and that the appraiser used all 1,225 SF to come up with the value. I double checked this at the county and sure enough were back to using actual SF for the value. I estimate it would cost over $200,000 to permit and bring to code this additional square footage so it's a big risk for him and the lender to take on.

Case 2: An agent acting as wholesaler bought a house in the neighborhood. He cleaned it up and listed it as 1,900 SF;however, only 925 SF is recognized by the county. There is no language in the MLS listing that references bonus square footage or the like. I've got to say it pees me off to some degree because I'm considering list my place next spring and spent about a year and a half getting the 500 SF home addition permitted not to mention $12,000 in permit fees and feel the sale of that place will reduce the comps to some degree.

Question: Have you agents or buyers noticed this shift in your area? Does this imply a break down in underwriting standards?