Anyone know how to deal with unpermitted additions?

Question

My wonderful agent dug up an off market SFR in Portland OR that's listed at about 20k less than it's comps in the area(short sale).  That's if you're using the tax recorded number of rooms, baths, and square footage.

Turns out this little 700 square foot 2/1 has a converted garage with its own full bath and kitchen.  So now it's a 1000 sqft 3/2, or a duplex.  The problem is not all of the permits were pulled before the work was finished.

So, I can get the property for 100k.  As a 2/1 700 sqft it's going to sell for about 130k. As a 3/2 1000sqft it's going to sell for about 170-180k.  Those are current market values both my agent and I have worked out.  The house sits on a corner lot in a neighborhood projected 13% increase in value this year.  I REALLY want to flip this house.  But...

I don't have any experience getting permits for work that's already done.  If all permits were in order I'd be looking at about 15k total for rehab.  All of the work is 90% done.

What's my first step on this?  Or am I walking into a flaming pile of burning disappointment?

I was handed the deal 4 hours ago.  I haven't had the chance to speak with the city yet, or a contractor.  It's after business hours and now I can't sleep.

J Scott · Answer

Call the local building department, ask to speak with an inspector and quiz him on what they'd likely have to do to approve the work should you buy it.  Some inspectors may tell you that you'll have to get drawings, open all the walls and start from scratch; others may tell you that they can get away with a lot less disruption and work (assuming they don't find anything troubling).

John Malahay · Answer

Corey,

Regardless whether you're using hard money or conventional, if the numbers, like 65% LTV for wholesale or rehab, it narrows your spread for your profits.  Familiarize yourself with City Hall's building & safety department or the actual office where you would apply for permits.  Some have even gone to an extent that they've created a library of the city's permitting codes online & downloadable on pdf.  Especially on some areas that have historical areas or zones, what you can do & not do to those structures considered having historical value.

Ed Wood · Answer

Step 1.  Have the inspector out and see what needs to be done.

Step 2.  If everything makes sense for th deal buy the property.

Step 3.  Get the work done.

As a side note, in case you're getting loan or when selling conventional lenders will only give value on permitted space and the property can not have health and safety issues.

Dave Vogt · Answer

I too found this out on a recent possible flip. After visiting with the inspector in my area and realized that it would all become my responsibility including all of the fines etc. I backed out. It can get ugly quick. If you do your homework and the work is within the scope of what fits your model it can work, but be very careful how you proceed.

I wouldn't rule it out , but I would certainly take the right steps to see if its a fit.

Jacob A. · Answer

I actually had this same situation pop up about 6 months ago and happen to know the head of the inspection department here in town and called him up.  He basically told me exactly what J mentioned above.  They will charge you an arm and a leg to bring it up to code and that's if your lucky.  If they don't like what they see they can make you start completely from scratch.  There are penalties and backed fees that they will charge you to have to come in after the fact.  I haven't directly dealt with it yet but it sounds like a messy ordeal.  If there's room in the budget though, I'm sure it's do-able but it looks like you are already dealing with a pretty tight budget as is.

Corey Davis · Answer

@John Malahay thanks John, I should have mentioned the most important part...  I'm using hard money.

The house JUST went on the market.

John Malahay · Answer

Corey,

To contractors that flip houses, dollar $$ signs flashing on their eyes.  As long as your offer stipulates an inspection period, unpermitted issues can be to your advantage in driving the price down lower.  If it's a listing that has been on the market for a long time (90+ days), it might be a tell-tale sign that there are big problems because of structures, wiring, or plumbing not according to code.  If you buy it, the headache of bringing it up to code is now on you.  What hurts more is having to pay to make it compliant or up to code standards.  Worse case scenario: property can't qualify for loan because of unpermitted issues.  Make sure you get an inspection first before closing escrow.

Hope that helps.

-john

Anyone know how to deal with unpermitted additions?

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