Previously finished basement - No permits pulled.

[Randy Bearden]

I purchased an REO property in Paulding County GA that had a finished basement. The bath in the basement was done when house was built. The rest was finished afterwards. I completed rehab on entire house. In the basement I replaced carpet and ceiling tiles and painted. Shortly after rehab was completed we got it under contract for $500 over asking price. Buyer is getting an FHA loan. Appraisal came back fine. Just a few days left until closing. Buyer's loan officer called me yesterday and said the appraiser shows more finished square footage than county records due to the finished basement. I explained basement was finished prior to me getting the property. He called me back today and said I need to pull permits and have basement inspected before he can go through with loan.

Now for my questions and concerns:
1. Has anybody else run in to this issue?
2. How big of a can of worms would I be opening if I decide to pull permits?
3. Will inspectors require me to open sheetrock, etc.?
4. If I decide to walk away, could this rear it's ugly head with another buyer using FHA?

I have never ran into this situation with other properties like this one. My RE agent has never ran into this situation and even the buyer's loan officer said he had not heard of this before.

Any advice or answers would be greatly appreciated.