Here’s a quandary some borrowers get into when they get an accepted offer on a property that does not have additions that are permitted by the county or parish where the property is located. Real Estate InvestingIt’s not uncommon in areas, especially where property taxes are relatively high, for property owners to make additions to their property in order to increase the value without getting the necessary permits. The owner thinks this will save them money, even if the additions have been completed by licensed contractors. But that’s the first rub. Many licensed contractors today won’t accept work on unpermitted additions. They want to be sure the property owner has the proper permits and paid the necessary fees and build to code.

 

When a buyer makes an offer on an investment property and it’s accepted one of the first things the bank does is order an appraisal. The appraiser first checks public records for square footage, zoning and the like before the appraiser even makes a physical inspection. The appraiser might see a small eight unit apartment showing 9,600 of gross living area in public records but when making a physical inspection the property shows an additional 3,000 square feet. The property owner added an additional two units and did not get the proper permits. Here’s what happens.

The property owner can be liable for not only back property taxes and penalties dating back potentially years but also the appraiser must make a determination the work was performed in what is called “workmanlike manner” which few appraisers in today’s environment are willing to certify. Not only does the property owner have to catch up on the property taxes but also the permits. Banks will want the additional square footage legitimately added to the appraisal and accounted for. Otherwise, it will be difficult to find financing.