Know The Lingo: Unpermitted Work

Unpermitted work is any renovation, alteration or construction completed without legally obtaining required building permits or approvals from the relevant city or county.

For California property investors, unpermitted work can have an enormous impact on a property’s purchase price.

That’s because acquiring it comes with some serious risks.

But it may also present an opportunity to buy a property that retail purchasers will not consider, and at a significant discount into the bargain.

That is because unpermitted work can substantially increase a renovation budget, make financing and insurance difficult to attain, reduce appraisal values and limit resale prospects.

Examples of unpermitted work

Unpermitted work comes in many shapes and forms.

But not every cosmetic renovation in California requires a permit.

Requirements depend on the type of work and the jurisdiction.

Generally, surface-level updates that do not alter a building’s structural integrity, safety systems or utilities do not require permits.

Additionally, work undertaken by unlicensed contractors is not necessarily ‘unpermitted’ although the two often overlap.

Classic examples of unpermitted work in California include:

• A garage converted into a bedroom or living space without approval
• A bathroom added without the necessary permits
• A kitchen renovation involving unapproved plumbing or electrical modifications
• A structural wall removed without the required engineering and building approvals
• A backyard ADU constructed without proper permits
• Extensions or additional living areas without final building approval
• Unapproved electrical and plumbing upgrades 

Why unpermitted work matters to California flippers and developers 

Flippers and developers considering buying a property with unpermitted work take on substantial financial and practical risks.

If a property contains unsafe or noncompliant construction, inspectors are likely to demand corrective work which may include removing the improvements or other expensive structural alterations.

In addition, appraisers are likely to treat unpermitted improvements differently from authorized improvements, potentially reducing their contribution to the property’s value.

That includes being unable to count unpermitted space among the legally approved living area.

Lenders and insurers may require clarification or remedial work.

Ultimately, buyers may be unwilling to meet the asking price, request repairs or withdraw from the transaction.

It’s challenging enough when going in with eyes wide open.

But unexpected permitting work is a developer’s nightmare.

It is likely to add a significant time and cost to a short-term investment loan while permits are sought and remedial work is undertaken.

California disclosure requirements for flippers

Often dubbed the “home flipper law”, California’s Assembly Bill 968 is a real estate disclosure law that took effect on July 1, 2024.

It applies to anyone who sells a single-family residential property (including condos) within 18 months of buying.

It demands the disclosure of qualifying additions, modifications, alterations and repairs undertaken by contracted parties during ownership, including their names and contact information for any work exceeding $1000.

Copies of any building or construction permits obtained for the work must be included or instructions on how to obtain them directly from the contractor.

Failure to provide the required disclosures can result in the seller being sued for financial damages as well as the rescission of the sales contract.

Investors must be prepared to maintain accurate records, permits and project documentation from the start of every project to ensure they meet the requirements of the new law.

How investors can protect themselves

The home flipper law is designed to protect new buyers from unscrupulous flippers.

But flippers are also protected from disingenuous sellers under California Civil Code Section 1102 which requires all sellers to disclose all known unpermitted work, modifications or room additions, regardless of how long they have owned the house.

This includes answering a range of questions on the California TDS (Transfer Disclosure Statement) form.

Falsifying information is considered fraud and leaves vendors open to legal action as well as the possibility of criminal charges if intent to commit theft or fraud can be proven.

However, flippers and developers should undertake their own due diligence to ensure any prospective purchase is free of unpermitted work.

Remember, square footage shown in listing material or assessor records is not by itself conclusive proof of permitted or legally habitable space!

Hence, the following actions are recommended:

• Comparing the advertised property configuration against assessor and building department records
• Reviewing existing building permits and final inspection status
• Investigating significant additions, conversions and alterations
• Obtaining a professional inspection and specialist advice where necessary
• Speaking with the local building department about whether legalization of disclosed unpermitted work is feasible
• Obtaining a realistic allowance for corrective work in the renovation budget
• Confirming the lender’s position before relying on unpermitted improvements in the property’s valuation or business plan

Can unpermitted work be legalized?

The simple answer is yes but costs can vary wildly.

It is possible to obtain an after-the-fact permit but approval is no certainty.

More likely, the following will be required:

• submitting plans
• obtaining inspections
• demonstrating compliance with applicable codes
• undertaking corrective work
• securing final approval

There is one important California-specific exception where the law restricts local agencies from denying certain permit applications for previously unpermitted ADUs or JADUs constructed before January 1, 2020 solely because they failed to meet particular building or ADU standards.

However, the law still allows health and safety findings, corrective requirements and other specified exceptions.

And the protection does not automatically extend to every type of unpermitted renovation. 

Risk vs opportunity

Buying a property with unpermitted work is a risk.

The consequences may include a lower ARV, additional construction expenses, delayed resale and ultimately extended loan carrying costs.

But it also offers flippers and developers a great opportunity to secure a property other buyers won’t consider at a substantial discount.

Sophisticated developers can solve problems that typical buyers either can’t or don’t want to take on.

This in turn gives them the chance to create value.

But any property with unpermitted work is only viable if the discount obtained exceeds the cost and risk of solving the problem.

Ask the following questions:

• What modifications were done?
• Was a permit required?
• Can the work be legalized?
• What might that legalization involve?
• How much will it cost?
• Does the deal still work if the unpermitted space is worth less, or nothing?

Get finance and support today

Due diligence is paramount when assessing every potential purchase, whether unpermitted work is disclosed or not.

When committing to buy a property with unpermitted work, accurate renovation budgets, realistic ARV calculations, multiple exit strategies and financing aligned with the project’s actual scope and timeline are essential

There is a lot to consider and errors in judgement do not come cheaply.

That’s why it’s handy to garner a second opinion.

Equidy has an intimate and personal history with all aspects of property development in California and has done so for well over 40 years.

They can run the rule over any potential purchase, advising you about its merits and risks.

Their sole focus is to help you maximize the return on your investment without putting yourself at unnecessary financial risk.

Equidy is also a hard money lender that can finance flippers and developers in as little as 48 hours.

They stand by their core belief that anything is possible and they strive to prove it every single day.

Even in difficult economic times, they are determined to reward entrepreneurship and resolve to help their clients crystallize their wealth creation dreams.

Equidy enjoys long and established relationships with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimize the risk to all parties.

Contact Equidy today to book your free strategy call.

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